The desire of every investor is to find new powerful and scalable projects with which to achieve a good return. However, from the moment of investment to the sale of the company, it usually takes between 5 and 7 years, although the hope of obtaining an extra return is always there.
ROI allows us to plan goals based on tangible results and to understand whether a particular startup is worth investing in or not, but why do so many investments fail? What are the most common mistakes?
1. Investing in unfamiliar sectors
Very often, investors throw their capital into innovative industries without having any knowledge about them (size, product penetration, current market share composition, etc.), which leads them to minimise the risks and put all their optimism on the balance sheet. If, on the other hand, they knew whether it is a booming industry, other failed projects in the sector or the sector's slowdown, they could avoid taking unnecessary risks with their capital.
2. Investing more than they can afford to lose in a single investment
High expectations of profitability can sometimes cloud our vision, preventing us from seeing the possibility of failure. It is wise not to invest more than you can afford to lose in a single investment, but to spread it over several start-ups. It will always be more effective to take a sensible approach that is not driven by emotions.
3. Not investing in projects with high potential
It is best to look for startups with very high potential in the early stages. Unless they are in very specific sectors where the terms are usually too long and require many years to become profitable.
4. Lack of diversification
Focusing all efforts on a few companies is very risky. It is advisable to spread the invested capital to avoid portfolio volatility. This reduces risk by investing in different assets and improves the return obtained in relation to the risk taken.
5. Little knowledge of the founders' backgrounds
Who is or are the people behind the project? What is their overall experience? Knowing these details in the initial stage of the startup is much more important than any idea. Knowing how the entrepreneur is going to face the different stages or situations that may arise allows you to know some of the risks, as well as to glimpse the possibilities of success.
6. Not knowing the competition
What differentiates our competitors? What is their value proposition? It is important to stop and look at the competitive environment before jumping into investment. Nowadays, practically nobody has a unique and innovative idea, as it is very difficult to have something totally new. The problem that this project is trying to solve, someone else is already solving it in another way, with substitute models. It is essential to study them to identify the differential value.
7. Lack of knowledge on how to get out of that venture
It is important to assess whether the return we are going to obtain is going to be from the sale of the project, from the sale of the stake or from the generation of cash flow. These are very different businesses, as a business generated by the sale of the company will seek to create much more capital in the future and reinvest. However, in a flow business, you can invest in human resources related projects where it is going to be very difficult to sell it. What you generate is a flow.
Ultimately, since there is no perfect strategy, the possibility of failure will always be there. But it is up to you to pull yourself out of the slump and get back to enjoying the benefits that investments can bring. Therefore, another mistake will be precisely not learning from your mistakes.