WHAT IT'S LIKE INSIDE A START-UP.
NOTES FOR POTENTIAL CROWDFUNDERS
I think it's worth properly describing what it's like inside a start-up company, to fully understand what you may be investing in.
Almost certainly, you're interested in a business for it's growth prospects. Growth means high multiples of return on investment.
But the higher the growth, the higher the risk. Why?
To grow decisions must be made fast. New and innovative ideas are given their day, and some will fail. To do anything new, there is a huge amount of experimentation and learning. Failure is the best teacher.
It is a frenetic atmosphere. Founders are using every minute of their time, every ounce of their energy and intellect.
This is in contrast to the careful research, signed off in triplicate world of the corporate giant. But these processes are exactly the start-up's opportunity. Low cost, fast decision making processes, quick learning, simple feedback structure and constant speedy iteration.
Growth also puts greater pressure on cashflow, particularly in retail. For instance, with Vulpine, we were buying stock in advance, for 149% growth. Typical of the clothing financial model. That means deposits and balance on delivery, before you've sold it. So there are big cash dips to fund success. You're also resourcing to maintain that growth, bringing in people, systems, etc, in advance, in readiness for the next stages of development, so you don't hit a resource wall.
It's like hanging onto a horse by it's mane, trying to feed it carrots as it runs, so it won't stop, without falling off. The lower the growth and therefore investment return you're gunning for, the slower the ride.
There are a lot of plates spinning in a frenetic but intoxicating atmosphere of driven 'doing'. But some plates will drop. If it's a really big plate, or a series of smaller plates (etc) it can all go wrong.
High potential returns means high risk. After all most businesses fail.
If I were to invest, I'd start by assuming it would fail, that any return was an unexpected bonus, since that is the statistical likelihood.
Even then, I'd split my risk, splitting my funds between 8-10 different businesses, hoping for a great return from a few, maybe one.
Really you should get professional advice. All the literature says that, but it's absolutely true. It's vital.
Investing in a small, fast growing business is a wonderful, fun, empowering, interesting thing to do. Being part of and supporting a team that's making things happen is awesome.
You may do amazingly well. There are incredible businesses out there. But most fail despite their intense efforts.
But some succeed....