Let’s start with some facts: In year one, 20% of small U.S. businesses fail. By the end of the 5th year, 50% do so. Throw in a newbie entrepreneur, and those statistics may be generous. Studies have pointed to a myriad of reasons; no market need, ran out of cash, and wrong team rated high on the list.
Here’s a fundamental truth that we embrace at Carofin: You must believe in the entrepreneur wholeheartedly, if you’re going to invest in that company. And, if the company founder has only worked in large corporations, the chips are already stacked against the company.
Why? Well, after several decades of evaluating thousands of companies’ chances, it’s become clear that managing and motivating a thousand employees requires a very different skill set than what a start-up company founder needs.
Entrepreneurship is tough, and successful entrepreneurs are incredibly persistent, creative and flexible – personal traits which can’t be learned in a classroom. Prior corporate success doesn’t necessarily translate, given the relative lack of support for an independent, early stage business. Not all of us possess these personal traits…in fact, relatively few of us do. Entrepreneurship is appealing when looked at from the outside, and the media tends to cover the more spectacularly successful start-ups and their founders. In reality, entrepreneurship is a constantly challenging, soul-searching, often humbling journey that relatively few people are cut out for.
Prior corporate success doesn’t necessarily translate. Successful corporate managers may have climbed the ladder, reached a high level, and now want to start their own business. However, gone are their assistants, their HR staff, their legal, accounting, and advertising colleagues. It’s now them, in a room they often share with silence. This is also not to suggest that serial entrepreneurs with prior, big-return “exits” are guaranteed to succeed in their next venture. However, like horse racing, picking a winner is more difficult if there isn’t a track record to look at.
Dig into the entrepreneur’s past: have they founded other new ventures and, if so, were they in the same or related field? One benefit, among others, is already having contacts with companies who will sell what the start-up needs, and, conversely, having an entrée into distributors or directly into buyers of the end product/service.
How much “skin in the game” do they have – are they committed financially, as well as emotionally to its success? Are they willing to pivot when needed to embrace an opportunity or cut their losses when facing insurmountable obstacles? Remembering the numbers above, do they have the wherewithal to support the company and live without a paycheck for 3 or even 5 years?
If they’ve endured failures, listen for what lessons they’ve learned. Failure, in our book, is one step closer to success. And, if they realize they don’t know everything, they’ll be more open to advice from peers and to hiring expert team members who can fill in the gaps in their skill set.
Investing in new ventures is, unlike other choices you can make, on the high end of the high-risk spectrum. So is the potential for a high return. Consider improving your chances by working with an experienced hand in a related industry and company stage. You’ll find more rewards if you back the right company, led by someone who has a track record of success as an entrepreneur.
Related questions to ask include:
- Have they worked at other venture-stage businesses before?
- How much money have they invested personally in the enterprise?
- Do they have the personal financial wherewithal to last 3-5 years or more without a paycheck?