It has been a very long time since wrote part 2 of the lessons from investing in the start-up arena in India and my apologies for leaving you hanging like that. It has been a very busy 45 days since I wrote part 1 of this article. In this time we have
- Invested into 3 start-ups
- Partially exited from 2 investees
- Participated in a Series B round for one of our investee companies
During this interim I learned a lot of new lessons that gives me the confidence to expand our list of 25 lessons from 25 startups to 28 lessons from 28 investments. In this post I shall cover lessons 6 through 10.
I must mention this as a disclaimer and as a sanity check – the content of my blog, my posts are my opinions and they cannot be taken as investment advice or suggestions. Each person is entitled to test, try and implement their own strategies and it is perfectly possible that there can be many ways to get to the same targeted return. So take what I say and filter it through your investment psyche and make your own decision.
- Decide your allocation based on round and keep it the same
- This is a very important lesson that many learn the hard way – that many includes yours truly. There will be that one killer idea/business plan/team/entrepreneur/weather/office/color/logo/you name it that will blow your lid and you will be read to go "all-in". At that time remember the deep meaning words of Jim Rohn:
"We must all suffer from one of two pains: the pain of discipline or the pain of regret. The difference is discipline weighs ounces while regret weighs tons"
- And take off the zeros from that cheque and go back to writing the "allocated" amount you had set for an investment in Company X. When you take the emotions out of a decision to invest you gain objectivity at the expense of subjectivity and you also give chance the opportunity to even out any mistake or outlier.
- True-Up when the going is good!
- If you have played a game of Blackjack you have an option to "Double Up" after you have been dealt you first two cards. A novice would double up only based on the strength of his own cards (especially if they total upto 10-11) however any decent player will also look at the cards of the dealer to decide whether he/she should double up or not. So if they see a 5 or a 6 as the Dealer's "Up" card they would double up if they held anything with an 8 or higher. The reason is simple – the dealer that holds a 5 or 6 has a 40-42% chance of busting.. so strike when the iron is hot!
- This strategy works well for start-ups too. When a business is growing and the market of which the company is just a subset itself is growing.. you may have a blockbuster of an investment in your hands – double down, saddle up and enjoy the ride!
- Exit when you are not sure
- One of the most difficult things to do when up or down is to know when to quit. Some sports people time their exits beautifully and some quit after being nudged to go. Either way you should know when to exit something when you are no longer sure that you can stay in. This is true for a start-up too. If you have questions on the business that you are unable to answer to get answers – exit! If you have tranches of capital left and you are faced with a haemorrhaging investment – quit!
- And no it is not true that you exit only when the chips are down. I urged the decision makers at AVP to exit out of one of our investments eventhough the company shows a 300% increase in sales from last year but for me.. it was not a business I could see getting successful – anymore.
- Take partial exits at each round when you are diluted
- So you have decided to exit but you don't know whether you should leave a little or take-off completely. While the answer to that depends on what you deduce.. the way to exit partially in my opinion is to take out as much as you had invested (directly or notionally) in the previous round. This way you get your principal back but stay invested in the profits of the asset.
- So for example if you get an offer of secondary sale at a 20x value of the share (at the time you had invested) then your original investment is 5% of the exit value. Take that out and you are now sitting on a pile of money that you have created.