Loving your startup investments is like loving your teenagers

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By Audrey Jacobs @OurCrowd VP CrowdFundBeat Guest Editor,

“I hate you! Get out of my room!”

I doubt you’ll hear the CEO of a startup yell this at you, however when you take the leap to invest in startups, a good way to mentally prepare is to love them the way you love your teenagers.

Accepting this mindset will make the journey towards a profitable return enjoyable. Be prepared to stay on top of how they’re doing, accept when they change directions, know they’ll keep asking for money, understand not all your children will excel and know you love them today for who they’ll be tomorrow.

Cyber stalk them

I told my three sons, you don’t get a phone until your bar mitzvah (age 13). I was not prepared for how much their life would shift to cyberspace. If I wanted to know what was going on in their world, I needed to cyber stalk them.

If you have teenagers they won’t willingly let you follow them on Instagram, Snapchat or YouTube. It sounds creepy but I suggest you make a false account of the opposite sex from a nearby high school. Everything will be revealed. You didn’t hear from me.

With startups, it’s a tad easier.  Since the companies are privately held and don’t have the same reporting obligations as public companies, you have to cyberstalk them to know how they’re doing.  I’m fortunate, as part of OurCrowd, it give the investors quarterly reports on each of our startup investments on their progress, achievements and struggles.  Yet I still stalk more.  Here’s how…

First set up news alerts for all your startups in Google news and CrunchBase.  Next connect/friend/follow the company name and its CEO on all forms of social media (LinkedIn, Facebook, twitter, YouTube).  If the company has a blog or email newsletter, subscribe to it.   You won’t learn everything however, you’ll have a good sense of the good and bad news that matters.

Embrace the passion pivot

I was heartbroken when my 16 year old tech genius, said

“Mom I don’t want to be a engineer anymore, I want be a fine art photographer.

He’d been designing drones and apps for startups already for four years.  I thought I could work for him one day. Argh.

Now he’s reborn as fine art photographer and his first art show is next week.

Breathe. Roll with it. Accept the sunk cost of raising a child.  Your teenager has pivoted his passion.

The same is true with startups. Now they are not as capricious as a teenager, but when you invest in a startup, you’re investing in the people first, the idea second.

You must be prepared for possibility the idea/product will change and the growth cycle will slow while they change direction.  If the idea or product does not take off, they realize they’re not making money, the customer demands a different solution or a competitor comes in and crushes them, the entrepreneur needs to pivot, change direction, try something new to stay alive and then thrive.

Three great examples of famous startup pivots are Pinterest, Twitter and Groupon.  Pinterest started as a mobile shopping app called Tote. Twitter started as a side project of Odeo, a podcast directory and marketplace.  Groupon began as a consumer activism site called The Point.

So don’t be afraid of the pivot.  It could be a really good thing.

Keep asking for money

“Mom I need money for X.”

Whether they have a job, an allowance, or savings your teenager will continually ask you for money.  We all feel like ATMs.

Investors new to startup investing often do not understand startups also keep asking for money. But they must in order for you to make money. Let me explain.

First, remember, a startup is not profitable, that’s why they are asking for investors to give them money in exchange for equity. They take the funds to develop and market their product or solution.

The common cycle of a startup is to have a “funding round” where they raise money at a set valuation (price) that is set by a lead investor.  The entrepreneurs project what they will accomplish with the funds until they will need to raise money again. Then in 6 to 18 months, once they have achieved measureable milestones (product testing, number of users, customers, revenue, etc.) they have the same or a new investor invest more money at a higher valuation (price).  The hope is each funding round the startup increases its valuation at least twice, often more.

If you want your investment to give you a 10 x return, i.e. your company increases from a $1M valuation to being acquired by a bigger company for $100M, it will raise funds multiple times.  So when you allocate funds to invest in startups, you have to set aside funds to invest in future rounds if the company is growing and doing well.

Expect not all will succeed

I love my three boys, but I predict when they grow up, one will take care of me, one will take care of himself and one will need to be taken care of.  I can’t predict which one will be the most successful; my engineer/artist, my actor/chef or m athlete and I don’t care. I love them all the same.

When investing in startups you must love your companies equally knowing that some of them will fail.  According to Yan Revzin in his Forbes article “The Major Reasons Startups Fail,” the percentage of startups that will fail is 80% to 90% – which is worse than your children. According to research by William Sahlman at Harvard Business School, 80% of a typical venture capital fund’s returns are generated by 20% of its investments. This is why you’re recommended to invest in at least 10 to 15 startups

I wouldn’t recommend having that many kids but sometimes I wonder if one more child would improve my odds.

Love them for who they will be

It’s often hard to love your pigheaded, opinionated teenager who knows everything.  But you have to step back and love them for who they will be, a passionate adult who is driven by their values and courageous to stand for what they believe in.

It can be maddening. One year I spent an hour each night arguing with my son on the existence of G-d.  He said G-d doesn’t exist. He’ll probably make a great Rabbi one day.

We have no idea who our children will become. We love them unconditionally knowing we love them more as we watch them grow into adults and become parents themselves.

Who would of thought 8 years ago when two young guys in San Francisco rented air mattresses in their living room because hotels were sold out for a conference they would become giants of the hospitality industry creating AirB&B, a company with a $25.5 billion valuation?  You have to love startups for their potential.

We love our startups for the vision of the founders, the problem they’re trying to solve, the market they’re trying to dominate and the hope they can bring that dream into reality.

Exponential pride

Having children and having the financial means to invest in startups is a difficult gift.  On the journey to success there are hiccups, frustrations and sometimes failure.  But we must love them unconditionally, watch them, support them and believe our dreams will come true.

When the startup exits (is acquired or goes public) it’s a similar sense of exponential pride and thrill as when our children graduate, get married or have their first child.

May we all have many moments of exponential pride.

– – – – –

The Angel in the Crowd blog is for smart investors who want to learn about investing in startups via equity crowdfunding websites.

Note: These are my personal views, not the opinion of my company or friends. I am not an investing advisor or parenting expert. Please discuss with your personal advisors before investing your time, heart, and money.

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