Maximise your Chances of Backing a Winner

Author

UK Business Angels Association

25 September 2015

It is notoriously difficult to make a return from investing in early-stage companies. Very experienced investors often fail so why do people get drawn to this asset class? The simple answer is that it can be very lucrative, but how do you maximise your chances of backing a winner?

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Nobody should consider investing in unlisted equities or early-stage companies unless they are prepared to build a portfolio of different holdings. Trying to pick a winner with just one investment is like finding a needle in a haystack. Over 80% of early-stage companies will fail and most of the others will not give a substantial return. This is why venture capitalists typically look for a 10x return. They need to balance the ones which give no return. The idea is that you only need one to perform very well to make up for the others treading water or even failing completely. The exciting thing about unlisted equities and early-stage companies is that successful firms can grow enormously in value, and easily make up for losses elsewhere in your portfolio. Crucially, however, you must be mindful that each early-stage company is likely to embark on several other fundraising rounds. This is often misunderstood by investors and can cost them dearly. Unless you have the money to invest again in later fundraisings, your original holding will be very much diluted, and even if you back a winner you may not see much of a return. It is important to have enough capital to “follow your money” and invest in further fundraising rounds to preserve the value of your initial investment as much as possible.

What are my Chances of Success?

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