Why You Don’t Need to Be a Unicorn
Understanding investors’ perspectives on risk will provide insights into how they make investments, build their portfolio, and even evaluate your business.
Despite deep due diligence, and in most cases — especially among angels — a deep desire to provide the tools and resources necessary for a business to succeed, investors can’t always pick winners. Consequently, many aim to intelligently invest in multiple companies and build out a robust portfolio, with the strategy of helping them all achieve successful exits, but the knowledge that only approximately 30% will provide returns and an even smaller number will produce extremely high returns. Portfolio theory argues that a larger portfolio increases an investor’s chance of a high return on investment.
To better understand this theory, we have to take a look at the investing J-Curve. Basically, it shows that after investing in a large number of companies, the unsuccessful ones will fail early, while the big exits will take a long time. So the return on investment will drop when an investor begins investing and will only be worth more than the original investment after several years.
So what does this mean for getting your business funded?
Investors aren’t always necessarily always looking for giant exits, but instead focusing on long-term returns. Smart investors want to invest in strong, growing businesses led by a capable team. You don’t have to be the next Google or Uber to get an investor’s attention, but you do need to have the growth, traction, and core base of power users to prove that your startup is in fact a venture.
This post is part of the Hyde Park Angels Entrepreneurial Education Series, which brings together successful, influential entrepreneurs and investors to teach entrepreneurs everything they need to know about early-stage investment through events, articles, videos, and more. If you are interested in learning more about similar topics, register for “Connecting Corporations and Startups” on September 24.