Successful startup investing 101 - budget and investment thesis

Good Day & Happy Tuesday!

I hope 2022 is treating you well, thank you for reading this newsletter?? Enjoy!! Please don’t hesitate to share any questions or comments you might have.

?Today we will address not one but two hyper important questions when you start?#investing?in private markets — 1) How much should you invest in?#privatemarkets?, and 2) What is your investment thesis?

1) How much should you invest in private markets?

Depending on your country, retail and qualified investors can invest more or less of their assets in private?#investments?every year.

My personal advice is to invest what you can lose, what you can forget about, what you won’t need. For some of us it will be $500, or $5,000, and for others it will be much more!

So as you start investing in private markets assume that you have the minimum risk tolerance.

Private investments especially in?#earlystage?companies can be super rewarding and also very risky, on one hand you can literally loose 100% of your?#capital?overnight and on the other hand it usually takes forever for a company to have what is called a liquidity event. A?#liquidity?event will create the opportunity for to get your?#money?back with hopefully handsome?#returns.

So again investing in private markets is very high risk and you will have huge delay in getting your money back. This is not for the faint of heart! But as always, huge?#risks, potentially huge?#rewards!!

Once you have established your budget, divide that amount by 5 to 10. You will invest only a portion of your overall budget by company, from 10 to 20% by?#investment. Invest in 5–10 companies. This is for a couple of reasons. The first is diversification. You are going to win some and to lose some, so you don’t want to put all your eggs in the same basket.

Second this is a learning?#opportunity. Today you don’t know what you don’t know when it comes to private?#markets. So each investment you make will give you the opportunity to learn and become much more savvy when it comes to private investing. You want to maximize this learning opportunity by allocating smaller checks to several companies. And trust me you will make mistakes, we all do!!

Now that we have a better grasp of the budget allocation, let's move to the second point.

2) What is your investment thesis?

I am a firm believer that you need an #investmentthesis whether you are an institutional investor, a family office, a super angel or a business angel.

Your thesis will not be as formalized as a VC if you are a business angel but you should have some guidelines, especially as you start investing in private. As you get more experienced you can expand your investment criteria.

I will focus on some of the top criteria.

First, what stage do you want to invest in? Usually your budget will drive part of the answer. If you are a business angel you will likely invest at the very early stages of the company lifecycle, such as pre-seed, seed and seed-extension (and I will record videos to explain the difference). This is simply because as companies grow the checks required to invest also grow and becomes inaccessible to?most investors. So institutional investors / professional investors (and some High Net Worth Individuals / Family Offices) are likely to be the only ones investing at the latest stages of a company development.

Second, in what geography do you want to invest in? Proximity tends to be valued with private investors so they can step in and support the company if necessary. Depending on where you are located the opportunity to invest can be more or less abundant. So you might have to expand your radius. You might also want to invest in other geographies to get exposure to certain areas of expertise or certain end markets. Access to deals and tax impacts might also be taken into consideration when selecting your geography of predilection. Several factors can then influence the geography you decide to focus on.

Third, what industries do you want to invest in? I tend to recommend to invest in industries you know well, especially as you start investing in private markets. First, it will be easier for you to do the due diligence. Second you will be able to provide support to the company if necessary. Also if it is a competitive deal, meaning the deal is oversubscribed, in other words the demand is higher than the supply, your expertise will differentiate you from other investors. Your investment thesis should be one or two level down from the industry. For example, my expertise lays in financial services and I focus on B2B software for the financial services industry (Fintech) with a preference for asset and wealth management.

You can also have additional parameters to your investment thesis, such as diversity and inclusion, or socially responsible investing.

This investment thesis is very important as it will prevent you to be distracted by shiny objects and you will use it to qualify your investments, so you don’t waste precious resources on deals that don’t make sense for you.

Some investors put valuation limits, I personally don’t like that. Valuations are highly subjective, they depend on industry, geography, founding team, lead investor, terms,... so I find it difficult to have an hard and fast rule.

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The next step for you now will be to master?#dealsourcing?and?#duedilligence, as they are key steps to be successful. You will find more insights on subsequent newsletters.

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