FOUR REASONS FOR FAILED INVESTMENTS IN STARTUPS
Investing a certain amount of money in a promising project, watching it develop without getting involved in operational processes, and occasionally collecting dividends is a very attractive prospect. This is what pushes entrepreneurs to invest in startups.
There is no lack of ideas—just announce your readiness to become a financial partner, and you'll find a line of people eager to "sell" you a business plan for the next "unicorn." However, sometimes it doesn’t even take a year before the unicorn turns into a feeble mare—it’s hard to keep it going, and it’s a pity to put it down because a lot of money has already been invested.
This is roughly how I can describe my experience in funding startups. I decided to try my hand as an investor a few years ago when I stepped down from the operational management of my machine-building company, Pet Technologies. All the projects I invested in were related to industrial production, which is a very complex and long-term process. Perhaps that’s why they faced such a fate.
I exited one project. We put the second one on hold because market conditions changed quite quickly, and the product we were producing became unneeded in our main markets. The third project became too costly for me—I had to bring in an external partner and sell a share. It is currently afloat, but we are definitely far from prosperity.
What went wrong? Analyzing my experience and similar stories from entrepreneurs around me, I identified four reasons.
1. Lack of Investment Traditions
Asset management, investing, and active entrepreneurship are fundamentally different processes. In my opinion, an investment culture has not yet been formed in Ukraine. Often, entrepreneurs who have accumulated a certain amount of money for financial participation in new businesses embark on this path without a deep understanding of the process and the associated risks.
Building our businesses in the 1990s (as I did), we gained a completely different experience and mindset: money should work, and preferably immediately; let's jump in now and figure it out later. Twenty-five years ago, I started with just two grinders and one mechanic. But a lot has changed since then.
When we with such an experience step into the role of a passive financial partner, it looks like wanting to jump from the fifth grade of school to the third year of university. From books and business school seminars, we know that out of ten young projects, five, six, or even nine will not be successful.
Those that do succeed will require additional funding and time to become profitable . But are we ready for this in practice? Especially considering that additional funds need to come from our own pockets, and quiet a lot of it. There is no alternative—this is the second reason.
2. Underdeveloped Financing Culture
It must be acknowledged that we, as an entrepreneurial nation, are quite poor compared to developed economies. We have the willingness to invest our own funds, but the funds are limited, and there are essentially no favorable options to invest less. In Ukraine, there are only two ways to finance. The first is to take a short-term loan at high interest rates, providing collateral, which you might not have in a startup. The second is to sell a share in the business, but our market for such deals is still too young and unstable. Few are willing to invest in high-risk projects without solid collateral. In countries with a developed startup culture, there are funds and institutions ready to invest in projects, assuming the risks of loss.
3. Lack of Experience in Young Entrepreneurs
We, as entrepreneurs, invest in startups not to dive back into the operational process and repeat the path we took twenty or thirty years ago. A passive investor is meant to be passive, so as not to do that. We are open to ideas that can be realized thanks to our money. But not thanks to our time, energy, and deep involvement.
However, in practice, it often turns out differently. Young idea authors simply lack experience and perseverance. They are enthusiastic about their idea at the start, selling it to the financial partner, but they quickly deflate when faced with the first difficulties and unforeseen events. Then, the investor, who has already put a lot of money into the project, has to step in and save the situation, even though this was not part of the plan.
It might seem reasonable to let the young talent make their own mistakes and gain invaluable entrepreneurial experience. But at a certain point, you realize that it's too costly for you to finance someone's learning this way.
An idea is very good. However, no matter how unique and promising it may be, an idea without execution is worthless.
4. Unfavorable External Circumstances
Even if the previous three reasons are not relevant, a promising startup can fail spectacularly due to unfavorable external circumstances. While you can influence the first three factors (better prepare for the role of an investor, stockpile funds for additional financial infusions, and be ready to actively engage in operational processes), you are powerless against black swan events. Poor timing or unforeseen factors, such as a pandemic or war, can turn yesterday's relevant ideas into today's failures.
Although I did not become a successful startup investor, this experience was very beneficial. I overcame the belief that eggs must be in different baskets and realized that it is more effective for me to develop what is already built and working. I looked at my company through the eyes of an investor and saw several very promising directions within the familiar business framework. These are essentially the same startups but on my turf.
The decision I made at this stage is not to get distracted or spread my money, energy, and attention too thin. But I emphasize—this is only at this stage. The role of an investor is the next logical step in the development of a businessman. If an entrepreneur does not stagnate, grows, and expands his horizons, sooner or later, he will move to the next level. It is important to prepare properly for this, taking previous experiences into account.
