- April 19, 2018
- Posted by: jorrit
- Category: Innovation
Let’s invest in a startup.
-“Ok, we agree, let’s try innovation. We’ll start slow, with 2 or 4 startups and see what happens”. I have heard this often enough. It seems a logical thing to do, try something ﬁrst. The problem lies in the fact that people often forget that investing in ideas is, and always will be, a betting game. So the chances of these two or four startups becoming a success are slim considering the odds of 2 out of 10 will make it big.
Once some of them have blown up, those one or two that do remain will become the company’s ‘innovation mascot’ and a lot of money is often invested to ensure success. Making decisions on whether or not to keep investing in the startup becomes an emotional decision rather than a rational one based on signs from the actual market ( or customers for that matter).
VC’s have learned this the hard way. They have learned to spread their investment over bigger numbers and hope for that one 140x return. If you look at the numbers of VC investors over time, you will see that investing a large amount of money in just a few startups will give you a higher than 80% chance of losing all of that money. Whereas spending that same amount on tenfold more startups will change your chances signiﬁcantly.
You may have heard this before, but it is still something a lot of people do not realize before they actually see the numbers. With real investments, these learnings take time and money. To save both of those for you, we have made this useful tool https://next.amsterdam/calculator
Fill in your innovation budget and try it with a few diﬀerent numbers of startups. These are scenarios based on real VC investments and their returns over several years. Since investing in startups is a betting game, the Monte Carlo simulation is used to calculate chances of success. It will give you an indication of the chance of return. More startups with less investment each will give you a better chance every time.
You’ll need a larger number of startups to start oﬀ with. There is no way to predict the success of a startup. There are a lot of elements that play a role. Luck, timing, talking to the right people, combining the right things. There is no way to control this. There are however ways to reduce the risk of loss in that portfolio. You can reduce the amount of money spent on startups that look like going the wrong way. Stage gated investment will give you a tool to be able to do just that. Provided that you ask the right questions at the right time that is.
For a healthy investment portfolio, innovation accounting is a crucial element. It will give you insight as well as a way to get some control over where your money is going.
Esther Gons is Founding Partner of NEXT Amsterdam and has over 20 years of experience as an entrepreneur. She is co-author of The Corporate Startup book, which has just won the 2018 Management Book Of The Year Award for Innovation & Entrepreneurship. This is her third and final blog on our website.