Investing in startups is not something that can be taught at school or university... like “management consulting”, investing in startups has almost the status of an art or profession... and, therefore, it must be learned like any trade... doing, and if possible under the supervision of one or more good teachers.
Investing in startups is different depending on whether you do it in one market or another. Investing in the USA has as great advantages the size of the target market, its homogeneity (both in terms of language and idiosyncrasy) and access to a huge pool of private investment at all stages of a company's life (very “entrepreneurial friendly” business angels, early stage VCs, growth VCs, and capital markets such as Nasdaq). In Europe, all this is different in each of the different countries/markets into which the continent and its islands are divided... UK is the most similar market to the USA but its size in terms of GDP is only 13% of the American market and the GDP per capita is 64% compared to that of the USA... It is clear that the startups that develop in this region will be different and will have different development possibilities. In short, we have to do significantly better in Europe than in the USA and we are witnessing this through the success in Western markets of companies ranging from Apple to Amazon, through Google or Netflix... Being aware that we are starting with a very important handicap, it is still possible to make good investments in startups from Spain. How? Well, there are a series of rules that range from basic issues to more sophisticated ones that we must take into account:
The first thing is to understand that investing is an art that you learn by doing., so the best thing - as in any profession - is to start with someone who knows and can mentor us. It's very easy to get carried away by emotions and make bad investments, so the best thing is to surround yourself with people who have been investing for a while, have made a lot of mistakes, have experienced frustrations of various kinds, and can guide us accordingly. The easiest way to achieve this goal is to join one of the renowned Business Angels networks in Spain: ESADeban, IESEBAN, Keiretsu, SeedRocket, etc. An important topic, as many of us have been able to verify since the beginning of the problem of Covid-19, is create an investment portfolio, and not invest at a sectoral level, concentrating all investments in an industry even if we know them very well. Those who have concentrated all their investments in the tourism sector are well aware of what I am talking about. Another related point is the amount of tickets. For Business Angels, my recommendation would be to start with tickets in the order of 15-20K€, keeping a small remnant in case the company is doing very well and everything indicates that it is worth doing a “follow-on” in the next round.If our intention is to invest in technology startups, it is important that we are able to follow our own guidelines... There are many companies that base their business models on “digitalization” and change of service or even business model, but whose technology is based on open source, easily replicable and does not create barriers to entry. I am not saying that good businesses can be generated in this way, but that they are less defensible and, therefore, less capable of succeeding in the long term, since they are, sooner or later, subject to intense competitive activity that erodes their gross margins. At this point, and provided that we have put into practice to the point we consider appropriate, the time has come to analyze potential investments to determine their capacity to generate attractive returns. The two main factors to consider are: the equipment and the market. In terms of equipment, we recently published an article in which we talked about the characteristics of entrepreneurs. We don't say it ourselves, but it is established by a series of papers developed by researchers with proven solvency. Entrepreneurs are divided between crazies, rascals and those who think they are being undervalued by the labor market... So here it's a matter of identifying the latter and avoiding the first two. A good team has at least 10 years of experience in the industry, has studied or worked outside the country of origin and has eventually worked in a renowned company — which is not easy to enter — into the past. As for the market, one of recent creation is of interest, which is growing in double digits and that is or will reach at least 1 trillion dollars in the next 2 to 3 years. Such a market forgives many of the mistakes that entrepreneurs will necessarily make. One of the aspects that investors must look at in these markets is whether there are M&A transactions in them, a fundamental question in order to be able to transform shares back into cash... There are markets such as fintech where M&A activity is frenetic. On the other hand, the fintech market is not easy to understand for those who have not worked in banks, so to invest in these startups, the ideal is to follow a business angel who comes from the sector.
In my opinion, I think that with these four ideas it is possible to start building a portfolio that over the next 7 to 10 years generates attractive returns for investors. What are attractive returns? Personally, between 12 and 15% could be considered healthy. But why not try to earn the same by actively investing in the stock market? For the same reason that there are people who invest in a sailboat even though the economic return is low or negative... for the pleasure of sailing! What kind of startups launched from Spain, with their large handicaps in terms of market size, different languages in the first target countries in terms of international expansion (France, Italy, UK, Germany) can work better, implying a good return with a lower risk? My bet is on SaaS software. I think that from Spain we have good developers, and if we can't access developers from Latam or Eastern Europe in teleworking mode, we have good business consultants who can work on simplifying business processes such as the best American, French or German consultant, and we are at a global inflection point where, due to generational change and due to the need of the current context, SMEs, medium and large, will be forced to digitize at very rapid steps. This is a good time to launch a strategy focused on SaaS at the European regional level. More: Funding round in a startup: What is it and what is it for?
