My worst investment decision was an investment in a start-up company. I did not invest because I thought the company had a good idea but because I liked the people who were working there, and I didn’t feel I could say “no” to them.
Throwing good money after bad was an exercise in sunk cost and saving face
And the reason it was a bad investment was that after I started investing, I got into a cycle of giving them more money when they were desperate. And, it ended up being an exercise in sunk cost and the social difficulty of saying “no”, an exercise that ended up being quite expensive.
Fundamental questions to ask about a start-up before investing in it
To avoid the above story when you look at investing in a start-up, I suggest you put it through the following test. But, don’t do it alone! Because you will be overly optimistic, I suggest that you test it with your most skeptical friend, oh, and write it down. If you get a “No” answer as you move through these questions just drop the whole idea (I learned this from my own losing start-up investments!) Question 1: Do you trust the person/people running the start-up? 2. Is the idea good? 3. Can this team execute the idea?
Ensure there is more than one funding resource behind a start-up
It is too easy for a start-up to rely on the original person who brought money to the deal. Sometimes the money source thinks that they can hold a larger share of the business if they don’t bring in other investors. But this thinking can lead to the trap of being the sole supplier of capital. Before you put money in a start-up, work with the founders to identify the next sources of funds. Then require the management team to pitch to these sources, go with them, see how it goes, then use that information to determine if you will invest.
1. Failed to do their own research
- Failed to do their own research
6. Invested in a start-up company
- Invested in a start-up that lacked various sources of funds
This article originally appeared on Become A Better Investor.
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