I see that the chairman of another major private equity fund has graced us with his wisdom on investing. I’ll summarize it for you:
Bet Bigly (and pray you get the timing right).
There’s only one massive problem: 99% of the time this leads to failure.
Which isn’t a recipe for putting food on the table.
For a rich guy with a billion dollar portfolio, investing in startups is a game of skill. Expertise matters. Toss a bunch of bets on the table and enough will pay off.
And yes, most of the returns come from a few massive home runs.
For a portfolio investor with 50+ companies, this isn’t a problem. You’ve got enough bets that you’re probably going to find that unicorn that pays for everything else. May the odds be ever in your favor.
Oh wait. You’re not rich. You only get one bet.
And by the way, on the back of that lottery ticket, someone likely stamped: “Must Be Present To Win”. Many companies hit their initial goals only to flame out before an IPO. In which case, you get…. nothing….
In which case, you need to look at this table. (distribution of single investment returns)
Translated: 10% chance of easy street, 65% odds of losing your money.
Investor Size: Anything Smaller Is Useless To Them
You know why billionaire venture capitalists hunt unicorns? Because when you’re running a few billion dollars, that’s the only way to bump your results up a notch. Nothing else matters.
Which means there is an irrationally high price for potential unicorns, since that is the only deal size which makes sense to a large institutional investor.
Except I’m not a billionaire. Neither are you, most likely.
Our “portfolio results” can benefit from a much smaller amount. I don’t know about you, but a few thousand dollars a month sounds great to me. Bootstrapping a business to low six figures? Life-changing. $5 Million dollar exit? I’m out – beach time!
Best of all… we don’t need to compete with Wall Street Geniuses for these deals.
A Better Formula For Main Street
I was taught to replace something before you tear it down. So, here are three better criteria for picking a small business or side project (from a successful founder)….
- It should be big enough to earn a fair return on your time, but no larger. The bigger the project, the more sharks you need to fend off. My best ideas were completely absurd and addressed markets ignored by competitors.
- Focus on learning instead of planning. I’ve never met a business plan which survived contact with reality. Your assumptions will be wrong. However, you’re going to have the opportunity to learn and adjust. Which may, in turn, lead to a much better idea that nobody else has considered. That’s the real story behind most niche empires.
- Become hard to kill. We read about picking the right market at the exact right time to make a fortune. Except it doesn’t work that way in real life. The industry insiders almost always know more than a new player. You’re betting against the house. So instead of trying to second guess the insiders, work to get a seat at the table. Keep your costs low, run lots of little tests to learn the business, keep exploring until you find a hole. Then become the strongest player in a niche others ignore.
Sometimes this requires a little patience. Take a job in the industry to learn the ropes. Connect with people at trade shows and networking events. Instead of making a mad dash to find product-market fit, get paid to scout the territory.
And then use that insight to make small bets, easily replenished if you fail. Don’t be afraid to call it a side hustle or a weekend business. You can easily upgrade your business card once you’ve built a list of happy customers.
Will you create a Unicorn? Probably not. But your chances of achieving a life changing success with this strategy are probably a lot higher than 10%….