You are a successful entrepreneur and have just sold your business for a stack of money.
So you either retire entirely (not always such a bad idea by the way!) or you decide that now is the time to become a serial investor in small private companies.
After all, this is what your company was, and if you get it right then it is where the real money is made and you can get personally involved. You also reckon that you know a fair amount about business generally and in many cases you rather like the idea of investing in a different sector from your core experience.
Despite the warnings, you still decide to go ahead and so you come and talk to me! Here are my thoughts.
Control or influence?
First of all, we all know that management is key in any business, but consider whether you want to become a majority or minority investor. In the former case you can hire and fire management, while in the second you can influence but cannot control.
Now let’s be clear: in most cases, to own a controlling interest is not possible and you may rightly take the view that you are an investor and don’t want to effectively go back into full-time management.
So let’s say you become a minority investor. You agree to join the board and your first board meeting probably goes something like this.
Your initial temptation is to dig into the numbers in great detail, but you might avoid this for the sake of not appearing too pushy to begin with. You then go through the sales pipeline and again bite your tongue, not asking endless questions about the fine details of the deal in question and when, or even if, it is going to close.
Then the MD asks for your help on a number of administrative matters he can’t be bothered to look into himself and you volunteer to help. Last but not least you are badgered to open up your carefully guarded black book of contacts, which have taken you years to collect and nourish.
I’m sure you get the drift. The number one rule as an investor is never promise to help in any way except for strategic advice, unless you really want to.
Rule two. Remember that you are no longer an executive but a non-executive and investor. This means that you generally have to use different technologies to find out how your investment is going or risk alienating management by becoming a burden in their eyes rather than a help.
This is where the “handkerchief trick” comes in handy, as taught to me by one of the best investors I have ever met. The trick is to imagine a handkerchief in a clenched fist with a tiny corner peeping out. What you need to do is grab the corner and keep pulling until you see the whole handkerchief.
In other words, it only takes one thing that you think is a little odd or doesn’t seem quite right to alert you to bigger problems. In these cases, follow your instinct and keep on pulling until you are completely satisfied that you have got to the bottom of your area of concern.
Another highly successful investor in small companies always used the analogy of a quick medical check-up. If you do an in-depth blood test, urine test, and then throw in blood pressure for good measure, you can generally see if the patient is ok.
Depending on sector, most companies will have three or four key barometers (or KPIs if you want jargon) that will tell you how well the business is doing.
I’m afraid that I am as boring as hell on this, as I always ask the same set of questions to my investee companies. This will include cash, or lack of it, order intake, progress on any big deals, progress on research and development, new marketing strategies, or lack of them, staff morale and headcount status, and the competitive situation – you get the idea.
Keep in touch
Another trick is to not be afraid to ring the MD or finance director regularly. The call might only take a few minutes, but cumulatively this gives you a much better up-to-date feel on your investment, and if the management is good, they generally welcome the communication.
Lastly, don’t be afraid to be really tough if you think management is not doing the right things – the only way is to be very stubborn. Likewise, if management is doing a good job, offer congratulation and encouragement. This also includes making sure you look after them properly through an appropriate mix of salary, bonus and, where relevant, share options.
It only remains for me to wish you good luck: investing in other people’s companies is great fun and really can make you money.
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