I sat down with one of my business partners who told me that I was nearing the threshold as a young investor and would soon be held to the same standard as everyone else in the business world.
While this was the beginning of a pitch to motivate me to take the reins of a company we co-founded together, it nevertheless gave me pause to think about the differences for young investors and the lessons they can learn from it.
We are a rare breed
This one is obvious yet important. There are advantages to being the youngest at the table. The main one being that people underestimate you. They will naturally expect you to be inexperienced and you can use this to your advantage. Aside from the threshold to impress founders and fellow investors being lower, young investors can also persuasively make the claim they deserve a seat at the table to give themselves opportunities to learn. For older investors, board seats may come at a higher price.
However, perhaps the most important difference for young investors is that older founders often are looking for young blood to mentor and depending on the age of the startup, a young investor might be their only option.
This can be an advantage but more importantly an incredible learning opportunity. The co-founder mentioned above has taught me more about B2C product integration than anyone else I have done business with and I, in turn, was able to shed some light on B2B trends in the industry.
These kinds of mutually beneficial mentorships very rarely exist for people in their twenties. Young investors have the capacity to gain a holistic view of the commercial world much earlier on, which is why they remain the exception to the rule.
There is no substitute for experience
This one’s a cliché but not without good reason. I spent the majority of my early years trying to prove it wrong and for a while, thought I was succeeding. However, a recent experience with one of my portfolio companies put me straight.
I used to believe that experience protected you from the mistakes and lapses you didn’t see coming. As a result, I thought that if I could predict every possible scenario then I could prove the cliché wrong. Putting aside the fact that this is nonsense, I have since found that the reason experience is important, is not because it keeps you from getting blindsided, but because it can protect you from explaining away potential problems that a more experienced investor would not ignore.
It is easy to convince yourself that a particular worst case scenario won’t occur from a position of ignorance. It is only through experience that we can know better.
Know your worth
People will try to take advantage of you as a young investor. This can apply to your time as well your capital. With regards to your time, you need to be clear from the start what your role in the company will be. If you will be contributing to the operations of the company beyond making introductions to relevant partners then it is not unreasonable to request a better deal than the passive investors in the round.
With regards to your capital always remember: an investor’s goal is to make a return! Again, it seems obvious but as a young investor it is easy to lose sight of that, especially if you invest in very early stage companies and become ‘part of a team’.
Investors are not entrepreneurs. An entrepreneur’s job is to grow the business. An investor’s job is to achieve a return and the best way he/she can do that is to remind the entrepreneur to grow the company in such a way as to invite further investment. This can be done by ’tranching’ your commitment to be released according to the fulfilling of certain KPIs and objectives or through a position on the board.
Regardless, of how you set this out it is always important to remember that in devising terms, you can afford to be tough so long as you are fair.
Entrepreneurship has become fashionable and as a result, there are many more founders looking for money than there are those willing to give it away. Being an angel investor is a position of responsibility. You have the means and hopefully the capability to empower the next wave of leaders and innovators. But don’t let the ‘angel’ part fool you. Your first responsibility is to yourself!
Adrian Clarke is the founder and CEO of Delarki, a boutique investment firm based in London, Miami, The Bahamas and now Hong Kong.