How can family offices reduce risk in direct startup investments?
Short answer: Richard C. Wilson says family offices can invest in stages, check whether a product has a real market and competition, and assess the founders' management experience. He also recommends spreading direct investments across at least 10 companies. For private shares that may be hard to sell, he says to identify possible exits before investing.
Richard C. Wilson discusses how technology, market, management, financing and liquidity risks can affect direct investments in early stage companies.
Richard C. Wilson on staged funding
Richard C. Wilson recommends investing in tranches tied to milestones, such as developing technology. If a company misses a milestone, he says the investor's loss is limited to the amount already invested.
Richard C. Wilson on market risk
Wilson says to invest in areas you know and assess whether customers will pay for the product. He also recommends checking the management team's experience in that field.
Richard C. Wilson on competitor research
Wilson says due diligence can uncover similar products or other ways to solve the same customer problem. He adds that a tranche can depend on filing patents or securing a key customer or strategic partner.
Richard C. Wilson on portfolio size
Wilson says to begin direct investing only if you can invest in at least 10 companies. His example uses an average of $100,000 per company from a $1 million pool, invested over two or three tranches.
Richard C. Wilson on exit routes
Wilson says to identify possible exit routes before investing in a private company. He names an acquisition, an IPO, or management buying the investor out as possible ways to cash out.
"One key mistake many investors make is pouring good money in with bad money."
Wilson says that out of 10 angel investments, three or four may be complete losses, even when investors spread their money across companies.
From Richard's exclusive Billionaires.com interviews
Lessons from Richard C. Wilson's one-on-one interviews, as published on each interview page.
- Michael Lee-Chin: Invest in what people will do next. He saw that his generation would shift from consuming to saving and investing. He chose wealth management companies over banks and insurers to avoid underwriting losses.
- Tom Rosen: Buy when the market is down. Tom bought a lot when the stock market almost collapsed and made a substantial profit. In the year that followed, oil and gas surged. So did some tech.
- Tim Draper: Teach children about money early. Give them a small allowance and have them earn and invest money in the stock market. Over time they learn to ask sharp questions about how a business works.
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Frequently asked questions
How can family offices reduce risk in direct startup investments?
Richard C. Wilson says family offices can invest in stages, check whether a product has a real market and competition, and assess the founders' management experience. He also recommends spreading direct investments across at least 10 companies. For private shares that may be hard to sell, he says to identify possible exits before investing.
What can an investor do if a private company has no clear exit?
Richard C. Wilson says an investor could negotiate for dividend payments or consider debt or convertible debt if the exit is unclear.
What does Wilson mean by a company being "walking dead"?
Wilson uses the phrase for a company that earns just enough profit to survive but may not attract an acquirer, leaving investors unable to realize a profit or write off the loss.
Sources
Quotes are copied from the video captions and checked against the transcript. Timestamps link to the moment in the video. General information only, not legal, tax or investment advice.