The move from entrepreneur to investor needn’t be fraught with risks

When making use of their first-hand experience, entrepreneurs-turned-investors have a real advantage over other types of investors. But this doesn’t mean that the transition isn’t fraught with risks

The move from entrepreneur to investor needn't be fraught with risks

After a successful exit, most likely the first thing an entrepreneur will do is break out the Veuve Clicquot and crack out the holiday brochures. “If they’ve made £5m or £25m, the first thing that most entrepreneurs do is pay off their debts and buy a house,” says Julie Meyer, CEO of Ariadne Capital, an investment and advisory firm. “But in a year’s time, they wake up and say ‘okay, what do I want to do now?’” There are a range of common responses, from moving to an island paradise to returning once more to the breach and launching a new start-up. But some choose to use their entrepreneurial experiences to go into investing.

Aside from the lure of making more money, one of the most oft-cited reasons for becoming an investor is that many are attracted by the prospect of giving something back to the ecosystem that supported their success. “Entrepreneurs tend to be some of the most generous people because we’ve all been helped by people along the way,” Meyer says. “We tend to be very much ‘how can I throw some goodwill into the universe’.” Few successful entrepreneurs will have forgotten the investors that helped them achieve that success and inevitably want to provide similar support to other enterprises.

It’s also possible that entrepreneurs are just reverting to type. “Naturally, we’re builders,” says Paul Lees, angel investor and former CEO of Powwownow, the free conference call provider. “Entrepreneurs are not necessarily very good managers.” The personalities that are drawn to entrepreneurialism tend to be pioneers rather than maintainers; this means that in investment terms they’re more likely to get their kicks out of helping start-ups grow than from playing the stock market. “The interesting thing is that early, high-growth stage,” he continues. “That’s probably our special skill.”

Another benefit that Lees thinks former entrepreneurs have over their more established brethren is their instincts. Whilst it’s always important to establish the financial case for backing a business, trying to understand the je ne sais quoi that makes a business become a runaway success can’t be worked out through the financials alone. “There isn’t a book that tells you how to do those things,” he says. “The numbers are important but a large amount of what entrepreneurs do is follow our gut feelings and it’s very difficult to put that down on paper.”

However, Meyer cautions against trusting gut instinct blindly. “Entrepreneurs tend to be very passionate,” she says. “They tend to fall in love with things.” Of course, there is nothing wrong with passion per se but the problem comes when this causes an entrepreneur-turned-investor to lose their objectivity. Meyer has witnessed cautionary tales where becoming too subjectively involved in a business has resulted in an investor losing unnecessary amounts of capital. “They believe they can have this same ability to turn their money into something magical as they were doing when they were working 100 hours a week for three years,” she says. “And so, just like that, they lose £200,000 essentially overnight.”

This is why making the right choices when it comes to investments is so vital. Given that an entrepreneur-turned- investor needs to accept that the start-up they’re investing in isn’t their baby, one needs to be sure that the founders they back are capable of seeing the project through to fruition. “It’s all about the team,” Lees says. “The idea’s important but it’s the people undertaking it that are the key to whether or not a business will succeed.” It’s an oft-repeated truism in the start-up space that an idea that isn’t working can usually be pivoted, whereas a bad team is something that you’re stuck with.

In part, one of the most significant dangers of former entrepreneurs investing in new start-ups is the fact that they’re likely to suffer from the burden of too much knowledge. It’s natural to want to help others avoid the mistakes you have made but it’s important to recognise the difference between acting in an advisory role and becoming a backseat driver. “You are no longer the boss,” says Lara Morgan, the serial entrepreneur and angel investor. “Recognise that you are no longer in the cockpit and are not in a position to just grab hold of the controls.”

However, it’s rare that an investment relationship will just be a cash-injection alone; many first- time start-up teams will be expecting to access an investor’s experience as well as their capital. But the key is having a light touch, rather than trying to mould someone else’s business according to one’s own agenda. “If you’re going to sit there and tell him or her that they’re wrong, the entrepreneurs are going to stop listening,” Meyer says. “You’ve got to find ways of being a coach, an influence with carrot – not stick.” Despite this, even when making the most astute of decisions and advising with suitable sensitivity, it’s important to recognise that even the surest of bets also come with a risk of failure. “When it comes to angel investing, the textbook says [when] you invest in ten, seven go bust, two do nothing and one does something special,” Morgan says. She has met several entrepreneurs who had simply invested in businesses and expected a return, regardless of their actual involvement in the start-up or their experience. Inevitably these individuals saw significant losses. “Many had lost all of their money or were heading in that direction,” she says.

Protecting oneself against these kinds of losses involves a little common sense. Particularly for those who are less experienced in the financials – for example those who have never worn the CFO mantle – it’s important to nibble away at investment rather than biting off more than you can chew. “You don’t want to jump in with both feet and put 50% of your net worth in,” says Meyer.

And an entrepreneur-turned-investor needs to conduct some thorough due diligence to make sure they know what they’re throwing their money behind. It’s vital to go over the figures with a fine-toothed comb and an investor shouldn’t be afraid of asking to speak to customers and shareholders. “Sometimes people will not do certain kinds of due diligence because they get pushback from the founder or they feel awkward – ‘the entrepreneur’s going to think that I don’t trust them’,” Meyer continues. “Well the simple fact of the matter is that, unless you know them extremely well, you probably shouldn’t trust them.”

But, regardless of how solid a business is at the time of investment, some losses are unavoidable and, in Lees’ opinion, failure isn’t necessarily the worst thing in the world. “Does it hurt if I lose money on something? Yes,” he says. “But do I think failure is a bad thing? No.” The ‘fail often’ mantra has come to hold especial significance in the high-growth start-up space; failure is rarely the end but is simply an opportunity to iterate, learn from one’s mistakes and hone one’s strategies. “The worst thing you can do is nothing,” says Lees. “You have to change, evolve and try different things.” 

A capital idea

Ariadne Capital

Having gone from building and exiting a start-up to creating her own venture firm Ariadne Capital, Julie Meyer is perhaps the quintessential entrepreneur-turned- investor. She set up First Tuesday, the networking organisation for tech start-ups, in 1998 and achieved a $50m exit just two years later, something which gave her invaluable experience in what it takes to grow a start-up to fruition. “I learned a lot in short period of time and that enabled me to really understand quite a lot about building a business, running a business and selling a business,” she says.

Whilst it would have been a natural step for her to simply join an investment bank or an existing VC, her experiences had taught her the huge value that an entrepreneur-led investment company could bring. “I came to the conclusion that the people who had ‘gone into the building’ so to speak and lived to tell the tale had quite a lot to share with people who were considering setting up a start-up,” Meyer explains. To help facilitate this, she set up Ariadne Capital as a means to help other entrepreneurs achieve these kinds of exits.

And Ariadne has certainly achieved these aims in its 15-year tenure. “We’ve managed to create a gravitational pull by virtue of our empathy and our reputation for being fair, hard-working, smart and adding a lot of value,” Meyer says. “We don’t just give up on start-ups when it gets difficult or they get shot at; we’re there with them in the trenches.” Because of this, Ariadne Capital has been able to support the growth of high-profile enterprises such as Skype, Monitise and Zopa

Josh Russell
Josh Russell

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