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Telling the stories of startup founders and creators and their unique journey. Each episode features actionable tips, practical advice and inspirational insight.
00:00:00:00 - 00:00:09:23
Welcome to the Founders Journey podcast. Inspiration education for Founders by Founders.
00:00:09:23 - 00:00:28:17
Hey, I'm Greg Moran from Evergreen Mountain Equity Partners and the Founders Collective. Today, I want to talk about one of the most effective strategies for managing risk and start startup investing. And really, what I'm talking to you here is really those of you who are considering making investments in the startup landscape. They're looking at that as an asset class for the first time.
00:00:28:17 - 00:00:47:03
Or maybe you're looking to really fine tune your skills. But founders, if you're tuning in, you're also listen up, because this is the way that investors will really think about managing risk. So it's something you need to understand as well. That strategy I'm going to talk about is diversification. Right. And it's something in a venture capital fund like Evergreen Mountain Equity Partners.
00:00:47:03 - 00:01:11:10
It's really kind of part and parcel to what we do. Right. So when like traditional investments, start up investing really carries unique risks. And it really requires a very thoughtful approach to diversification. It's a little bit different than managing, say, a stock portfolio. So in this video we're going to really explore why and how angel investors should diversify across sectors, stages and geographies to really balance risks.
00:01:11:10 - 00:01:44:11
When you're looking at startup investing as an asset class and really, you know, help to use that diversification to really maximize your returns. We're also going to dive into the critical role that founders selection plays in any startup investment, because that's another way that really help you kind of think about startup investing and why we developed a unique founder assessment tool here at Evergreen Mountain, because we think it's such an important part of managing our own risk in the risk ops money within our fund startup investing can be incredibly rewarding on many levels, but it also comes with really high risks.
00:01:44:13 - 00:02:10:07
The research shows that over 75% of venture backed startups never generate a positive return. That's not great. However, the ones that do often generate very outsized returns. So unlike traditional assessments, say, stocks or bonds or things like that, startup investments are less liquid and they also have very uncertain exit timelines. You're probably going to be in it for a while, especially if you're investing at a really early stage to manage these risks.
00:02:10:07 - 00:02:33:10
Diversification is really essential. So by spreading investments across various startups, sectors and stages, really what investors do is create a safety net. So if one investment fails, they will. Others in different categories may succeed and then balance your overall portfolio. I can't tell you how many conversations I've had with angel investors that have invested in 3 or 4 companies and say, I'm never doing that again.
00:02:33:10 - 00:02:55:19
I lost all my money. Well, the numbers are in your favor, right? You got 75% that probably aren't going to make it. You really need to be thinking about diversification, not just throwing money into a very early stage startup. So investing across different sectors is one of the most effective ways to diversify. So different industries operate on really unique growth cycles and they operate on really unique risk profiles.
00:02:55:19 - 00:03:21:16
So for instance, tech startups are fast growing, but they face really intense competition most of the time. Well, health care tech may have slower growth, but it offers a much more stable market in many cases. So imagine if you're allocating investments to SAS in health tech, right? In an economic downturn, say, SAS may experience high volatility, while health tech may remain steady.
00:03:21:18 - 00:03:48:15
So creating it creates a natural hedge where that diversification comes in. So by investing in multiple sectors, you can minimize the real impact of industry specific risks and really broaden your opportunity to capture returns. Another really key approach to to diversify across is across different stages. So early mid light each stage has its own risk return profile. So we're early stage investments have high risk with high return potential.
00:03:48:15 - 00:04:12:03
Here you're betting on the founders vision and ability to execute more than anything else mid stage investments. At this point the startup typically has some traction. They're reducing some risk. Also you can start to see where the significant growth potential can really come in here. Later. Stage investments are lower risk. The startup is closer to an exit. Your timeline is going to be a lot shorter, but the returns are usually going to be lower as well.
00:04:12:05 - 00:04:32:03
So it's just balancing what do you want that return profile to look like? But also what's your acceptable timeline and really making sure you have a balanced portfolio that take these things into consideration and by doing that across various stages, what it does is it allows you to capture high growth potential in the early stages, but you're able to stabilize return through later stage investments.
00:04:32:03 - 00:04:58:14
Geographic diversification is another really important. So a lot of angel investors are now exploring opportunities outside their local markets, even outside the United States. Right. If you're a US based investor within Evergreen Mountain, about half of our fund is now outside the US. Investing globally opens doors to really unique high growth sectors in emerging markets. The valuations you're paying, the price you're investing at is often cheaper than what you'll see in the U.S., but the growth rate is still there.
00:04:58:14 - 00:05:20:20
So, for instance, Southeast Asia has seen explosive growth in tech and fintech. Latin America is a hot spot for e-commerce. We really like investing. We've got investments in India. We're looking at certain investments in Eastern Europe. We've got some in Western Europe as well. So if you're heavily invested in the US, really start to consider maybe looking at investments in Latin American e-commerce or Asian fintech startups.
00:05:20:20 - 00:05:41:08
Those regions are rapidly evolving and they offer diversification against US centric market risks. One of the common mistakes I see is angel investors investing in founders who are only just in their local like literally local town or city. You're just not going to get the level of diversification you need to there, and it's really going to create a difficult thing.
00:05:41:08 - 00:06:01:05
So not to say you shouldn't invest locally, you should, but balance that with some geographic diversification so you can take advantage of different market dynamics and different customer demands, while reducing the reliance in any single economic environment. Diversifying your portfolio is really crucial, but the other way you're going to really manage risk is by investing in the right founders.
00:06:01:05 - 00:06:28:05
So whenever Green Mountain Equity Partners, we developed a proprietary assessment to identify founders who exhibit the unique qualities of what we call the entrepreneurial adaptive innovator, we studied a lot of founders with multiple successful exits, and really what our research showed that successful founders often share four key traits creative resilience, humble assertiveness, balance, risk taking, and strategic accountability.
00:06:28:05 - 00:06:48:10
So what we really look for just to kind of give you an idea of what we look for in our founders assessment within the fund is that successful founders really demonstrate resourcefulness and creativity. They generate really innovative solutions when they're under pressure, because so much of their time as a founders spent under pressure, humble assertiveness was the second trait.
00:06:48:10 - 00:07:14:19
Founders with strong, humble assertiveness really influence through collaboration rather than domination. They show an openness to feedback and they really value input from others. Balanced risk taking is another important one. So rather than betting everything they approach risk with, level headed balance between ambition and stability can be a tough one for a founder to manage sometimes. And the fourth trait is around strategic accountability that top founders own their decisions.
00:07:14:21 - 00:07:39:20
They admit mistakes, and they quickly pivot strategically when necessary. By using this kind of criteria, we're able to evaluate whether a founder has what it takes to steer startup through challenges. So our proprietary model helps us predict which founders possess these qualities that they often really distinguish high potential startups from the risk. That's how we manage risk. That's one of the ways that we manage risk.
00:07:39:20 - 00:08:01:06
If you want more information on that, just go to Empire. You can download the white paper that shows the whole adaptive innovator model and push through those four archetypes in more detail. And if you're actually evaluating startup, you want to put a founder through the assessment. We're happy to provide the data free of charge to sum it up, diversification across sectors, stages, geographies is a really powerful way to manage risk and startup investing.
00:08:01:06 - 00:08:28:07
Don't overlook, though, founder selection. That's your ultimate risk mitigation. Investing in founders with the right qualities can make all the difference in high risk investing. Like this. So if you're interested in investing or exploring startup investing as an asset class, if this is new, you just want to learn more about our approach to portfolio management. How as a venture fund, we manage a portfolio of investments and manage risk for LPs and our unique approach to founders selection.
00:08:28:09 - 00:08:50:12
Reach out to us at Evergreen Mountain Equity Partners EMEA IPO. We'd love to discuss how we can support your investment strategy while you're there. Download the free whitepaper on the Adaptive Innovator Founder Selection model. Thanks for watching. Don't forget, please take a second. Like subscribe. Hit that bell to turn on the notifications for more content like this, and feel free to drop your questions in the comments below.
00:08:50:14 - 00:08:56:00
Thanks!