When talking about ways to grow your assets, it is always extremely difficult to decide which is the best and safest way to grow your capital.
It is clear most investors look at companies that are already consolidated in the market, because they know their capital will multiply safely. But in doing so, they shun what is fast becoming one of the most profitable business areas: the startup world.
From Silicon Valley to Spain, Sweden, Mexico and Argentina, entrepreneurs have begun to surprise us with their ability to innovate. They present highly valuable ideas which often cannot progress for want of capital injection, execution problems, competition and development of products and services which do not end up generating enough income. There are quite a lot of statistics to show that only a small percentage of startups remain active after 2-3 years. During a recent conversation with a New-York based investment fund specializing in media and ad tech, they said that only 5 out of every 10 investments earn money, of which only 2 obtain very high returns while in the other 3 they recover their investment with a small yield. Of the other half, they lose all their money in 2-3 companies and recover some of what was invested in the rest. These statistics must alarm more than a few investors.
So why is investment in startups part of Cisneros Interactive’s strategy? We invest in startups with the following characteristics and under specific parameters which improve our chances of success:
• We only invest in regions we know well (Latin America, Spain and the US Hispanic market) and where we have other companies that can help the new startups.
• We only invest in the digital advertising sector where we already have very experienced professionals.
• We invest in companies with a proven business model in other regions. This avoids the risk of inventing something nobody wants (though we still retain the execution risk and competition risk, which are nothing to be sneezed at).
• We try to invest in companies that are already generating revenue (obviously, this reduces our upside because valuations are higher but because founders believe we add a lot of value, we are able to obtain slightly discounted valuations compared to other investors.)
• We only invest in startups in which we can add a lot of value and/or when these startups can generate value for our other companies.
• Finally, we are very active investors. We help startups with their day-to-day activities and take control of the financial, tax and accounting side of their companies so that the founders can concentrate inbuilding their teams as well as developing and selling their product.
We believe this method minimizes our risk of investing in startups and we benefit from the positive aspects of startups which include: a) dedicated focus on one product, b) innovation and c) having a team of people who act like owners, because that’s what they are.
This may seem like a simple strategy but the reality is not that simple and we know we will always have a percentage of startups that fail. But innovation either through investment in startups or investment in projects developed internally is always risky. We have to be prepared to fail in order to be able to invent something new.