Winning the Battle of Investors. Smart Money & Venture Investments in Troubled Times
My name is Max Volokhov. I am involved in innovation and venture investments at Mitgo. I wrote this article for two types of people:
- Experienced IT investors who want to better adapt to these turbulent times.
- Those who are interested in IT investments but forced to use trial and error to make sense of how things work.
First stage: Involuntary investor
For successful entrepreneurs, the struggle is common. One might have just started making decent money, and their business continues to grow. Yet still, it’s not enough. While they were grinding, their competitors have become more active. The traffic sources have dried up, and acquiring new customers costs more than ever. This leads to a solemn thought, “My business will only survive for the next 2–3 years. Now what?”
Another scenario for entrepreneurs is burnout. Especially when they haven’t been able to start anything exciting in the past few years, while all their friends and colleagues boast about new business ideas. A person might already have everything they need: a family, a house, cars, vacations, and savings, but the feeling of dissatisfaction creeps into their life like a poison.
In both cases, the solution seems obvious: they have to do something, and grow, and create new things. Otherwise, they risk falling back below their current level.
This is how entrepreneurs turn into investors.
Second stage: Utilizing accumulated capital
As an investor, you are seeking to utilize your hard-earned money. Preferably with lesser risks and better reward. But it doesn’t matter whether you create a new product / service internally within your company or outsource it by funding some guys in smart suits.
The question remains: why do some people succeed in reaping the benefits of their investments while others lose everything, all else being equal?
Previously, I discussed the reasons for investing in R&D, the process that involves the creation of new products / services.
What R&D tools are currently in place in your business? How can you measure R&D results? Ultimately, focusing solely on reality can lead to a reactionary approach, potentially ignoring long-term prospects. On the other hand, only fixating on long-term can turn into delusions.
If you’re looking for answers, see my other post.
There are no guarantees in venture investing because it only applies to the future. And the future is not verifiably foreseeable — at least not yet. However, we do know how to increase the chances of success, so let’s explore this “know-how”.
Winning the battle of investors
Here’s a simple example. OpenAl is raising money in their new funding round. The project is extremely promising, so a lot of people want to profit from investing in it. In order to acquire a share, they need to win in the fierce battle against other investors. That’s where the concept of smart money or smart investment comes in.
A smart investment is when an investor brings more than just capital to the table. Money is merely a commodity, and there is enough of it in the world to fund promising ideas. Therefore, simply having money won’t secure you a good deal. After all, $100 million holds the same value regardless of whose account it was transferred from.
So let’s remove money from the equation and delve deeper into smart investments.
Other benefits, aside from money
When addressing the potential partnership, entrepreneurs often ask, “What else can you offer besides money?” This is often an uncomfortable question for venture capitalists. The answers typically revolve around offering expertise, consulting, introductions to portfolio teams, and client acquisition. More often than not, both the fund and the project have no idea whether these benefits are truly available and pose any value.
For founders applying for funding, I can give one practical tip. Find a way to contact the teams of your potential investor’s portfolio projects and ask whether they received any “smart” benefits. But be prepared that overall, this will be very difficult to verify.
As for those who provide funding, don’t be disheartened if you function solely as a financial investor, much like everyone else in the market. If you recognize that you can only offer capital, allocate it on time, and refrain from making impossible promises, then you are exceptional — head and shoulders above most so-called investors in the marketplace. This stands as a solid foundation for your partnerships.
However, there’s an extra step to increase your chances of success. Here, we come closer to the focal point of this article.
Third stage: Investor level-ups
Imagine an RPG where player level-ups bring new skills, weapons, and gear. These acquired perks set leveled-up players apart from newbies who have just started playing. In investments, the picture is similar. There is a set of levels; the more perks you gain, the easier it becomes to succeed (and the risks are lower as well).
My message is this: understand your investor level, ensure that your assessment aligns with reality, and conscientiously try to level up.
Below are some perks that can level up your value as an investor. In reality, there are many more, but I’ll stick with these three to get the idea across.
- Industry expertise: Do you possess expertise in the field you are investing in? If so, you’re a few steps ahead of other investors lacking this knowledge. Congratulations, you’ve gained +1 level in smart investments!
- Assisting services: Perhaps you have your own advertising agency or a proficient HR person who can find real talent. If you have anything that can propel your potential new project forward, kudos! You’ve got another +1 level in smart money.
- Client base: What if you share the same target audience with your potential project? Or you can assist it with sales, at least in the early stages? Excellent — another level-up!
While these perks may seem straightforward, not many investors and businesses are good at leveraging them. But in such troubled times, these perks might not suffice for an investor to mitigate the heightened risk levels.
Instead, let’s set our sights on higher aspirations. How can investors reliably hack the system and gain +2–3 levels at once?
To achieve this, they need to recalibrate their investment business model. In a classic scenario, an investor typically acquires a stake in a company and sells it in 5–7 years at a profit. You can follow this scenario — or you can do something better.
I refer to this approach as…
Fourth stage: Double economics
It’s when an investor has more than one source of income from a project.
For example, your primary business sells timber, whereas the project you invested in manufactures wooden furniture. You can support your portfolio project by supplying timber at market price or even offering a small discount. But how could such a scheme unfold?
You invested in the project, and as it grew and developed, it began purchasing raw materials from you. The short-term profit trickled right into your pocket.
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Best-case scenario
The project’s net worth increased, allowing you to sell your share for a profit. Plus, the project was buying raw materials from you, bringing you more money.
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Worst-case scenario
The project did not survive, resulting in losses on your share. Still, the project was buying materials from you, which allowed you to recoup at least some of your investments.
It’s a win-win situation for the project as well. It was buying the resources at a discount or simply from a trusted source, which is already a significant advantage in a volatile market.
Now, imagine that two investors are involved in a single project. One of them is at level 1 — a solely financial investor, while the other is at level 4 — a provider of smart money perks.
At first glance, it might appear that the conditions favor the “smart” investor disproportionately. However, the project also benefits from having a shareholder who can contribute to its business processes. Furthermore, the financial investor’s share value is likely to increase due to the expertise level of all the participants. A win-win situation once again!
Example. Microsoft invests in startups with large computing power needs, such as OpenAl. As the project grows and develops, it pays huge hosting bills. What a coincidence that Microsoft runs a cloud computing platform Azure capable of catering to these startups’ needs :)
Even if Microsoft fails to sell their share in OpenAI, which they acquired for $10 billion, they can still rest assured that funds will flow from OpenAi into Azure’s accounts.
“Is it bad to be a solely financial investor?”
No, it’s not inherently bad. But it’s important to recognize that you are just that — a financial investor, as well as understand the associated pros and cons.
Still, I would encourage you to explore opportunities to level up your skills as a smart investor. In doing so, you stand to benefit in two ways:
- By significantly improving your “risk / reward” skill.
- By contributing to the growth of your portfolio projects.
However, this approach comes with a cost: your strengths will shape your investment strategy, thus limiting the potential projects you can work with to a rather narrow list. It is unlikely that your web3 portfolio will include a trendy social network for doggies. Of course, you can still pursue it as a pet project, but not as an investment business. Your projects need to understand their positioning within this dichotomy as well.
Good luck with your growth and new projects!
The less we dwell on the past and instead focus on the future, the sooner we can improve the world around us. When you concentrate on the future, time flies by. Before you know it, 1–2 years have passed, and you find yourself living in the present that you have shaped.
Wishing you a creative 2024 with a better risk / reward ratio than the previous year ;)
