As we are approaching a new year, Monaco resident friends are often reaching out to us, whether we can recommend them businesses to invest into. Naturally, finding the right business, one has to understand some basic principles.
The Principality of Monaco often feels like a pond full of crocodiles. The majority of foreign people come to Monaco for fundraising and to cut business deals. This often creates the feeling that people love you only because of your money. Monaco also has a sort-of investment tourism, where many start-ups that are looking for additional funds, travel here to catch the attention of the local residents.
This is also the main reason why it is hard to socialise with long-term residents; they simply do not like to mix with the new ones. They are cautious, and they have every reason to be.
However, in some cases, Monaco residents are open to investing; therefore, I have collected the most basic considerations and the red flags to look out for when you try to invest into a small business.
Usually, a person behind the startup company or the idea and his/ her capability for success is considered a main factor. Therefore, one of the most important pre-investment considerations is the due intelligence of the people involved. In many cases, investors trust people more than the idea itself.
However, the most successful fundraisers are those that solve a truly massive human problem. Or, at least they liberate people from automating tasks, freeing up valuable time. In these cases, the story focuses on what the world will look like when the problem will be completely eradicated.
One of the most important things for you as an investor is to look beyond the product and to try to discover its advantages and potentials.
Business concept or Investment offer
One of the very first things I always consider in any business is its possibility to create significant revenue. It is always necessary to look for scalable businesses with the potential for explosive growth.
If it is an existing business, do not rely on the owners and directors, but ask for possibilities to speak directly with the customers. During private talks with customers without any of the owners present, you can get a first-hand impression that can serve as a valuable base for you to determine the business development potential. A lot can be learned from independent customer references.
Keep director salaries under control. It is always better to offer them higher compensation with corporate shares related to business results, instead of exceptionally high, fixed monthly salaries. Work with motivated people who want to grow together.
Check the financial plans as well to see the reality behind the ambitions. Usually, a financial prediction is way more positive than it should be; therefore, it is good to consider that sales cycles can be much longer than anticipated, especially with early-stage technology ventures.
Ensure there is enough “headroom” in the financials. If they are under-capitalised from the start, they could get into the vicious circle of requiring further funds when targets are not achieved, and then being distracted from the sales process to raise further funds, which gets them into deeper trouble.
When you invest into an existing business, always handle desperate cases sensitively. Some companies get into financial difficulties and appear to require funds immediately to avoid closure. These can be interesting opportunities, in spite of the fact that the company’s funds may have been mismanaged. For most investors, it is essential to have board representation in order to protect minority shareholders. Also, let them have some say as to how the business and their investment fund is being managed.
Many entrepreneurs are blind to the risks associated with their ventures and insist that the risks are minimal. The earlier the stage, the higher the risk, but the more you should get for your money. Striking a balance between your perceived risk and the directors’ believed certainty is difficult in an area where there are no hard-and-fast rules on valuation.
Be aware that many investments will require further capital injection. The follow-up funding is usually a further 50% in the upcoming years. Walk away if the budgeting seems unrealistic to support the steady scaling of the business.
In many cases, it can be beneficial to look for business interruption insurance.
Also, be sure that all the intellectual properties belong to the company and the business is secured on all legal platforms. If not, you can still create a pre-condition before you invest.
Check the exit. Is there a realistic and credible exit plan as well as a genuine desire to exit? Too many investors have their funds tied up in investments they cannot realise.
If someone invests after you at a lower valuation, an investor can provide an option to protect himself by getting extra shares to compensate for this. This would need to be detailed upfront in the Shareholder Agreement or the Articles.
Many people make the mistake that they are seeking funds for relocating to Monaco. Investors should not aim to fund someone’s lifestyle. An investor invests into the development of the company and not into the personal lifestyle of someone. Walk away from a deal if the owners aim to use the fund to relocate themselves to Monaco.
Do not allow the legal process to get ahead of due diligence. In any investment decision, due diligence is one of the most important tasks that you simply cannot outsource. It is very important to get first-hand information regarding the investment offers and the people involved in the investment process.
Walk away if the directors cannot provide clear answers to tough questions on the market or the finances.
Early-stage business or Business in its Early stage?
Have you also noticed that many people have started to refer to startup businesses as Early-stage businesses?
During the past years, the word “startup” might have lost its shine, and smart people have redesigned the concept. But they are wrong and it often misleads the market.
In general, when we talk about business growth, we identify multiple stages in the life cycle of a business. This is a great thing because by categorising the different growth patterns, we can offer a useful tool for the potential investors as well. However, these indicators might be more important to the company leaders and owners, offering them a full understanding on the current challenges that their businesses are facing.
Let me summarise the differences of the first business development stages in a nutshell, which are important to understand if you ever plan to invest into a business.
Stage I.: Grow-or-Fail
The first phase in every business is grow-or-fail. It affects every new business, (and it can come back later if the management is not competent enough to handle market changes).
At this stage, the main problem is to educate the market about the new products/services, and to obtain more and more clients.
In this period, business owners have two main “enemies” called time and cash flow.
We also refer to this stage as the “survival period”, where our existence is essential, and to overcome the obstacles is strongly time sensitive for long-term prosperity.
The keyword here is “existence”.
Make no mistake, working with a startup business can also be exceptional, because it is exciting whether you can prove the concept and break down the obstacles. This is a phase when you invest your time, energy, knowledge, and money into passion and because you believe in the person behind the company.
When an idea is exciting and the concept is clean, business angels are willing to take the risk in the hope that the concept and great execution will bring the desired success.
These are the businesses that are usually looking for crowdfunding to survive, which is not a problem if they can do this parallel to survival mode.
The mistake that many startups make is that they are not focusing enough on obtaining costumers and delivering products, because they are convinced that all they need is an investor. However, in reality, an investor seeks some kind of visible achievement to decide whether the idea and concept is viable or not.
In this stage, one of the most important tasks for startups is to expand from their tiny key customer base to a much broader, possibly international sales base. This is the period when the owners do much more on their own (sometimes everything).
The strategy: simply to remain alive.
To overcome any survival period, creating business value and utilising social networks are of key importance.
Stage II.: Early-stage
Businesses that have obtained enough costumers to become true businesses thanks to their hard-working entrepreneurs, but whose income is still just hardly enough to exist are the early-stage businesses. These are the ventures where we can already observe some sort of proof of concept, however, they still need to make significant efforts to stabilise their existence. The keyword here is “survival”.
By reaching this stage, the early-stage businesses have already demonstrated that they have a market need. This is usually backed with enough, and more importantly, satisfied customers; therefore, they are a workable business entity. However, their key struggle is shifting their focus from the question of existence to productivity and potential revenue.
(A few years ago, I wrote a book called “NO EXCUSE! in business” which is highly recommended to all business owners.)
Usually this is the stage when pilot products and ideas have already moved (or are ready to move) into quality production. This is why investors are willing to invest into Early-stage businesses; they have objective marketing results to evaluate.
In this stage, businesses are usually maintaining a simple organisation, supervised by the owners. Still, they have managed to break even with their initial cash investments. They also generate just enough cash-flow to stay in business, and might be able to finance their own growth in the future. Early-stage businesses are close to earning an economic return on their work.
For the above mentioned reasons, Early-stage businesses are usually targeted by venture capitalists because of their growth potential. A venture capitalist is usually seeking 10x a return on their investments in a three to five-year period.
Since an Early-stage business has a proof of concept, investing early into these entities is often very attractive for the venture capitalists and private investors.
Obviously, the risk is still there, since after a strong start, the business may fail completely. However, with proper partnership, specifically when the investor is not just “loaning” the funds, but mentoring and helping the business through his/her connections, the Early-stage business has a higher likelihood of survival than a startup.
Stage III.: Small business
We usually refer to Small business that cannot reach the 10 million Euro annual income with activities such as manufacturers/service providers and the 20 million Euro as wholesales. The difference between an Early-stage business and a Small business is that a small business has usually already overcome “existing” problems and is prospering.
The keyword here is “success”.
Small business owners usually face the dilemma of keeping their company small and stable or trying to expand for a bigger purpose. This bigger good is not always a financial motivation. Some owners aim to “retire” from their businesses, to leave the daily hassle over to their trusted employees.
Proper delegation of the daily operational tasks can ensure the owners a partial disengagement from their company. This gives them more time with their family, hobbies (such as sailing or playing golf) or simply a new and exciting business venture.
When a company has attained its true economic health, the organisational rules are set, performance indicators are defined, and the management is trusted. At this point, the owners have great potential for a successful disengagement.
These companies focus more and more on the business, marketing, and growth planning. The owners become board members, who monitor the strategy, rather than being active daily executers. Their number one task is to make sure that the basic business stays profitable in the hands of the new management without their daily presence.
Stage IV: Take off
Most likely, no explanation is needed here. In this phase, the company has a strong base for developments because their marketing plan is fully developed from extensive research and market experience. In this stage, usually, new types of challenges will appear, such as delegations, organisation behaviour, creation of sophisticated information, control systems, and well-developed, standardised operating procedures.
All of these serve as the international brand identification and the base of a stronger, revenue-steady business foundation.
To summarise it
To summarise it, Grow-or-Fail is the business period that I would define as a startup business. An Early-stage business is much more than a startup venture, since it already has proved that the market is open for its product/service.
The confusion is coming from the fact that a startup business is in its early-stage of business life. However, it is not an Early-stage business. Startup businesses are also looking for funds to secure their existence, however, they want to reduce the normal timeframe without proving their concept or idea first.
Any business with proof of concept can be called an early-stage business, but none of the businesses should be labelled as early-stage if they do not have solid information regarding the market reaction of their target groups. Those are startup businesses waiting to verify the potential of their dream and visions.
Usually, a person behind the start-up company or the idea and his/ her capability for success is considered a main factor. Therefore, one of the most important pre-investment considerations is the due intelligence of the people involved.
This can be especially true in Monaco, where it takes time to build up trust and valuable connections.
The good thing is that unlike some countries in the European Union, the Principality of Monaco offers you the possibility for a penal check on the people you intend on dealing with.
When a funding project involves experienced business people, who fully understand the corporate processes, they are ready to come up with innovative ideas.
Remember, do not be a worrier, be a warrior because the thing is that people who are unable to decide often fall into the trap of analysis paralysis.
In 2005, author Malcolm Gladwell published a book called “Blink: The Power of Thinking Without Thinking”. It presents research from psychology and behavioural economics on the adaptive unconscious – mental processes that work rapidly and automatically from relatively little information. It considers both the strengths of the adaptive unconscious, for example, in expert judgment, and its pitfalls such as stereotypes.
The author describes the main subject of his book as “thin-slicing”: our ability to gauge what is really important from a very narrow period of experience. In other words, this is an idea that spontaneous decisions are often as good as — or even better than — carefully planned and considered ones. Gladwell draws on examples from science, advertising, sales, medicine, and popular music to reinforce his ideas. Gladwell also uses many examples of regular people’s experiences with “thin-slicing”.
Gladwell explains how an expert’s ability to “thin slice” can be corrupted by their likes and dislikes, prejudices, and stereotypes (even unconscious ones), and how they can be overloaded by too much information.
We do that by “thin-slicing,” using limited information to come to our conclusion. In what Gladwell contends is an age of information overload, he finds that experts often make better decisions with snap judgments than they do with volumes of analysis.
Gladwell gives a wide range of examples of thin-slicing. Gladwell also mentions that sometimes having too much information can interfere with the accuracy of a judgment or a doctor’s diagnosis.
“Analysis paralysis: sometimes having too much information can interfere with the accuracy of a judgment.” – Malcolm Gladwell
This is commonly called “Analysis paralysis”. The challenge is to sift through and focus on only the most critical information to make a decision. The other information may be irrelevant and confusing to the decision-maker. Collecting more and more information, in most cases, just reinforces our judgment, but does not help to make it more accurate.
The collection of information is commonly interpreted as confirming a person’s initial belief or bias. Gladwell explains that better judgments can be executed from simplicity and frugality of information, rather than the more common belief that greater information about a patient is proportional to an improved diagnosis. If the big picture is clear enough to decide, then decide from the big picture without using a magnifying glass. However, you should never forget that even the big picture has to clarify the most important facts and legal indicators.