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Investor Concerns and Startup Realities: Navigating Pathways to Success

When it comes to investing in startups, understanding the various concerns and realities is crucial. This guide explores the importance of due diligence, corporate structures, financial expectations, exit strategies, and ethical considerations. It sheds light on common misconceptions, the role of optimism and pessimism, and how to navigate the complex landscape of startup investments. Whether you are an investor or an entrepreneur, equipping yourself with this knowledge can pave the way for successful ventures.

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Investor Concerns and Startup Realities: Navigating Pathways to Success

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  1. Beware of Being Sold the Dream Pessimists: Totally risk averse – never start anything Optimists: Positive thinking required to found a business – temper it with realism and develop ability to recognize and deal with killer threats

  2. Investor Concerns Corporate structure: • Closely held – minority shareholder • Closely held – minority shareholder on board • Closely held – controlling share • Public corporation – minority shareholder

  3. Investor Concerns Closely held corporation: • A minority shareholder can be frozen out of decision making even if on the board • Plan on being a passive participant • Must have great confidence in the management team and a clear understanding and acceptance of the business plan

  4. Investor Concerns Due diligence: • Technical due diligence • Financial considerations • Management considerations • Business plan • Role of NDAs • Financial expectations • Exit strategies • Ethics and angels

  5. Investor Concerns NDAs and due diligence: • Preserve corporate intellectual property and plans from the competition • Range from the simple and straightforward to the patently silly • As a shareholder, honor NDAs fully • NDAs in alt.space are usually excessive because the players overvalue their concept • PowerPoint vehicles are cheap and common – the skills to create them are expensive and rare

  6. Investor Concerns Financial expectations and risk: • Intend to make money from dividends or from capital gains on selling the stock • Paper profits may be illusory • Opportunity costs must be considered • Most startups fail

  7. Investor Concerns Exit strategies and due diligence: • Be acquired by a larger entity for cash or stock trade (or cash out after a successful IPO) • Marketability of stock in a closely held corporation is limited • IRS typically discounts book value by 50-75%

  8. Investor Concerns Ethics, angels, and due diligence: • Honesty must prevail on both sides • No statements should be taken at face value • Angels often invest for reasons other than strictly financial (such as the coolness factor) • Confidence that the management team can either acquire or grow the necessary skills is an absolute prerequisite to investing

  9. Investor Concerns Stereotypical Alt.Space startup – “The Mojave crowd”: • Several engineers with concept • Little or no business track record • What is the market? • What is the plan? • Capital – family, friends, and fools • No current personnel costs, grandiose projections • Functions like university dept with C corp structure

  10. Investor Concerns Common engineering misconception: • R&D man years inconstant with team size • Doubling team does not cut R&D time in half • If it did, 9 women could make a baby in one month

  11. Investor Concerns Successful evolutionary track: • Closely held – family, friends, and fools • Angels – the coolness factor • VCs play the numbers game (and act like loan sharks) • Second round offering memorandum • Acquired by biggie (Northrup buys Scaled) • IPO – public gets in and founders cash out • Little upstart is now a biggie (Orbital Sciences)

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