Soccer is a curious sport. The fear of losing can drive you from giving up to attacking and winning. For this reason, 25 years ago, the Spanish League decided to change the value of victories from two to three points, compared to the point awarded for a draw. This way, a team with one win and two losses receives the same score as a team with three draws, though the latter has not lost a single game. So, the positive value of one win offsets the negative value of two losses.
The investment world presents a similar dilemma to that of football. Every company wants to make successful investments. However, what if the bottom line turns out to be in the red? The risk is even worse with the entry of startups onto the playing field. Traditional companies offer us some historical data with which we can make a forecast. Yet when we invest in a startup, we don’t know whether it will become the next Facebook or fall by the wayside.
Finance and investment, a hazardous combination
Just as in soccer, there are more offensive and defensive coaches. There are more and fewer risk-averse entrepreneurs. The most risk-averse are usually the financial directors, who focus on keeping the company’s balance sheets in good shape, even if this means rejecting practically all the projects presented to them. Heriberto Diarte, the founder of Schneider Electric‘s corporate venture capital fund, believes that “anything that makes you an amazing CFO makes you a lousy investor”.
When Diarte founded this $500 million fund, he warned the company that it would probably lose all the money over the next five years. Hopefully, he would recover it in the next five years. He tells anecdotally that the CFO once told him, “I understand. You will lose all the investment sometimes.” Diarte replied, “No, you still don’t understand. I will lose all the money most of the time.”
No risk, no gain
Diarte’s attitude may even seem reckless. But it represents the venture capital activity. The investor must be aware that he will often come back from a project empty-handed. The focus should not be on making every investment profitable, but on taking risks until the “goose that lays the golden egg” is found.
For this reason, investment portfolios are of particular importance. Investing in a single project implies a high probability of failure. However, if you diversify your investment, you can bet on diverse startups. At least one of them is likely to yield the expected returns.
At Fellow Funders, we do not manage $500 million funds like Schneider Electric. However, we do have years of experience in investing in startups. We always recommend our investors diversify their portfolios by betting on different projects. Although we carefully study every project that comes our way, we understand that investing is not a risk-free activity. Still, we know firsthand that, in the investment world, one win is worth more than two losses.
Source: Financial Times
