DISCUSSION

Serial investors, whether they invest on their own or with others, display a very strong tendency to back concepts which are familiar to them and have invested in a variety of industrial sectors. Compared to the findings of a number of other studies (Sullivan, 1991; Mason, Harrison & Chaloner, 1991; Landström, 1993; Harrison & Mason, 1990; Aram, 1989) which concluded that informal investors prefer to invest in markets and/or technologies familiar to them or in which they have direct experience, the serial investors we interviewed display a great deal of diversity in their actual investment behaviour. The difference may simply be attributable to the fact that we explicitly restricted our attention to a small sub-segment of the overall population. In addition, during the course of interviews, many respondents considered their experience in building businesses to be widely applicable in any number of industries, thus in some respects, it was not surprising to find that investments were diversified by industry.

 

In general, agency risk is, to some extent, managed by bringing some prior personal knowledge of the entrepreneur to bear, investing alongside investors who know the entrepreneur, and/or having the deal referred to them by an individual who possesses such knowledge. Syndicate investors are more inclined to back unknown entrepreneurs as compared to solo investors and do seem to draw some measure of comfort from knowing that "I am not in this investment alone". However, it is important to note that all respondents relied on themselves to judge the capabilities of the entrepreneur. One syndicate investor commented: "No matter how good the opportunity, unless I can get along with the people, I simply won't do the deal!"

 

THE LINK WITH PERFORMANCE

During the course of interviews, we had the respondents provide us with either: i) a subjective assessment of venture performance; or ii) details of the exit, if available. For purposes of exposition, it is useful to deal with solo and syndicated investments separately. Moreover, in order to identify discriminating factors we have isolated those investments where actual or perceived performance had either been poor or had exceeded expectations. Consistent with the experience of venture capitalists, "the lemons do ripen much more quickly than the plums" - realised losses appeared much earlier than gains.

 

The advice to be given for serial investors who choose to invest on their own is to back individuals either known to them or to the deal referrer competing in an industry in which they have direct experience. In every single case where a loss was realised or where the investment performance was poor, the investor backed an unknown entrepreneur competing in an unfamiliar industry. In the one instance where a successful exit was achieved, the investor had prior personal knowledge of both the entrepreneur and the industry and was very familiar with the concept. It is interesting to note that there was an equal number of early and later stage "losers";

 

TABLE 2

Solo Investment Summary

 

Industry Experience

Stage of
Development

Known
Entrepreneur

Performance Assessment
or Exit Details

7 Early Stage 7 Total Loss (1 year)
7 Early Stage 7 Total Loss (1 year)
7 Expansion 7 Trade Sale [partial loss] (1 year)
7 Expansion 7 Very Disappointing (1 year)
3 Expansion 3 Trade Sale [65% IRR] (4 years)

 

TABLE 3

Syndicate Investment Summary

Industry Experience Stage of

Development

Known

Entrepreneur

Performance Assessment

or Exit Details

7 Early Stage

7

Total Loss (3 years)
7 Expansion

7

Total Loss (<1 year)
3 Expansion

7

Total Loss (1 year)
7 Expansion

7

Disappointing (1 year)
7 Expansion

3

Disappointing (5 years)
3 Start-up

7

Very Good (1 year)
3 Start-up

3

Very Good (6 years)
3 Expansion

3

Very Good (2 years)
7 Start-up

3

Very Good (2 years)
7 Expansion

7

Outstanding (3 years)
7 Start-up

3

Outstanding (4 years)
7 Expansion

3

Trade Sale [21% IRR] (6 years)
3 Start-up

3

Trade Sale [28% IRR] (6 years)
7 Expansion

3

Trade Sale [45% IRR] (6 years)
7 Expansion

7

Trade Sale [65% IRR] (4 years)

one can speculate that irrespective of stage of venture development, the investor might very well be assuming increased business and agency risk by investing in situations where they bring no prior knowledge of the industry or the people involved.

 

As illustrated in Table 3, for investors choosing to invest with others, backing known entrepreneurs appears to be a discriminating factor when the linkage with investment performance is made. In every instances where a loss was realised, syndicate members backed an unknown entrepreneur. In 70% of the cases when an investment was performing well or where successful exit had been achieved, someone in the syndicate had prior knowledge of the entrepreneur to the deal. Industry familiarity appears to be much less important - in 60% of the syndicated investments we reviewed where performance had been rated positively or where successful exit had been achieved, syndicate members did not bring prior industry experience to bear on the particular deal. An interesting pattern is evident with respect to venture stage of development. All of the "losers" with one exception were later stage investments. In the case of the one start-up which realised a total loss, the investor group did not have any prior direct experience with either the industry or the entrepreneur. For start-up ventures where performance rated positively or successful exit had been achieved, in every case the investor group had prior industry expertise and/or personal knowledge of the individuals driving the deal. Of the two, it would appear that prior knowledge of the entrepreneur is an important discriminating factor. The general advice to investors who choose to participate in syndicates is to back concepts and entrepreneurs which are familiar to at least one member of the syndicate.

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