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Thoughts From the UKIF Membership

Richard Atkinson - Risk Capital:  Risky for whom? 

Richard is Chief Executive of Second Mile Ltd and is an experienced technology entrepreneur who has led start-ups in the cleantech, automotive, communications, defence and software sectors. This week he stamps:

 

This week I’d like to stamp my feet about a practice that I run across from time to time.  That practice is asking technology entrepreneurs to give personal guarantees against investment.

 

At one level these make apparent sense; does the entrepreneur believe in it, is he/she committed?  But it stems from a misunderstanding of new ventures, often by both parties.   They fail to separate external unknowns from management competence.

 

The fact is that many startups fail for reasons beyond management control.  Technology startups are bets on the future, worth many times the bet if the future plays out as hoped; mostly worthless if not.  Investable startups are positive-expected-value bets, with low-probability but high-winnings profiles.

 

Obviously, such bets pay off only in a portfolio, but then they do pay off.   Entrepreneurs do not have a portfolio, investors do.   So when the entrepreneur is asked to write PGs something is wrong.  Ethics aside, risk is not being allocated to the party able to carry it at lowest cost.  It is being allocated to those least able to understand or avoid it.  The market is not functioning.

 

Appallingly, I’ve even seen government funds demanding PGs.  The fact is that 9 in 10 early stage businesses fail.  No government scheme should be encouraging individuals to risk their homes on those odds, no matter what the upside for the 1 in 10.  ‘We really want you to start a business, but we’ll take your house away if you fail.  Jolly good luck old chap!’

 

The effect is to drive out the wise and the experienced from the profession.  This destroys both new businesses and returns on investment.

 

If an investor asks you for PGs walk away, unless you’re happy with a 90% chance of losing your home.  Right, end of foot-stamping.  As you were!

Comments

Comments

3 people have had something to say so far

Richard, I agree with you but the flip side is that the entrepreneur cannot ask for a generous salary.

The key is for investors and entrepreneurs to have aligned interests - they both do well if the venture is successful and both lose out if it fails. What they lose can be different - hard work for not a lot of money + their dreams on the entrepreneur's side and cash + some time on the investor's side.
Posted on 14/11/12 18:32.
Hi Roger,

I think that's a very fair analysis. I think it's fair play for an entrepreneur to see a couple of years' work go down the tube when a business fails. On the other hand setting up a situation where homes are lost if it fails is unwise and, I think, counter-productive.

Clearly there's a trade-off of salary and equity in early stage roles, and this applied to original founders and incoming management. I'd certainly be a little skeptical about a startup leader who was red hot to maximise his or her salary rather than build capital gain.

Richard
Posted on 16/11/12 15:42 in reply to Roger Stone.
The stats supporting the SEIS Scheme indicate investors in Start Ups need to place 12 "bets" in order for one to deliver the level of returns to cover all losses. Smart investors will be aware of these odds but those asking for guarantees aren't. At this point the entrepreneur ought to be asking the question "Where are the other eleven start ups you are working on?" The only guarantee is that you have to kiss plenty of frogs to find a Prince.
Posted on 09/04/13 11:07.

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