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!