INVESTMENT DECISIONS IN STARTUPS ARE BEST MADE WITH YOUR HEAD – NOT YOUR HEART
Investing in a friends’ startup can be risky business -especially for seniors. A recent article in a Philly paper, relayed the story of how in 2013 a father, who was then 82, and his daughter lost nearly a quarter of a million dollars investing in a startup run by a friend whose expertise was in physical therapy. Their hearts were in the right place. The friend had developed a novel lymphedema compression medical device used post-surgery for cancer patients and needed investors to bring the product to market. As the daughter was going through treatment herself, she and her father wanted to be helpful so that others could benefit from the device. As warm as this story begins, it doesn’t end well. The company went under taking the investors’ money with it.
Investing in any startup, much less one that is basically still in prototype development, is a very risky venture. Folks with a particular expertise – such as in this case, physical therapy, likely have little if any experience in manufacturing much less sales, marketing, and channel development. What’s more, if the device targets a medical market and ends up requiring FDA clearance, the cost to go to market could be in the millions even before you make one sale.
An inexperienced entrepreneur combined with an inexperienced investor is the recipe for disaster. Since it’s typically friends and family that make the first investment in a startup, the decision made tends to be an emotional one and not based on sound business sense. The result of not doing the appropriate due-diligence up front is expensive and often makes for a very unpleasant holiday dinner conversation when it turns out the business is not doing well – or worse has gone bankrupt.
Just as with the purchase of a home – often the biggest investment many people ever make – there are a myriad of questions that should be answered prior to opening your checkbook. Unless you can easily afford to lose your money, all investment decisions should be made with your head and never your heart.