Investing in startups can be an incredibly rewarding endeavor when done properly, but it can also be difficult to get a seat at the table without the availability of significant capital. Wise investors have long known the benefits of diversification, and it is certainly a risk to put all of your investment dollars into just one or two startups.
So rather than focusing on investing in one or two high-dollar startups, John Pryor rugby coach, believes it is much wiser for some investors to turn their attention to a multitude of low-cost startups. The same general rules apply, as it is always important to understand the startup’s market, its competition and, perhaps most importantly, the people running the show.
Pryor compares this to the state of professional rugby teams. When looking at the top level competition Pryor suggests there are two strategies. If you diversify you spread the total budget around to many great players. The other strategy is to spend a premium to attract top talent and fill in the holes with affordable players.
According to John Pryor, investing in low-cost startups represents a safer option that still has the potential to yield a significant financial return. After backing a few startups that were literally operating out of basements and garages, Pryor found that he had hit on a strong investment strategy that did not require massive amounts of capital and did not involve the financial risk that is attached to such big investments.
“It has been my experience that there is significant strength to focusing on these low-cost startups, as it only takes one home run to see a return of anywhere from five to 100 times the initial investment,” said Pryor. “With a low-cost startup, you are dealing with companies that have tremendous growth potential, enabling you to get in on the ground floor when those behind the company are starving for success.”
Pryor has also found that he has been very successful in working with companies that are hesitant to give up control over a big portion of their company in exchange for funding.
“When a company turns down a massive offer in exchange for control — even just some control — over the company, it’s easy to see that they have a firm belief in what they are doing,” noted Pryor. “The safe play is to take the big payout up front, but the ones who turn down those big dollars have a clear vision of what their company can ultimately be. Those are the people you really want to work with.”
Copyright: <a href=’http://www.stockunlimited.com’>Image by StockUnlimited</a>