Thinking like VC can help young investor make better investment decisions with their money.
Venture capital commonly known as VCs, offers funding to businesses and startups that are growing quickly in exchange for an equity stake in the company.
With so many investment opportunities and start-up pitches, VCs often have a set of criteria that they look for and evaluate before making an investment.
VCs investing knowledge and operating experience are as valuable as their capital. This is because venture capital investments tend to be high-risk.
With around 65% of VC invested businesses failing to provide a return on investment, VCs tend to be very careful about where they invest their capital.
Most VCs expect a return of between 25% and 35% per year over the lifetime of the investment.
Their investment strategy is basically to invest in a company’s balance sheet and infrastructure until it reaches a sufficient size where they can get their money back.
Fundamentally, VCs buy a stake in a business idea, rears it for a period, and then exit. Of course, after receiving a sufficient return on capital.
If venture capitalists can exit the company and industry before it tops out, they can reap extraordinary returns at relatively low risk.
As a young investor, thinking like a VC can help you make good investments decisions.
Below are some of the ways you can apply the VC mindset when investing your money.
1. Thinking big
In the world of investing, one of the factors that separate the most successful investors from the rest is the capacity to think big.
Thinking big can help you get better results with your investments, even if you don’t achieve the desired result.
Many investors have been chasing investment returns for years.
But to the surprise, not too many investors have achieved what they thought they would with their investments.
The naked truth is that they have been focusing on the wrong target.
For VCs, Investment profile and how each deal is structured is the only single ingredient of how they usually meet their investors’ expectations at acceptable risk levels.
They believe that the best opportunities don’t always walk into their office.
They go beyond to identify and research industry trends and bold enough reach out to those entrepreneurs who share a vision of where the world is going.
As a young investor, thinking big requires that you see your investments from a wider and far-reaching perspective.
For instance, if you have a lot of money to invest, you have a lot more opportunities, options, and choices to make.
Many VCs don’t necessarily concentrate too much on financial terms during their investment tenure with the start-ups.
Instead, they give equal emphasis to how the company aligns with their portfolios and gain. As well as how their experience and expertise can help the owners and management of the business to grow.
To make right investment decisions as a young investor, it is necessarily important to have a clear point of view beyond just making money.
You should have a clear picture of what you-as an investor trying to do, and does it align with the company, industry, or investment landscape you want to get in?
2.Taking risks and managing them accordingly
Many young investors find it hard to define and measure risk.
Our perception of risk is greatly influenced by what we experienced in the past as well as what is currently or likely to happen to us.
The only way you can learn about risk is by taking risks.
By their very nature, venture capitalists take on extensive risk when investing in a startup or an entrepreneur.
The risky aspect of it entails a high level of uncertainty as well as a high chance of failure by the startup.
However, it can be very rewarding when the investments do pay off.
For example, Alphabet Inc., commonly known as Google. Was launched as a startup in 1997 with $1 million in seed money from FF&F.
In 1999, the company was growing rapidly and attracted $25 million in venture capital funding, with two VC firms acquiring around 10% each of the company.
In August 2004, Google’s IPO raised over $1.2 billion for the company and almost half a billion dollars for those original investors, a return of almost 1,700%.
This big return potential is the result of the incredible amount of risk inherent in new companies.
To achieve anything in life you need to take risks.
As a young investor, when you invest you make a possible course of action about what to do with your financial assets.
You might not need that saved money for 30 or more years, so you can benefit from it by getting invested in the stock market.
Data shows that stocks have historically done well over long periods. So, it’s worth taking the risk and diving into stocks.
The tools you can use to assess, eliminate, and mitigate investment risks may vary by different financial asset classes.
All investments: stocks, bonds, mutual funds, or exchange-traded funds carry some degree of risk. The investment can lose value.
Good knowledge of capital allocation, risk management, and effective investment is mandatory for a thorough understanding of the risks involved in each financial asset invested in.
To mitigate the risk factor, there are a whole host of unique risk factors that you must address when considering a new investment.
Being patient with your investment is one way of controlling risk
3.Taking a broader & more objective view
Investing is an extensive practice; different people invest with a specific objective in mind. Also, each investment has its own distinctive set of rewards and risks.
Investment is made because it serves some objective for an investor. In the past, many people have made their luck in the process.
Venture capitalists exist to serve founders much like businesses exist to serve customers.
The objective of most corporations is to benefit from venture capital investing, such as product marketing rights, acquisitions, technology licenses, and or international opportunities.
However, this objective is often mixed with a financial gain objective and can lead to a confused strategy.
The starting point for young investors in this process is to determine the characteristics of the various investments and then match them with individual objectives.
Depending on the age and risk appetite of the investor; there are 3 main objectives of investment:
The first assignment of any successful young investor is to find the correct balance among these three objectives.
While safety, growth and income objectives are the most common among investors, some other objectives include Liquidity, Tax, Lifestyle, Financial Security, and Peace of mind.
Investment objectives are usually associated with risk and return, which are interdependent, as the risk that you are willing to take, will determine your returns.
Higher risk investments may have greater long-term rewards, but in the meantime, you will probably experience turbulence along the way.
You will see some ups and downs. It is important to be prepared and be aware of this in advance before putting your money on a certain financial asset.