Four Mistakes That Led to the Failure of My First Investment Reasons that made a venture not perform and fail are going to help you in not making those mistakes yourself
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The thought to write this article came as the culmination of two different events in my life that happened recently.
I failed. Yes, my first investment in a venture was a failure, we wound the business up even before its first anniversary. What could go horribly wrong even after we were able to achieve more than 125% of our sales projections for the first two months. Still we wound up.
The other one was watching Scarface, the movie about the rise of a drug lord Tony Montana! There are at least a few lessons for me from this movie as I look back at my investment failure.
Mistake #1: Not planning for worst case scenario
There is this famous line from the movie The Bourne Ultimatum: "My number one rule is to hope for the best and plan for the worst."
Except for a couple of people, every one of our investing partners was in a day job, which meant we weren't on the ground, didn't do a thorough job with the analysis of the business plan, didn't ask the right questions, and didn't have venture investment experience or came with the background of evaluating a business. We were all hoping for an underserved market, where people were looking to spend. We had built our hopes from seeing the projections. We didn't plan for anything let alone the worst.
Mistake #2: Absence of skin in the game by the managing partner
The dialogue from Scarface, "Don't underestimate the other guy's greed" was more appropriate when I look back at the situation. This being a greenfield venture, my prime grouse was that we didn't incorporate a risk(penalty)/reward model for the partner who was running it. We flatly agreed to a 30% return on the profits topped with a regular salary for managing day to day operations. He also didn't make any investments. To top it all, the working partner was also having his own B2B business of the same product line, and his firm was supplying the products to this venture. This meant the working partner was bound to make money even in a situation when this venture wasn't. Wasn't this a perfect recipe for failure?
Mistake #3: Failure to do ground work / research about the business in the target market
And since none of us had background in the retail consumer business or the product we were selling, we also weren't from the operating geography except for the working partner. We didn't do a research on the target market or the reason why our product needed to be priced so much (based on our later survey, our high pricing was one of the major factors of not getting repeat patrons) or how to pull patrons from the neighborhood. All these factors resulted in a confounding failure. In short, as an antithesis to Tony Montana's words, "Don't get high on your own supply" which loosely relates as don't live in your own fancy world and have the belief that the customer wants us more than we want them or that we are always right!
Mistake #4: Hesitation to take tough decisions when warranted
Last but not the least – one really needs to develop thick skin and be ruthless about taking hard decisions in business. Though we started getting troubling signs since the 5th or 6th month of operation, by way of not getting regular updates on ground reality like sales figures, transaction related details, shop not being open on all days (closed days not being reported), etc., we didn't take those hard decisions. In hindsight, our overlooking of these critical signs and maintaining the status quo meant that as investors, we too didn't take responsibility of what our role demanded thus accelerating the failure of our first investment.
If at all I would invest for the second time (which I most likely would), I am certain to look at these realizations to reflect upon before saying "I do."
As entrepreneurs who are looking either for angel investors or any sort of investors, it's very important to realize that you are trusted for other's money based on what you commit as deliverables. While it's also upon the investors to do a due inspection of the business, as the person who is running the show, you are bound to know more about the business than the investors. It's only by being transparent about what's happening, relationship and credibility is established, leading to a win-win relationship.