High risk investing is the label that is often stuck on the front of a venture capital file and with good reason. The sum of the 10 worst flameouts run up a tab of $1.7 billion and with a combination of banks and venture capitalists backing names such as Jawbone and Yik Yak, throwing money at a startup won’t guarantee its success.
But there are those startups that just have what it takes to make it, and funding through the traditional routes is just not guaranteed. One of the biggest red flags is when those behind the company are in the red in their personal capacity. Here’s how to separate good business sense from a bad personal record.
$100 Million In Loans For The Uncreditworthy
Before chalking up a bad or non-existent credit record as a flaming red flag, it’s important to apply a more accurate algorithm to determine the possibility of repayments. Tala, a loan firm started purely as a means to test out a new credit algorithm, has gained traction in Kenya and is rewriting what financial institutions think they know about a credit score. A92% success rate in terms of repaymentsis the reason. Venture capitalists who wish to invest in a startup but are hindered by poor credit should do further investigation to satisfy their due diligence as to just accepting it at face value.
Be Open To Alternative Solutions
Entrepreneurs who show resilience and the ability to run a good venture may just have experienced a tough financial break. If there is a willingness to repair their personal credit, a venture capitalist might just have found the ideal partner. It is also important that owners, despite their credit history, are willing to take on some of the risks of the venture. Putting their own funds into the concern is an important first step, and one way to do this is by approaching firms that specialize in loans for those with adverse credit records. Investing in a business is about more than just the money and ensuring that the owner is committed to the cause is half a venture capitalist’s job done.
Minimize The Risk By Sharing
When the risk factor of a new venture seems high, which is the case with poor credit ratings, but the potential for return seems great, it might be time to share a piece of the pie. By sharing the risk with other venture capitalists, it also allows for a second set of eyes to scrutinize both the venture and the opportunity for gain. It also provides the entrepreneur with fresh motivation to resolve their credit record issue as another investor will want to know the details.
Investing in startups is only for those who are willing to lose their investments and cut their losses, as these are high-risk investments. The potential for gain could also be great, but investors will need to exercise patience to allow the business cycle to run its course. Understanding the potential risks in each business will provide investors with the opportunity to mitigate it before they invest a single dollar.