Investment Risk: Dangers of a Single Founder Business and “Ideas”

Investing is all about risk. Ridding yourself of unnecessary risks entirely, and mitigating those that cannot be eliminated altogether, is one of the most important steps an investor can take in my opinion.

Sitting on the white sands of a beach on a private island of the coast of Southern Thailand yesterday I was recalling this lesson learned. Maybe the setting was too idyllic, the food too good and the sunshine too warm that my internal conscience just had to throw a curveball. Whatever it was, I recounted why it is that I will never invest in a company with a single founder.

Years ago I funded a start-up run by just one guy. I will not go into the details of the particular business or the entrepreneur involved, as it is not relevant to this discussion. I still wish this gentleman well, even though things did not work out as planned. It was in fact a complete disaster.

I was solely a provider of capital and did not provide any of my own time, expertise or otherwise. It is important to note that the investment did not work out for me due to MY own failure to identify some very clear and evident risks prior to investing my capital. In hindsight I believe the entrepreneur would have failed with or without my capital, and as such the failure was mine in that I did not identify certain risks which were actually quite identifiable.

What am I talking about and what are these identifiable dangers?

Single Founders

Why the risk?

Think about it. If you have an idea, some capital and conviction what are you going to do? If you are like most people I’ve met you will talk to your friends and family about your idea. You’ll also likely invite one or some of them to join you.

A single founder is likely either a hermit or his friends and family, who know him better than you ever will, have no faith in him.

Every entrepreneur needs to brainstorm ideas, no matter how smart, they need help with the multiple aspects that starting and running a business takes. It’s nigh on impossible to do it all yourself.

Importance of Business Partner Relations

The other thing that is important to consider is that being an entrepreneur takes a lot of courage and ability to get through what will possibly be some of the most demoralizing experiences in your life. If you don’t have others to bounce ideas off and keep each other in check you’re at a strong disadvantage. Business partners’ relationships, in start-ups and in fact in any businesses, are relationships that are critically important. These relationships are more like a marriage than a real marriage is in many ways. Typically business owners will spend more time together than they do with their own wives and husbands.

Keyman insurance too becomes much more important with a single founder and can become prohibitively expensive to a start-up. Basically without the founder you have nothing. Sickness, depression, hormonal wife/husband, a bad case of hemorrhoids or just a bad attitude can put your capital at risk.

This is the same reason I will not invest in companies where founders and management are not friends. I would say that it is impossible for a business to thrive and grow where the founders or management dislike each other. There might be some examples out there, but as I mentioned at the beginning of this post, investing is all about eliminating risk. Why take the risk?

Ideas: What Value Do They Actually Have?

I get a lot of proposals from entrepreneurs and they all vary, but the one that irks me more than most is a guy/gal with an “idea” that they have no metrics on.

Don’t bring me ideas and tell me to sign an NDA right off the bat. I discussed ideas without action before so I won’t rehash my thinking in this post. When a CEO or founder does this I will instantly know two things. One is that he is a complete moron and the other is that he has no grasp of reality. Ideas are as numerous as grains of sand on the beach, and secondly asking me to sign an NDA…?? Look, if I can take and replicate your business idea by simply hearing about it then you haven’t got a business model I want any part of. I’m happy to sign an NDA after some discussions, but if you ask me for an NDA right of the bat your grasp of the real world is… ahem, problematic.

Consider asking a girl out on a date and asking her to sign an NDA so that she doesn’t give away your super-sexy secrets of how to perform in the bedroom. Give it a whirl and let me know your success rate. I’m like the girl that is being seduced. I want to see the goods or at least some of them before I do ANYTHING. You want what I got, and I want to see value first.

I would be very interested to hear from the community what experiences both positive and negative others have had. Comment below or email us here with your thoughts.

– Chris

“It isn’t necessary to be rich and famous to be happy, it’s only necessary to be rich.” — Alan Alda