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Before You Invest in a Startup Read This

I’ve been thinking a lot recently about if pursuing venture funding for Virtual Payment Systems. Last night I ran across Fred Wilson’s (of Union Square Ventures) blog post called Chasing Returns. In short, Wilson explains how banks were lured into pursuing high returns by selling or investing in derivatives that they did not understand. how It’s a very good read from two perspectives:

If you are seeking investment, it’s crucial that your CEO understands how you make money, not just that your firm does make money.

If you are an investor, you absolutely have to be certain that the CEO and management team you are considering investing in understands how they make money.

After sitting through anything that resembles a pitch to investors from startup companies, about the only thing that ends up being clear is that the startup wants money. Most often what isn’t clear is how the startup intends to generate a return for investors.

Which leads to this:

If you are looking for cash, venture capital may not be the right answer. You are dealing with people that will want you to give up control of your company should something go wrong, and they may not understand your business.

On the other hand, if you are looking to invest, the allure of big returns from startups hides the fact nine out of ten startups go out of business. If you aren’t willing to learn how to find the one in ten that will succeed, you are making a very dangerous bet with a startup.

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