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Mitigating Investor Downside (AKA: Investment Risk)

Mitigating Investor Downside (AKA: Investment Risk)

Investors who put up venture capital typically do so in anticipation of a positive return for a profit on their investment amount and/or for strategic value return.  The term “venture” denotes that there is an inherent risk to investing – often referred to as “investment risk”.  And yes, there is also an opportunity for a big return on that investment if things go well.  But sometimes it doesn’t go well.  So, risk mitigation is always on the minds of investors and usually considered during the investor’s own due diligence that is done before investing.  But 100% risk mitigation is difficult as investors can’t usually foresee when external factors, such as news events or changes in economic conditions, will disrupt the markets.  But investors can take some actions to help mitigate investment risks and any potential portfolio downside.  Let’s break this down to better understand investors, investment risk and risk mitigation.  

Investors.  

An investor is an individual or a syndicate of individuals (aka Angels) or a firm (a VC firm or a Corporate Venture VC) who provide capital to startup ventures or supports small companies that wish to expand but do not have access to specific markets.  Another type of investor is a private equity firm who invests to acquire companies with good technology in a good market but need help in scaling towards a successful revenue ramp and potentially a successful exit.  

Investment Risk.  

Investments carry a high degree of inherent risk which can be defined as the probability or likelihood of occurrence of losses relative to the expected return. Basically, it is a measure of the level of uncertainty of achieving the returns as per the expectations of the investor. 

Mitigating Risk.   

Obviously, as an investor, your goal is to achieve a positive return on your investment. However, there are times when, due to both internal and external factors, the investor’s money is at risk of being partially lost or fully lost.  This is also referred to as either a partial impairment or full impairment of the value of the investment.   However, when an investor’s investment is negatively impacted to the point of a full impairment, investors usually look at exit options that would allow an investor to recover some, or all, of their investment money.  Unfortunately, when the investment is at full impairment, it usually means that the company invested in is performing poorly and the promise of the investor’s return is no longer there.  
 
So, what can the investor do when this happens?  In a small company / start-up investment, the options to the investor are somewhat limited.  Typically, an investor can choose to continue to fund the company in hopes that its prospects improve. This usually never works out for full recovery of the investor’s money. Or the investor can choose to divest their shares of the company it owns to a third party.  This too, usually, does not return the full investment value to the investor as their shares are usually sold to the third party at a heavily discounted price.  

An Investor’s Alternative Risk Mitigation Path.         

What if there was a better way for an investor to preserve a majority or in many cases all their venture capital investment in a start-up company.  This would be much preferred over taking a full or even a partial impairment or selling their shares to a third party at a heavily discounted share price. 
 
Linear Growth, LLC (LG) offers an alternative risk mitigation path for investors.  In most situations, the financial health of a start-up company is impacted by negative market conditions and/or the lack of timely execution by the management team and/or the Board in reaction to said conditions.  LG’s turn around team will determine the root cause and next steps towards defining the process.  The following are LG’s steps towards a new approach to protect investors equity.  The LG approach… 

Step 1.  Know what is broken.  Fix it and create a strong infrastructure… 

In order to fix something, one must first identify and then understand what is broken and the root cause.  Is it infrastructure? Is it positioning? Is it more deep rooted, such as in the make-up of the team or the Board and/or the market that the start-up is attempting to pursue or perhaps the technology itself is flawed.  Obviously, there will be a hard decision to be made. LG’s team of specialized consultants apply best-known methodologies to identify root cause problems and then apply proven solutions to implement the necessary changes to prepare the company to move to the next step in mitigation of investor risk.  

Step 2.  Defining a CAP.   

LG, working hand in hand with the investors and the company, will implement a CAP “corrective action plan”.  The plan is based on the key findings in Step 1 and structured to achieve tangible results specific to generating a positive ROI for the investor and the company.  The CAP plan has built-in vectors based on quantifiable data.  The net result is a company with a stronger foundation to now move to the next step in the process.    

Step 3. Determining what actions to take towards a positive ROI. 

The next set of activities determine what actions to take relative to deciding on the next course of action.  After, fixing what was broken, LG ascertains the continued viability of the company.  It is important, at this stage, to determine if there is enough traction within the company, its products and go to market strategy to warrant continued funding.  Or is the company at the right inflection point to move towards an exit path.  LG will make a recommendation to the investor and/or the Board to either continue to fund or commence an exit strategy. 

Summary 

Investors invest in start-ups for positive ROI on their money.  When that doesn’t happen, investors take action to minimize the downside of their investment.  Investors’ options, in many start-up cases, are limited.  Engaging a new business paradigm to protect their investment should be of great interest to any investor.  LG’s model is based on the premise of protecting all or most of the investor’s investment by utilizing both new and proven methods coupled with a proven team of industry specialists. 
 
We are proud to have John Mascarenas on our Advisory Board.  He has s 34+ years of experience in high-tech (IT, Biotech, Health). Currently an advisor/consultant at large, John provides Advisory Services for equity, business development, business strategy, M&A to both small (startups, incubators, accelerators) and big companies.  

His specialties lie in the areas of deal sourcing, analysis/negotiation, alliances, venture, M&A, business dev, management, team and company building, sales, engineering. Domain expertise: semiconductors, wireless, IoT, AI, storage, comms, Enterprise, software & services, networking, biotech, mobile/wireless, infrastructure, Data Centers/Cloud/Services, health. 

LGC is composed of extremely high-qualified, experienced, industry-proven, high-tech executives, and personnel with hundreds of man-years of successful results in building, maintaining, and growing successful businesses. We are your Growth and Turnaround Specialists. Find out how LGC can help your business compete in today’s markets by speaking with our key executives.