How do we test for great investors?

Back in June 2014 we took time out of the program at Accelerace Investor Day to debate how the government can help strengthen entrepreneurship in Denmark. One of the favorite subjects in these types of debates is about capital. Should government play a role in providing capital to start-ups? How much should government invest? And who should invest government money?

Investments go where the returns are
If we start by taking a step back, the discussion usually starts with an example of a strong company that couldn’t raise capital in Denmark. This leads to the opinion that there isn’t sufficient money to finance companies with great ideas. However, if you believe in free markets, one must assume that money go where they get the greatest return. This means that if it’s possible to make a return on start-up companies that is larger than when investing in property, selling shares on the stock exchange or the like, there should be plenty of capital. But the problem today may be that the return when investing in startups does not meet our expectations and is not good enough compared to alternative investment opportunities.
The more interesting question is therefore: Why is it still such a bad deal to invest in startups?

A learning curve for investing
One explanation could very likely be that we investors are not skilled enough at spotting, attracting and developing the right companies that pay the right return. If we look at entrepreneurship, we know today that it takes a long time to become an accomplished entrepreneur. At least 10,000 hours of quality training and typically several attempts before you are an accomplished entrepreneur with a higher probability of success.
Maybe it’s exactly the same with investors? Maybe it requires a very long time and many attempts to become a good investor? Unfortunately, there is today no guarantee that you learn to make good investments, just because you’ve had many attempts. Because there is such a long distance between cause (when you make an investment) and effect (when that investment either pays back or doesn’t) it’s hard to identify key metrics, associate them to the individual investor and course correct in small iterations.

Lean Investing
So how do we know if an investor is on the right learning track meaning that he or she may eventually become a great investor? In the start-up world we are inspired by the Lean Startup methodology where the purpose is to find a way to increase the likelihood of success for a given business idea or technology. Or at least a method that’s cheaper and more efficient, which can help us figure out if we are working on a business that never will be a success.  Maybe the counterpart to Lean Startup is Lean Investing? How can we make cheaper and faster experiments with investing that provides a picture of whether an investor is on the right learning track, have the right talents and the right patience to become a skilled investor, who will eventually generate a return? And how do we measure it, so we don’t just have to sit and wait to see if there will be a return or not. I think THAT is an interesting discussion.

In regards to the government’s role, their role could then be to:
• Help meet the costs to train and develop the right investors, which could ultimately generate a return.
• Help develop ways to measure and design experiments that help us discover if an investor is on the right learning track.
• Contribute to developing a methodology for Lean Investing

We know today that the number of serial entrepreneurs within an ecosystem is of great importance to the number of emerging growth companies, we create. But I also believe that the number of skilled investors have an impact on how many new growth businesses we create. Therefore I believe it matters how fast and efficient, we develop a solid number of great investors.

But to stay within the Lean Startup world: this is an assumption that we would need to test.

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