If your plans to start a company require an investor and you’ve never purchased a stock, please do so now. Start a portfolio, and even with small purchases of public company stock, you’ll better understand the role of your angel investor or venture capitalist. You’ll better understand what they’re looking for and what your business has to do in order to become a success.

Portfolio Rant

Around last fall, I started trading with an E*trade account to better understand other investors using Wikinvest.  Prior to that, I had spent some time positioning a 457 account, but nothing more than that. Just a few months into my time at Wikinvest, though, it was hard to not want to invest.  I’m constantly reading investment reports, finance blogs, news, and generally talking about the markets and investment ideas.  It was a perfect fit and, lucky for me, I decided to start my investment portfolio right around the time of one of the greatest stock market crashes ever.

Investing since Wall Street’s collapse in October (and then Geithner’s bobble in March) has its benefits.  With valuations seemingly at the lowest they’ve been in decades, it felt like a good time to be greedy (or as greedy one can be when purchasing 10-50 stocks at a time).

Investing has since fascinated me.  I’m in awe of the thought that, for $9.82, I can own part of American Express (it certainly helps that their dividends offset some of my credit card interest too) or Tata Motors for $4.42.  Ownership can be addictive, and I certainly throughout some of the markets lows.

Since this is an entirely new portfolio of mine, I have a long horizon.  Unless we go into a 1990s Japan-like slide, I’m assuming that a monkey could make money with a long-term investment just after the Oct 08 to March 09 fall.  That said, I’m certainly not willing to count on that, and after markets rose this spring and summer, I’m now looking for quality companies.

I like a good, low debt-to-equity / high ROA / low P/E combo if it’s to make it into my portfolio.  From all the opportunities out there, I start with sectors and regions and work my way down to companies.  I stay away from retail in the U.S., but I embrace it in India and China.  I like companies that build things, or build things that are used to build things, or transport things, or dispose of the wreckage from buildings things.  I like financial institutions — a few of them at least, the ones I haven’t heard much about on television.  Before I invest in a company, I look at recent earnings reports, annual reports, investment reports, and read news associated with the company.

The Investment Portfolio as Venture Capital

It’s not long into this process that I realize what it must take for a VC to part ways with several million dollars of their and their client’s money for an unproven idea and company, all the while knowing they can only, maybe, get the initial investment back in three to five years.  If they’re incredibly good and lucky, they’ll get that investment back with interest.  It’s no wonder it’s hard to get money from a VC.

I’ve found I have certain tendencies with my portfolio similar to a VC.  For my stable investment — the IRA — I’m less willing to risk an entire company’s collapse.  I focus on ETFs like ADRE or QQQQ that follow big emerging market and major technology companies, respectively.  On the other hand, I’ve come to think of my trading account as my “extra” savings where I can take chances.  It’s where I’m going to prove my investor worth.  I’m OK with it disappearing over night.  I’m willing to be risky with multiple small cap companies, looking for one explosive stock.  I spread those investments around; some work while others don’t.  I do what I can to be good and hope to get lucky.  Sometimes, it’s no wonder it’s so easy to get money from a VC.

Portfolios for Founders

The other part about running your own portfolio is — you learn to understand the levers for building your own business.  Create more value than you require.  Give away equity for cash; take on debt for cash.  Purchase people / space / machines.  Convince someone to give you more cash and continue the loop  It’s all there within your portfolio.  You expect management of your portfolio companies to control costs, increase their cash, and demonstrate health by increasing earnings, milestones, dividends, etc.  Management has to preach to employees and investors, alike, with probably a slightly different story for each.  It all sounds like start-up world to me (except those dividends, of course).

As an early founder, you’ll be stuck in the details of your business at all times.  Your investors won’t.  They’ll expect you to step back from the conversation about the misalignment of that button by 5px and figure out whether your market strategy is going to withstand this economy given your cash on hand.  They’ll want it in digestible figures and metrics.  Further, they’ll want you to put your thousands of hours a year into a half hour phone call and presentation.  They just want the basics — are you creating more value than you require?

It makes you understand both the weight of the founder and the risk a venture capital takes investing in a start-up.  Both parties are flying blind in this arrangement.  There’s no easily accessible “Sell” button like there is on my E*trade account, and a bankrupt start-up is worth even less than GM.  Investments are designed for a three to five year exit (at least) with only a hope and a prototype to go on.

Founders, it’s up to you to figure out the rest.  You should understand what your investors are going through (employees are investors too — but that requires another post).  Just remember to create more than you require.  Start from nothing and be willing to lose everything.  Create ownership.

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