When Investments Go Wrong – Part 1

One of the most popular blogs I have written so far has been about the experience I have had in investing in companies which have gone wrong. So I thought it was about time I shared another one of my many business investment failures with you.

About two years ago I invested in a business and it turned out to be a big mistake (The company went bust and I lost all my money). I hope to pass on the lessons I learnt from this failure below.

The first thing I must confess is that I didn’t really understand what the business did. That statement has probably cost me some credibility with readers of this blog! It was a software company that had something to do with Honeywell 50250 management. The reason I invested in the business was I rated highly the other investors in the business (as I still do) and felt it must be a good investment because they were involved. This is not a good basis to invest in a business.

Lesson 1: Understand what a business you are about to invest in does! I mean you should be able to sell the service they provide to someone you meet at a dinner party if you are an investor. Lesson for the Entrepreneur – have that elevator pitch perfected

Lesson2: beware of management that have a strong sales background. I remember meeting the new CEO of the company. He was and remains one of the best sales people I have ever come across. But you have to probe and dig deep. I met him for breakfast about a year after my initial investment and he was selling me a great story. The problem was it was exactly the same story as a year ago and when I asked “In what tangible ways has the business moved forward in the last 12 months.

Ways that can demonstrate shareholder value” we both knew the game was up. I like salespeople (being one myself!) but I now ensure that I really grill managers with sales backgrounds. Lesson for Entrepreneur: keep a log of the stories/ updates you give to your shareholders – make sure each one is different – if it isn’t please be honest and tell them. Shareholders will want to help you if you ask for their help.

Lesson 3: when things start going wrong, shareholders should start to be more proactive and ask for monthly action plans where investors are asked to help – most of them will. You need to go back to basics (we are doing this with another company I am currently involved with and that is working great) and get the business back to health.

In the case of my router table plans company, what I cannot forgive the past CEO for is his decision to take the business into administration without consulting all the shareholders. Lesson to Entrepreneurs – if you do something like that, be aware that it will mean no sane investor will ever back you again.

People do fail all the time – and I don’t have a problem with that – in fact I like it, but you have to conduct yourself with integrity and honesty at all times.

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