Time to invest in a startup.

All investments have a risk. A friend once told me that the best investment for me was to stick the money I had under my mattress. Considering the success I've had with startups, he probably WAS right. I use the past tense. If you follow the value of the dollar, it has gone down almost 10% on the world market. The Sequel has done well so far in relation to the dollar, but as time goes on, it will "adjust" itself. The Israeli economy is based on the Dollar being 4.25 Sequels. More likely, it will be closer to 5 to 1 than 4 to 1 or last week's low of 3.70 to 1.

If you have followed other investments they all have been dropping in value. Real estate, both as a short term investment and a rentals have gone down. Many people have mortgages far beyond the current value of their property. Rents peaked here in Jerusalem last summer, when airplane loads of immigrants arrived and not understanding the market went on a feeding frenzy to rent apartments in what they had been told were good neighborhoods. When they arrived and found that they were paying twice as much rent as their neighbors, and that their rent did not include things they thought it would, they passed the word back to the next group. Not only that, but there are very few people coming with large sums of money to spend, and many are arriving, or planing to arrive to escape debt.

In the U.S. it is worse in some places, real estate is a worse investment than hi-tech stocks. Hi-tech stocks have always been risky, if you ask someone who invested in CISCO, they tell you how well they did, but what about people who invested in the competition? There was in the WSJ about the difference in value you would have if you invested $1000 in a well thought of router company, or beer. After the bubble burst, if you held on to the stock for a year, or drank the beer, the empty cans would be worth more than the stock.

Similar things are in motion now. My last posting was about Crocs, the brilliant Summer shoes, in their winter of (investor) discontent. (sorry, Bill.) Even Apple, which has been a darling of investors since they successfully faced the choice of going bankrupt or giving the company to Steve Jobs. My speculation is that the company will split into a company that makes the iPod, the love it or hate it iPhone, and iTunes which is doing very well, and a computer company, which is doing better than others, but that won't be saying much.

So if you have money to invest, either made when the market was hot and is now festering in 2%-3% savings (or going negative in stocks or real estate)? My suggestion is to invest in startups. The risk is high, very high, 95% of all startups (not just hi-tech) exit in failure and loss, and 75% of them do it in the first year. However, the rewards for those that succeed are as great. If you look at it from the point of view of someone with $100m to invest, and I understand that such a person probably would not be reading this blog, and they invest that $100m in a startup, they are likely to loose it all. If they invest $1m in 100 startups, they are very likely to make it back, and could end up making many times their investment.

So how does a small investor do that. Look for startups in the pre-seed money phase. Many startups need small amounts of money to get going. Money to incorporate,
write a business plan and shop it around, file U.S. provisional patent applications, and feed the people behind it for a few months until they get the seed money. This is not the same as an angel investor, who funds the company well into the development of the product, at least until there is a prototype and enough of a company to go to a VC fund.

The point is to never over invest. Don't put in more money than you can afford to loose. I've seen many companies here that call themselves "young", meaning no adults involved. It's usually kids just out of the army, or college and have an IDEA. They convince a family member to empty their savings, mortgage their home, or cash in their retirement plan and angel their company. They don't have any experience working on large projects, doing it all as opposed to one small part (for example programing), and don't have a clue of how to write a business plan, develop a product, or what management they really need.

You can spot them easily if their CEO is under 30, no one involved is over 50, and they are looking for a CTO, but have already chosen their technologies. You can also spot them if when they first pitch you their IDEA, they have to ask for an NDA (non disclosure agreement). If they have not already written up a description that tells you what they want to accomplish without giving it away, they it is obvious they did not do their homework, and may not even know that they have to.

Here in Israel, you have to avoid pitches for IDEAS from Israelis who believe that an Israeli patent is worth anything, or they can incorporate here with a software only idea and expect a U.S. company not to to a similar thing, only better, and crush them. I have seen many of companies that work that way. Luckily for them, I have no desire to steal anyone else's idea, even if I can see where they went wrong and can make it work. Yes, people really do publish descriptions that are so detailed I can do it. I'm sure if I can, so can 100 other people, and among them at least one who is not as ethical as I am.

I have tried to politely (and sometimes more directly) let people know that, but usually I get no response, and if I do, it's a refusal, not always polite.

I should point out that this posting is not 100% altruistic, I'm looking for someone to pre-seed a company ($20k-$30k) range, or angel ($250k-$300k) it, and I know several other pre-seed ideas that could become IDEA's with the right funding, and might even make it into products .

Geoff.