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Investing in start up
Old 02-15-2017, 03:26 PM   #1
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Investing in start up

Hi guys

I have a question, I have 3 young cousins who are college seniors (1 engineering, 1 business and the other prelaw) Great kids. anyhoo, they've come up with an invention for the petroleum industry, I don't want to say what it is because they have applied for a patent.

but they of course are asking family and friends some capital to start this venture

What are some questions I should ask?? They do have a business plan.

thanks, I need to start watching Shark tank

BC
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Old 02-15-2017, 06:16 PM   #2
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I can't say specifics for what you asked, but I would consider it as speculative or gambling money. In other words only invest what you can lose.
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Old 02-15-2017, 06:29 PM   #3
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+1 the reality is no matter how talented they are that it is a high risk gamble.... if it fails you know the outcome... you lose all that you put in... but a key question is what is in it for you if they are successful?

That said, stranger things have happened but mostly in high tech.... given how mature the petroleum industry is it would seem to me that the likelihood of a few 20 somethings developing the next best thing is remote.
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Old 02-15-2017, 07:27 PM   #4
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I think you have received good advice that you should only provide money you are willing to lose. Most people passed my desk with ideas that fell short. And most were somehow attached to the industry.

As for your question, you need to be convinced the idea will fit a significant need. The cost of manufacture makes sense as it relates to the sales price. The prototype can be scaled. And more. Watching shark tank is not a bad idea.
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Old 02-15-2017, 07:45 PM   #5
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If you like the idea why not? It could pay off big time. Or go bust.

Only one way to find out. "Place your bets please"

I have heard that venture capitol firms say out of 10 they fund one makes it big time and another does good. One breaks even and the other 7 are a total loss.

But they are still funding eh? Big risk = big potential rewards. I like to gamble, I'm "all in" on an Elio.

Go for it -
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Old 02-15-2017, 07:51 PM   #6
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Quote:
Originally Posted by 38Chevy454 View Post
... only invest what you can lose.
Quote:
Originally Posted by pb4uski View Post
+1 the reality is no matter how talented they are that it is a high risk gamble.... if it fails you know the outcome... you lose all that you put in...
Quote:
Originally Posted by davef View Post
I think you have received good advice that you should only provide money you are willing to lose...
I invested my labor into two start ups. If I converted my hours into money using my pay grade at megacorp, it was in the 6 figures. I lost it all. Nuf' said.

PS. By the way, I was "invited" to put real money into these besides my labor. Hell, I was not that stupid! To lose real money earned from real job in addition to my sweat?

PPS. It was in effect real money, because I did quit megacorp to help run one of the startups. And did it for free for a while trying to save it.
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Old 02-15-2017, 11:23 PM   #7
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My parents invested about 10K in a startup mining company, run by a close life long friend, a lot of circle of friends invested.
Now my parents never invested in the risky stock market, but because they trusted this person they put in 10K (which was a large % of retirement money).

They all lost it all....

My advice is ONLY invest what you can LOSE and still greet the cousins and parents at family gatherings.
Remember even 5K in Microsoft in the beginning would now be worth over 4.4 Million. So a little investment would still make you rich and would be not too bad to lose.
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Old 02-16-2017, 07:09 AM   #8
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What are some questions I should ask?? They do have a business plan.
Peter Thiel seven questions
==
1. Engineering: Breakthrough vs. incremental
2. Timing: is now the time to start?
3. Monopoly: big share of a small market first
4. People: right team?
5. Distribution: not only create, but also deliver
6. Durability: defensible position in 10 or 20 years?
7. Secret question: Have you defined a unique opportunity that others don't see

In addition a few answers you should have: basic use of funds, need for additional funds. And agree on milestones. When are you successful? doesn't need to be financial, just some way to measure progress.
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Old 02-16-2017, 07:22 AM   #9
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Agree with others: just like ANY loan to ANY relative, expect to never see your cash again. That's not to say you shouldn't help them out if you can afford it - it just means you are taking a huge flyer and losses are highly likely.
You'll be their favorite rich uncle though.
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Old 02-16-2017, 07:33 AM   #10
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Also consider the regret if they hit it big and you miss out. Might want to invest a token amount for the lottery ticket. JMHO
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Old 02-16-2017, 08:27 AM   #11
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Is it a loan or will you be given stock?

I invested in two business both worked out, but getting my money out of the first one took a really long time and was overall probably not worth the stress. The second one I hit paydirt, but again took 20+ years.
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Old 02-16-2017, 10:15 AM   #12
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Tough call. I'm sure you feel something of an urge to help these kids out and to maybe make some additional money for yourself if things so well. Investments like these can be tricky on multiple levels, though, so just be sure you've thought through all the eventualities. And I would be extra, extra careful considering that these are still college students with zero experience running a business in the real world.

Having said all that, I faced a similar situation several years ago -- although with older, more experienced folks whom I'd known and been friends with for years -- and decided to go ahead with the investment. It has not paid off for me yet, but the company has grown fairly impressively and has received Series A funding from a VC firm. I'm hoping (and kind of expecting) that there will be a return on my investment within the next 24 months. Probably not anything earth-shattering, but not peanuts either. Regardless of what happens, my investment was only about 5% of my total NW at the time -- and less than 4% now -- so even if things go totally south it's hardly catastrophic.

If you do decide to move forward, the trickiest part will probably be coming up with a realistic valuation of the company. Considering it's just a patent right now and they have no customers or revenue, the valuation should be quite low, and therefore your investment should give you a relatively large equity stake. Make sure to put everything in writing in an properly drafted legal agreement.
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Old 02-16-2017, 11:15 AM   #13
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Since FIRE, I have invested time with fifth startups and time +money in a sixth. One has closed completely. Four are around in some form or other and one - the one I put a little money in - seems to be doing well, but is still years off from any return. I've enjoyed it tremendously, but it always was hobby time/mad money. Never anything I counted on or had much hope for. Startups are very tough. Most fail.
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