I am a financial controller of a tech company and now we want to start investing in securities and startups. What should our starting point be in establishing such a department? How do we get started?
While this can seem a logical extension of a business, it’s important to know that operating and investing are completely different pursuits and require very different skill sets. To get started, try to define the mandate of the department. It’s useful to understand whether the investment process you envision is designed to broaden your current business or to better use existing capital.
Investing in business lines related to your primary business can often inform buy vs. build decisions, can help define product extensions by better understanding costs and market dynamics, and can also bring your firm closer to suppliers, distribution or product innovation. If this is the goal, target investment opportunities can be filtered through the lens of vertical or horizontal extensions to the existing business. The best investments are ones where there is a natural asymmetry in marketplace information, where the opportunity is informed by your existing business knowledge.
However, investing can also be incredibly distracting for the core business, and rather than diversify the firm’s risks, can often concentrate them. Having defined the purpose of the investment program, it can be helpful to know in advance which resources you would use to make investment decisions, and more importantly which would be deployed to solve problems should a portfolio company run into trouble. You want to avoid the scenario where you have your best talent working to solve problems in a small investment instead of running your primary business.
Finally, it’s important to have a clear and shared view of how and when to exit investments. It’s easy to get behind great people; but if they turn out to be unproductive or your business is better off deploying capital in a more productive venture, having pre-determined rules of disengagement can be as important as understanding why you’re initially setting up the department.