Avoid the lemmings and top-tier teams
Unique investing lessons from Silicon Valley Angel Investors
New platforms are opening up investor access to tech startups on a massive scale. AngelList, FundersClub, and Alphaworks all allow Angels that meet Accredited Investor status to invest in startups and tech companies. While still very high risk, the lowered barrier to becoming an Angel has caused some to consider it a new and exciting investing class to consider, worthy of a place inside any savvy investor’s portfolio.
Another more recent trend points to the evolution of how Angels themselves operate and make investing decisions. Angel groups were common over the past few decades, but that’s changing as more individuals are empowered — via shared knowledge, as well as via the new platforms — to invest independent of a group. The number of angels investing on their own has increased more than 50% in the past year, up from 26% to 41% of deals done in Q1 of 2014.
This new era of independent, open angel investing has the potential to involve many more people than could previously participate in a massive market, representing $22.9B of capital invested in 2012. The nuances of this type of investment are slight, and best learned from people who have been there themselves and are actively investing in the most active market — i.e. Silicon Valley-based entrepreneurs that have become Angels.
Five successful Angel Investors and Quibb members share their unique knowledge on the topic, and answer the question “What counter-intuitive yet repeatable lessons have you learned about investing in America’s best startups?”
Two lessons I learned from angel investing, one from a great investment, and one from an investment that I missed out on:
Optimize for pivotability — This is a quality that I think is underrated. Some of the biggest success stories in investing come from teams that have executed multiple pivots (Twitter, Slack, Kabam, Groupon). This is probably the #1 quality that I look for. One of my most successful investments, TouchOfModern, ended up with their current business model on their 3rd pivot.
Be careful when judging early execution — Focus instead on the team and the market. When I first used Uber back when they were in private beta, I wrote them off because their credit card input system was bugged. “They won’t even let me pay them!”, I said. We all know how that story ended. When you’re doing seed stage angel investing you’re going to be investing in very early products, it’s important to judge opportunities accordingly.
When I first started investing, the question I asked myself when deciding to invest was “Is this company going to yield a positive return on my investment?”. Now, I usually ask “Is this a company that I could have seen myself joining when I was 24?”.
If the answer to the second question is yes, it means the founders are working on a big problem that doesn’t have glaring structural flaws, they have a good chance of success, they’re people who could convince someone geeky like me to work for them, they’re working on something important, and they pass my integrity test. If all of those things are satisfied, I feel like I’m probably doing something right as an investor, even if my investment doesn’t make money.
I had always known that there is something of a lemming mentality in all investing (those with a stronger backbone than others have long made a fortune in the public stock markets simply by reading the herd correctly and running the other way.) When I began to angel invest a few years ago, the phenomena seemed exponential. When I brought a deal to successful, bright and saavy friends, the first question inevitably was “who is in?” before “tell me about the team and the concept and why they can get through the typhoon that is startups?”
On the other end of the spectrum was the over due-diligencers. These are the types who have years of experience in a related field (with emphasis on related), often in more established enterprises who are almost McKinsey-like in their analysis. Their experience and insight are not without value, and make for interesting board meetings, but I just lost my shirt on a company for pretty much every reason other than the ones my over-due-diligencers predicted.
My batting average approaches Hall of Fame figures when I start with the individuals (btw, meaning that as often as not I foul tip or worse) — their personal stories, their conviction, their willfulness to figure out anything without being captured by their own hubris. The idea, of course, matters and their approach to it tells us a lot — but they as often are as good at asking the right questions of themselves, and have the steely will to walk through walls attuned to that when sufficient evidence tells them they are wrong — they, well, go at it in a different way.
And I seek the same in angel investors who bring me ideas, and have become heavily biased towards women and men who themselves have built companies from scratch. Not all great CEOs are great investors — but in companies who are one level barely above the dream stage, it sure comes in handy.
As an investor it’s extremely challenging to be of significant help to an entrepreneur (aside from capital). This isn’t for want of trying. Most founders I know are appreciative when angels give product feedback, send a supportive tweet, or make themselves available as a sounding board, but the types of clutch actions by an investor that can affect a company’s future — like making an intro to a key hire, for example — is much more rare than I had anticipated it would be. The flip side is that the best performing companies tend to need the least amount of assistance from their investors. This runs counter to what I think most angels expect when they get into the game.
External market trends and potential impacts on the companies you invest in are almost impossible to predict — but can have monumental impacts, potentially creating an inflection point in the company’s trajectory. I’ve learned that partnerships can be extremely valuable when these external shifts take place, and it’s important to have at least small partnerships and relationships with bigger companies in place, as they can be really powerful once those shifts start to occur.
Another lesson — I feel that the definition of what makes a ‘good team’ isn’t concrete, and is potentially skewed by the types of people that choose to start companies. Over time, I’ve come to prefer a company that has a product that’s really working (i.e. has product-market fit), versus one that has a ‘good team’ but a product that isn’t quite working yet. I’ve found that a ‘good enough’ team, with support and guidance, oftentimes has the capacity to pull off something great.
Originally published at Quibb.com.