What I learned investing in early stage startups
My semester as a student member of the Roughdraft Ventures team
Last semester, I moonlighted as a member of the Roughdraft Ventures (RDV) team. Officially, RDV is a student-focused initiative backed by General Catalyst partners to foster entrepreneurship and technology development at the university level. We are a group of 11 people — 7 undergrads from Boston universities with a variety of backgrounds, 1 business student, 1 computer science PhD student (yes. That’s me.), and 2 General Catalyst employees. We seek out early stage student startups and provide up to 25k in funding, back by General Catalyst. We are similar to Dorm Room Fund for those of you more familiar with that. I don’t really want to talk too much about RDV in this post. Instead, I want to share some of my experiences from this past semester. The usual disclaimer: these views don’t represent RDV or General Catalyst Partners but rather my own personal ones.
How I became involved? So why am I doing this? Well… good question. I grew up in Silicon Valley and went to Stanford. That’s really the only startup world I knew — yes I know it’s THE startup world. As a PhD student, I always wanted to be more involved in the startup community because I feel like I could provide some valuable technical insights. However, in Boston, this community seemed non-existent. Enter TechCrunch and subsequently Peter Boyce. I heard about RDV in a TechCrunch article, and I reached out to Peter to just talk about it. Somehow, over a summer, he had convinced me to join the group. I thought it would be exciting to contribute to a growing community where I could use my Silicon Valley experience and connections to make a large impact. It was also an easy way to meet and work with startups because many times, they come to you. Finally, if you have read my other posts, PhD life can be frustrating, so it’s good to have some mental context switches.
Main Lesson: Investing is hard. Many investors know this lesson, and they have probably learned it the hard way. For early stage startups, these uncertainties are exacerbated. Here are some issues I struggled with during pitch meetings.
There are a lot of markets. RDV loosely invests in software focused companies, but these companies can span multiple markets. Some examples of markets we’ve seen are biotech, fashion, social media, finance, etc. I think it’s impossible for anyone to understand the dynamics of every market and then determine the validity and potential of a startup’s approach to “disrupt” the market. Even though our group comprises of various backgrounds, it’s still hard to have expertise in every market. Even if one or two people understand themarket, you’re placing a lot of trust in their opinion. I tend to understand the markets for areas I’ve worked in the past such as social media, big data systems, web application platforms.
Evaluating the team is difficult. The startups we see are very preliminary and just have a minimum viable product (MVP). Our task is to evaluate a team’s capability to adapt and work together even when times are tough. This is extremely difficult because many times, we don’t personally know them. Even if we know them, we still have to know if they are the best team to work on this particular product. This is a really subjective process, but I try to focus on the objective aspects: past experiences and background.
“Cool” is subjective. Many times, we see a “cool” startup. The startup’s presentation captures our attention. This is concerning to me because some ideas might be a result of a fad or could be the next fad. How long will this fad last? Will this fad even catch attention? Also, we represent just 11 users out of a large pool of potential users. Many times, I’ll ignore my excitement and just look at the facts. What is the market size? What is their distinguishing factor? Have they done any user research to validate some of our concerns about user growth? Is there any new technology and is it really disrupting any market? It’s really difficult not to let my emotions come into the mix, so that’s why I always try to interrupt the presentation to ask some technical questions or clarifications to give my senses some relief.
We can’t see the future. This is probably the single hardest thing about investing. You can’t see how a product will evolve or how a team will grow a product. There are unpredictable market factors, and you have just the past and history to base your decisions. This is particularly hard for early stage startups because we don’t know how the product will be received by users or the market. Usually, the small things make a big difference. Why did MySpace fail while Facebook succeeded? Why are people using GMail instead of Outlook? The differences are easy to see in retrospect but hard to see at the moment. Similarly, bad management and other non-product related problems also arise and cause a startup to fail. Investors are constantly wrong even about big investments (see Color and Clinkle). Personally, I have better intuition for software that deals with systems and security because I do research in it, so I’m already thinking about the future and spending a lot of time understanding the important problems in a space. Similarly, when a startup identifies a fundamental problem, it’s a lot more compelling.
These are some basic lessons that I’ve learned from RDV this semester. Being an investor is difficult, and you’re constantly wrong if you really see how many companies exit for a VC fund compared to how many companies they fund. The ratio is relatively low. With all that said, I have become more confident with my opinion regarding what investments we should make or deny, especially in spaces I’m familiar with.
