Why I Suck At Investing In Startups
The first time I ever put my own money into a startup that I did not found, I felt like I was onto something amazing. It turned into a disaster so quickly and quietly that I’ve never felt comfortable investing since.
What I learned is that you’re either an investor or you’re not. But how do you know?
Man, I was so excited to write that first check. This was after startup #7, and I was batting .500 with one still in play. I wasn’t ridiculously rich, but I was ridiculously young. And eager. And stupid. And I had a bit of money.
Yes, that scenario is the common downfall of most young entrepreneurs. Or athletes. Or actors. Or anyone who comes into sudden money after never having had money — lacking, you know, a lifetime of experience to keep them out of the way of their own ego.
I was different, I told myself. I’d never been trendy or flashy. I didn’t need to buy status. For example: I had just purchased my dream car, a used BMW 318i stick shift convertible, black and tan, which I had picked up for $15K.
Not exactly a Tesla.
This was how the progression went, as I understood it. You take the risk, you work your ass off, you reap the reward, you buy the car, you start writing checks. I was simply carrying out step five of that progression.
Problem. Several problems actually.
- I wasn’t living in Silicon Valley or New York. So my sphere of investable opportunities was not of the magnitude of those that most successful entrepreneurs have access to.
- While I had successfully exited three times, I had not yet done so as a founder. So I had neither the cred nor the backup cash to comfortably invest where I’d be doing anything other than dabbling.
- And most importantly, I’m just not that guy. I’ll get to that in a minute.
Doing my best to avoid implicating anyone, here’s what happened.
- I invested because I thought I was supposed to, not because I wanted to.
- I wrote a check despite feeling not great about my own due diligence, because I was following a herd.
- I didn’t invest enough to have any sort of influence.
- Things looked great until they didn’t.
- There was no malfeasance, incompetence, or any other form of chicanery. I just lost. About 70%. Which I realize is about 30% less of a loss than most bad startup investments.
Make no mistake, the problem here wasn’t the game, it was the player.
I realize that VCs and angels need to offset that 70% loss and nine others like it with one 700% win. However, as an entrepreneur, my mindset isn’t one-out-of-ten, it’s all-or-nothing. As an entrepreneur, I’m used to focusing on one thing, and doing it very hard and very well.
I realize that no matter how much risk I feel like I can take on, I have a huge problem with others taking on that same risk. I’m not sure why this is and I hope it isn’t ego, but I know, at best, it’s about control issues, which I hope makes me a better entrepreneur.
I realize that you don’t dabble in startup investing. You invest enough to have a strategic and positive influence on the business, and you bring all your connections to bear to make that happen. This is a rich person’s game, not a smart person’s game.
Now wait, if you happen to be rich AND smart, you’re going to do very well, but you have to be smart about investing in startups. Being smart about building startups isn’t a substitute. I thought it was.
I realize I need my hands on the wheel. For me, for startup to be satisfying or even fun, I need to be directly involved in taking the company from point A to point B. As I’ve matured and evolved, point A has moved from the very beginning to much further along in the lifecycle, right around the $10 million in revenue mark. Point B is still the same, go public or get acquired. So the challenges have grown with me.
I realize that when things go from looking great to not so great, that’s where I come alive. And just having a silent stake in a startup when this happens is nothing short of torture. There’s little I can do except maybe cash out if that’s even possible. And I hate that feeling.
But like I said, most importantly, I’m just not that guy. After the dual exits of Automated Insights and ExitEvent a few years ago, I still get asked to invest all the time. I should be part of angel groups and semi-secret Slack chains. I used to get all awkward about it but now I just say no, and if pressed, this is the story I tell.
I’m not a startup investor because I’m not in startup for the riches and the glory. I’m just not. I’m in it to fire the rocket, to change the world, to disrupt the status quo, whatever cliche makes the most sense to describe coming home at the end of every day and feeling like I accomplished something. This doesn’t have to come from startup for everyone, it just does for me.
But it just so happens that, in startup, if you succeed at the rocket and the change and the disrupt, the riches and the glory come anyway. I tend to dismiss all that. So I realize I probably sabotage myself a bit in the eyes of some power people, but so be it.
I have nothing but huge respect for entrepreneurs that make it and give back by funding one-to-ten other early stage startups and hoping that one of those one-to-ten blow up just like they did.
I’ll take those checks I would have written as small time investments and write them for other things: Family, charity, offsetting taking startup salary to go to work for something early, and, most importantly, funding my own projects down the road.
There’s no riches or glory in that. But it’s a quiet way to take that next step in an entrepreneurial career. And as long as I can come home feeling accomplishment at the end of the day, it doesn’t matter how it happens.