The Five Truths I Learned as an Early-Stage Investor
Investing at the early stage is a form of accelerated learning. As much as you may prepare, there are so many variables at play — and unexpected outcomes — that every situation demands new thinking and creative problem-solving. When I co-founded UpWest Labs with my partner Gil Ben-Artzy, we made the decision to thrust ourselves into a state of accelerated learning, where everything we thought we knew would be challenged.
This month marked five years for UpWest Labs, which has me reflecting on our journey and what we’ve learned along the way. Being in the trenches with more than 60 companies that have raised a combined $300 million, we have been surprised, validated, and proven wrong despite our best laid plans. However, we’ve also discovered there are some constant truths that can guide early-stage investors who are in it for the long haul. Here are the “five truths” that have guided our work, and other early-stage investors, over the past five years.
1. It Gets Personal — Fast
Being an investor at the early stage of a company requires getting personal — and fast. In addition to gaining a deep understanding of the business — including market fit and revenue potential — the investor must dive head first into understanding the founder’s motivations, values, and beliefs. At this stage, there is no avoiding personal conversations, when much of the product, market validation and proof simply isn’t there. What is motivating the entrepreneur? Can this founder sustain the long journey and weather the tough days? What is their personal runway, and how do they make decisions?
The founders’ and CEOs’ personalities can make or break a company. Specifically, is the founder able to develop meaningful relationships, read complex situations, be self-aware and tactful. Does the person demonstrate flexibility, the ability to absorb feedback without hostility or defensiveness, humility yet boldness, and, most important, the drive and hustle? It’s essential to know how the founder will react to tough situations and will he/she be a great CEO? My Partner at UpWest Liron Petrushka wrote about these traits and dilemmas in this great piece.
2. Gritty, Scrappy, and Messy — Your Mantra
If you are not ready for the scrappy, messy, day-to-day grind of working with founders on early ideas, problem-solving, product formation, market validation and the occasional founders drama, then you are in for a very rocky experience. Founders at early-stage startups have to make countless important decisions every day about direction, strategy, funding, hiring, and product. As the earliest investor, you must ask yourself: What is it that I can do to help this decision-making process? What perspective or resources or intelligence can I bring to the table so that CEOs can make better decisions?
Investors also need to be scrappy. This means everything from going to industry-specific showcases where founders work the floor, to answering customer questions and discussing endless iterations of marketing and fundraising decks. It’s about sourcing talent and services and speaking opportunities for CEOs who are breaking through the glass of anonymity. When things get messy, it’s your job to embrace the chaos, listening to founders who disagree on directions, dealing with some of their personal drama, and in certain cases finding outside help to provide mediation. The investor can’t be afraid to get their hands dirty when necessary in order to resolve the tricky situations that arise.
3. Differentiate and Define
Startups have many funding options today when starting a company. Not all investors are created equal and their checks come in all shapes and sizes. So what is it that makes you unique and differentiated as an investor in the startup universe? When we started out five years ago, it was very important that we stake our place in the ecosystem and constantly evaluate our differentiation and value proposition to founders. In contrast to other angel investors, we felt our greatest value add was the provisioning of resources, support, and network to drive the long-term growth of Israeli startups in the US. To do so, we had to invest in fewer companies but much earlier, and spend considerable more time and involvement to deliver on our promise.
As the seed investor, you must ask yourself what you bring that isn’t offered anywhere else, whether that’s domain expertise, access to market, pedigree, network, and beyond. When I spend time with founders looking to raise seed or Series A rounds today, we often have these discussions. Smart founders are looking for more than the check and will often forgo a sizable offer to pick someone with a specific value, network, and expertise.
4. Upstream is as Important as Downstream
Spending time downstream on developing a healthy deal flow is essential to any investor. We invest enormous time sourcing and creating opportunities to help as many founders as we can. Being accessible, transparent and supportive across your founder ecosystem should be a priority for you as seed investor.
However, it is equally important to build solid relationships upstream with bigger funds and spend time with partners at firms who are likely to follow and back your companies. In the early days, we divided our time by 80% downstream and 20% upstream. As we grew and our portfolio matured, there was a real need to spend significantly more time upstream and focus on those relationships. Needless to say, building such relationships with the investment community takes time to sustain and nourish and may involve countless conversations on industry verticals, your investment thesis, and fundraising strategies. It also means that you must communicate to your founders the fundamentals of VC economics and what aiming high means for them.
5. Build Data and Learn
Organizations cannot evolve and investors cannot grow and make better decisions if they are not applying data analysis to their approach. Initially we relied on a combination of mostly external data and our intuition to validate a lot of our thinking about founders’ success, startup failure, and how to provide support in specific scenarios. But this approach had limitations.
Over the years, as our portfolio grew, we began to notice patterns and signals that we’ve had to take seriously in order to perfect our sourcing, provide support and develop future engagement with founders. We applied a data-driven approach to understanding our portfolio construction from a domain perspective in relation to the market and where we source the teams. For us, that meant looking at the data on what it takes for foreign founders to succeed in the US, and what common challenges and obstacles stood in their way. Most importantly we learned how to use the data we collected to help our portfolio of startups accelerate through their early stages, in our case, how to build a solid, scalable operation in both the US and Israel.
The privilege of partnering so early with entrepreneurs and share their journey ought to be taken seriously. While early-stage investing might be viewed as simply a financial transaction to many who consider the opportunity and path as investors, our short yet deep experience proved that the process is much more complex. With constant learning and refinement, great products find their way to greatness. The same holds for investors: those who are willing to dedicate their time and resources, and become deeply involved in their portfolio, will set forth on a path of accelerated learning and ultimately gain a more sensitive grasp of the market forces shaping their companies.
I’d love to hear your experiences in early-stage investing. Leave a comment with a lesson you’ve learned below or reach me at @shulygalili