24 things I learned as a Seed Investor — Part 1: about being an Investor
Back in 2011 I decided to switch sides from being a founder to the other side of the table. This text is the result of over a decade of learnings, thoughts, observations and some open questions I collected in VC along the way.
For the past 11 years I built Speedinvest, a pan-european Venture Capital fund, together with a bunch of great people. We started with a 10m $ fund and now manage over 1bn $ in assets. We went from 6 people to over 100 and did more than 250 deals across Europe on the way.
Back then I wish I would have found some advice online, that’s why I decided to reflect on my experience here, hoping it is useful for others, founders and investors alike. My perspective is that of a Pre Seed / Seed investor in Europe, so your mileage may vary.
Part 1: About being an Investor
1. It’s a numbers game
It took me a long time to decode what “good” means in venture capital, what it takes to become a “good investor”. I am still not sure I understand, let alone mastered all the skills. But I am convinced that to learn in this industry, you have to do a lot of deals. There is no shortcut to being able to judge what a “good company” or “capable founders” are. You operate with incomplete information and companies take surprising turns, in all possible directions. I have seen “successful” companies completely flounder in late stages and even fall apart. And I have seen spectacular and completely unexpected rebounds. Some of the most successful companies in our portfolio went from not being able to raise any money to becoming a unicorn in less than 12 months. Picking up signals is almost like gardening: you plant the same seeds year after year. Only by observing them for many springs you’ll be able to draw conclusions on where and how they grow best. And even then it is hard to reproduce it.
2. ABI — Always be investing
Venture Capital is a simple market at work. It’s called valuations, but it really is a price, as there is not much (sometimes nothing) to actually value. Hence over a fund cycle or a career, you will invest in different market conditions. The best investments I made 10 years ago reached valuations in the hundreds of millions, if I would have done 3 years ago, they would have been unicorns. Not because the companies are different, but because the market changed massively. My takeaway is, that in order to “hedge” returns against market developments, it is better to invest constantly over time, rather than doing some investments early and then working with these companies. It pays off to always be investing.
3. Feedback cycles in Venture are complicated
Feedback cycles are long in this industry. You’ll only know the outcome of your investment decision once the company sells. That takes 7–10 years from a seed round easily. But for a career in venture the feedback cycles are much shorter. Do you see the right (often “contested”) deals? Do you win them? Do those companies close follow-on rounds fast? From top tier investors? These are some of the proxies that others will use to judge your performance. While these signals might turn out to be completely irrelevant or even outright wrong in the end, they’ll determine a lot along the way. This is not only the case for individual investors. It’s especially true for funds: you’re judged by whatever data is available, even if it has nothing to do with actual performance.
4. Better lucky than smart (thanks Andrej!)
Even though most investors would not admit it, I came to believe that lucky beats smart in this industry. While having a thesis and keeping discipline is something that can help build a brand and helps to narrow the area where you are collecting signals (see above), it often was the “outlier” deals, the most controversial ones that led to surprising and important outcomes. In my observation, taking risks has paid off.
5. A wave can carry you a long way
The easiest way to de-risk picking the right companies is to find a wave you can ride. That means to invest into a growing market with lots of VC activity. More VC activity means more money. That means more deals with bigger tickets and higher valuations. It’s a sad reality that investors are a herd grazing on the same pastures. If you are a Seed VC that can take you a long way, because it’s all about securing more resources (aka money -> talent) for your companies.
6. Being wrong hurts. Being right hurts.
I don’t think it comes as a surprise that a failed investment hurts a lot as an investor. But being right also hurts, just at a different time. How often did we discuss investing in Quick Commerce plays, like Gorillas? Often. We never did, because we felt the unit economics would never work out. Seeing them raise round after round hurt a lot. That’s one example. There are many others. As much as you still believe you took a right decision, it’s hard to stick to it when the rest of the world seems to see something you don’t. Of course there is still money to make in cases like this, but if you look at VC the way I do, it’s not about the short term. So having strong beliefs is going to hurt. Until it doesn’t.
7. Your network is your success
A book that I found most helpful to understand venture is actually not about venture at all. It is about success and universal laws that guide it, from Laszlo Barabasi. It starts out with the realization that success is not about you, but about others. And that as long as performance can not be measured, your network will define success. That is certainly true (as are his other rules) for venture: in the early stages of a company, there is nothing to measure success with. So the opinion and assessment of the network of follow-on VCs will define what is a “good” deal (VCs call that FOMO). Interestingly this effect persists up to the growth stage of a company, because it’s a beauty contest.
8. It helps to have a plan
Like every fund builds a portfolio to diversify risk, I came to believe every investor should look at her investments / portfolio companies with a portfolio theory in mind. I haven’t found an answer what the ideal portfolio looks like, but I realized (late) that focus helps. Some examples: it’s easier to be helpful if you work with multiple companies with the same business model. It helps to be on the board of companies in different stages, so you can transfer knowledge from late to early stage. As an investor you can use investments to learn from other investors, understand other industries or expand your network. It’s good to have both, safe bets and moonshots. Some deals create visibility in your network, in turn leading to better dealflow. This is especially true if you recently started in venture capital. You’ll probably not stay at the same fund for 30 years, so your portfolio is also your calling card.
9. The first board meeting after the investment sucks
So you’ve done a deal, all good and rosy, then it’s time for the first board meeting. Then in that meeting there is a sense of disappointment in the air. The performance of the company doesn’t look as great as in due diligence. A core employee wants to quit. There is a conflict within the founders and the goals for this year will not be reached. Welcome to reality. After dating, the work on a long term relationship starts, with all the ups and downs that are normal. I go into those meetings with very different expectations now than I used to.
10. The sidelines are a tough place
“Doing deals”, investing, is the raison d’etre for an investor. That’s also your biggest leverage, as most of the outcomes are completely out of your control. Accepting this reality, looking at outcomes with humility and trying to show up, doing new deals again and again, is about the only thing you can do. That doesn’t mean you can’t contribute. Getting great at the few things founders actually need from their investors is a rare virtue in this industry. Like building connections with founders and other investors, providing perspective and insights from similar companies and showing up when needed. Sometimes it is hard to watch a team play from the sidelines, when you just want to kick the ball forward yourself.
11. Don’t become a VC
VC is a long term game, not only for startups but even more so for investors. Fund generations and vesting schedules drive that. But it’s also determined by network effects. Effects accumulate over time, so going into VC with a perspective of less than 10 years is possible, but likely a waste of time. Understanding how VCs think is possible in a matter of weeks, it’s not rocket science. The actual tools are all public knowledge (valuations, captables, etc.) and having been an investor doesn’t help if you want to build a company later on. To learn discipline and rigor, it’s much better to do 3 years in consulting.
12. You are on the easy side of the table
Being a founder is much harder than being a VC. I have seen both sides. The constant sword of Damocles of even having a runway, the daily struggle of ridiculously small and mundane tasks (Why is there no coffee? We need to move the release date. Someone joins, someone quits, someone has a personal drama, etc.) makes it hard to focus on all the “big” things that investors usually want. Founders need to think big and small at the same time. A skill that is not only hard, but also exhausting, especially as being a founder is a very lonely job. You probably heard VCs talking about their “fiduciary duty” in board meetings. My belief is the only duties a good investor has are to support the founders, challenge them in the right moments, provide undivided attention and serve the business. Recently it also became necessary to keep fellow investors in check. I have seen many companies ruined by their investors. Through blown-up fundraises, unsustainable growth expectations and pure negligence. While the investor walks away and focuses on the next investment, founders are left with a mess to clean up.
Update: Part 2 is out, with lessons for founders.
Some other investors have provided written accounts of their learnings, I found them a great help and inspiration:
50 brutally honest takeaways about my time in Venture Capital
Investing in Public: Non-Obvious Lessons from 100+ Angel Investments
Thanks to Andreas and Felix for providing feedback on this piece. If you have any question on any of the points, feel free to reach out.
