A couple of years ago, I was approached by a serial founder. She was ready for success & had found the right opportunity: partnering with an existing startup that had great tech, but needed a capable biz lead.
I was excited and said I would lead the round.
Then, the disclosure: they had legacy investors.
So, I met up with them … IMO, they represented zero value-add.
I pulled out.
There’s no room for baggage in a fast-growing, early-stage startup.
In a 2007 US study of >3k angel investments, there was a bias to success for startups that engaged with their investors.
There was an even stronger bias when the investor had domain expertise (perhaps, they had made their money in the same industry?).
But, the bias isn’t strong, and a similar UK study from around the same time even warned:
failure was greater where investors were perhaps too involved
Does this explain why I’m ‘hands off’ with the companies I’m invested in?
Nah, I’m just lazy …
That, plus I have a portfolio approaching 60 startups (split neatly between AngelCube & personal investments), so I only oil the squeaky wheels (translation: reach out to me if you need my help; otherwise, you have a startup to run, so I won’t - can’t - annoy you).
Taking on an investor is like taking on a long-distance relationship: it’s a lot more difficult - and, nowhere near as romantic - as it seems.
I have a simple 2-step process to protect you from bad investor advice:
Firstly, meet with any aspiring investor (once you’ve completed the suck-up-and-hope-to-hell-they-want-to-invest bit) and apply the Beer and BBQ tests (created by the founder of 1800-GOT-JUNK):
I developed what I call the Beer Test, narrowing interview questions down to one: “Would I enjoy grabbing a beer with this person?” It’s a hypothetical (most of the time), but it’s incredibly powerful. If the answer is yes, it’s likely the start of a great working relationship … the Beer Test determines if the candidate is culturally compatible. Sure, it’s simple, but it cuts right to the chase.
The BBQ Test is all about the group dynamic. It’s a matter of asking, “Would this person fit in at a backyard barbecue with my corporate ‘family’?” If you threw the candidate into a group social situation with other employees, would she be able to hold her own, or find someone to connect with? Secondly, and this is critical:Ignore half of what your investor/s tell you
Secondly, do this:
Ignore half of the advice even your best investor gives you
This is because an investor’s experience, like Uranium - whilst potentially incredibly powerful - has a half-life:
It depletes as soon as they step away from their own business, or make their last investment …
… yet, your own experience grows every single day.
Your learnings (what you see in the market, what you learn about your customers, what you feel from the competition) are fresh … dynamic.
Your investors’ experience - my experience - is stale by comparison … and, is getting a little staler with every passing day.
Let me propose a solution:
From now on, every potential angel investor should wear a badge at startup events showing the amount and date of their most recent startup investment.
- less than $50k, or
- more than 6 months, or
- your impression is that they won’t pass both the Beer & BBQ tests)
… say “great to meet!” and, walk (don’t run) away!!
Image credits: Speedlancer