September 26th, 2018
Reflecting On The First 100 Investments
As I begin Haystack III, I wanted to write down and share the reflections I’ve had on seed investing to date. However, please note (1) I’m still learning; (2) I’ll make new mistakes; and (3) these reflections are for me, and not generally applicable to others — there are 101 ways to invest effectively and different things work for different people. And, ultimately, (4) it is a privilege for me to be even just a small investor, and it’s a privilege I take seriously, and am grateful for all the investors in my fund and founders I’ve gotten to work with — they have all taken a chance on me, and that is a very humbling set of circumstances to keep in mind.
With that, here’s what I’ve been reflecting on with 100 investments now in the portfolio, three years in. I don’t have a technology or investment background, so I wanted to invest in a lot of companies quickly as a way to speed up my learning, but I know in the back of my mind, there are no shortcuts and will be more learnings in the years to come. [I want to dig into some my stats (as I’ve shared on Twitter before), but I’ll do this in another post, as here I want to focus more on what I’m taking away as I move into Fund III.] Finally, I’ve had a tough time organizing my reflections in specific categories, so this may ramble a bit. Apologies in advance.
1/ Out Of Market, Out Of Mind
I made a small handful of “out of market” seed investments, some in LA, one in Canada, a few in NYC, one in Boston, and one in Europe. While I’ve been active with them, it is hard to keep in touch and requires a lot of extra work and communication. For Fund III, I’ve elected to keep my focus to invest locally in the Bay Area. I’m sure it will be tested over the course of this fund, and lo and behold, I met an entrepreneur with operations in Israel and parts of West Africa that I would love to work with, but I am not sure about the geographic divide. At the Series A level, I can see how a VC firm would invest out of market, but at the seed stage, I believe the financing risk is too high generally. I sense some people will take offense to this stance, and I hope local seed markets flow to other geographies. I know I’ll miss out on great opportunities, but for this fund, I’m OK with it, which brings me to the next section…
2/ I Can’t See Everything, And That’s OK
At the seed stage, there’s just no way to see every good opportunity. Company creation is so pervasive, I am not sure how wide one’s coverage at seed could be. By adopting more process constraints (like focusing on local investments, etc.), I’m implicitly saying it will OK to not see a company in another market or in a hot category, etc. It’s OK.
3/ Existential Risk Rules The Day
“Only the paranoid survive.” Or, any similar phrase will do the trick. Seed-stage companies biggest risk isn’t competition or a large company — it’s surviving, and often that comes down to securing future financing venture capital. Every seed stage company, whether they admit or not, strives to “reach Series A,” but we know most don’t make it, so we have an explosion of bridge rounds, or second seed rounds, or seed extensions…whatever you want to call them. While a select few companies will have VCs chasing them or boast insane metrics, the rest have to really fight it out, and it often requires a level of risk, sacrifice, and paranoia among the team to get the deal done, which brings me to the next section….
4/ Founder-Market Fit And Startup-Founder Fit
I have learned that I like to find some connection between what a founder is working on today and what they’ve experienced in the past. It could be a loose connection, but I strive to understand what those connections are and how deep they may be. It could be how they’ve been trained, or where they’ve spent their careers, or it could be personal like where or how they grew up. Additionally, I try to evaluate through conversation and reference checks the level of dedication one has to startup life — Do they have the willingness to take real risks, even if it’s reputational risk? Are they willing to sacrifice in pursuit of their goals? Do they exude a mix of confidence about their abilities and competitiveness to fend off all the copycats that will emerge in today’s startup culture, alongside a healthy paranoia that drives them to understand the next round of financing will be an uphill battle? Speaking of uphill battles…
5/ The Seed Round Doesn’t Really Count Anymore
Receiving an offer to invest early in the life of a company generally doesn’t mean much. Yes, it’s very hard to raise money, but there are so many seed stage financings every day, why announce them or view it as some kind of validation? It is not. Securing a seed round means a team has convinced others to believe in their potential. That is something to be proud of as the recipient, yes, but perhaps more of an internal high-five to one’s self versus broadcasting it to the world. I think what really matters are: Do friends and former colleagues want to work at your new company? Do customers find you and bring business your way? Does your product or service change the behavior of your users or customers in meaningful ways? Do any or all of these exist in your company to the point where a professional investor fights to invest in your company, to join your board, and to work with you on a long-term project? Those are the things that count in the long-term.
6/ What Does “Value-Add” Mean At The Seed Stage?
I’m a very small investor on the cap table. The biggest area seed stage companies ask for help with is, unfortunately, one area I can’t really help much on: Recruiting. Now, I have certainly sent a few ex-colleagues to startups in my portfolio and try to do more when I can, but as a percentage it’s pretty small. I’ve also helped “close” many candidates who are looking to join portfolio companies, which is definitely more effective for me. After a while, one kind of glosses over the standard requests like “Hey, if you know any good iOS engineers, send ‘em our way — we are hiring!” I didn’t want to turn into a recruiter (though I think it’s a very valuable skill), and I believe the talent fragmentation in today’s SF/Valley startup scene is so pronounced that being effective at this may be a waste of effort. Instead, I choose to focus on mitigating the risk in Point #3 above, and from that lens, everything flows.
7/ Being Helpful Via Push Versus Pull
With a larger portfolio and being so early, I initially decided to be available and approachable when someone needed any kind of help or just someone to talk to. To encourage this to happen more casually, I set a calendar alert to BCC email all the founders together on the 1st of the month with a short note to tell them what I was up to, to share where I was speaking, to share generalized opportunities I came across, and to add my phone number. From those more casual emails, conversations would emerge. And as those conversations progressed, I would start to ask about burn rate and runway, and if I gathered that the founder was potentially underestimating how much runway they really had, I would offer to work together on it. Many took me up on this offer. Some didn’t. There will be a higher number of things that don’t work at seed, so I focus on (1) trying to pick well prior to selecting an investment and (2) being in a position to help if it’s welcomed, but then not pushing beyond that. It is not my company.
8/ Investing Pre-Product Or Pre-Launch
Unless I know the founders previously on a personal level or it is someone who has successfully started companies in the past, there are way too many good investment opportunities on my desk for me to consider investing in someone’s concept or dream. In fact, I’m shocked how many people waste time trying to pitch someone about their concept when there are live products in the wild for investors to play with and test. It does feel a bit like people view this very early stage investing as a newfield area to go after, but to me it looks more like grant funding — now, there’s nothing wrong with grants, assuming those grants are made on some type of asymmetric information and/or prior evidence of application of talent.
9/ Leading Rounds Versus Catalyzing Rounds
Being a small investor, I cannot lead a round by investing the most money. However, on occasion, I have been one of the earliest investor in a seed round and then worked to catalyze the round by sharing it with a network of investors who enjoy co-investing with me from time to time. In these cases, so long as the founder is OK with it, I can have a bit more influence on the overall terms (what I think the clearing price will be) before sharing it with the wider network. This has been very successful to date — for both investors and founders I work with. Keeping in line with my views on the threat of existential risk, I focus on catalyzing rounds to make sure they get done versus trying to lead them with the small, inexperienced checkbook I wield. And, as seed rounds are never really closed and therefore this is rarely true urgency around closing a seed round, it is entirely manufactured without real teeth as founders may need bridge capital later on in the company’s life.
10/ The Good And Bad With Party Rounds
I have no clue, statistically speaking, if party rounds impact the trajectory of a company. It is intuitive to think that they do, given that more investors with a smaller share won’t care as much about the company, but then you can see some companies on AngelList which have over a 100 direct investors (not through a Syndicate), and it makes you wonder. Clearly for a founder, managing more lines on the cap table can be a pain, but ultimately, if every seed stage company faces existential risk, and if there are too many investors such that no one has meaningful enough ownership to care for and fight for the company in hard times, that composition may impact how the company fares. Philosophy aside, most rounds I see are split between having 1-2 leads with a few individuals and pure party rounds where the founder just scraps to get it done. For now, I’ve decided to focus on making the sure the round can close if I have conviction versus trying to make sure there’s a lead, though some cases definitely require a lead.
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