Over the last ten years, I have been intimately involved with early-stage technology funding (advising VC firms and Angels, as a part-time venture partner) in Silicon Valley and have invested personal time and money in building high-growth for early-stage ventures. That has given me a unique perspective on the challenges between entrepreneurs and investors.
1) Invest in the founders, but be wary if the company consists of technologists only. The ones that come in without an operating plan clearly do not understand what you as an investor are looking for. Get a real operator in early.
2) Invest in the business, don’t invest in technology. The statistics prove it: ninety-nine out of a hundred of the most innovative technologies never turn into successful companies. Especially investors (both VC and Angels) that made their money in the hay-days of technology tend to underfund the business side, providing a weak foundation for any technology to succeed.
3) Don’t invest in an early-stage company with more than one product or service. Let the company become the King-of-One, rather than the King-of-None. Multiple products or services require more money to support successfully and dramatically dilutes the focus of the company. Numerous products or services also “invite” a larger group of competitors, making it hard for customers to perceive real differentiation and unknowingly, slows down adoption.
4) Don’t invest in an early-stage company with more than one business model. Keep it simple. Multiple revenue models sound good, but usually, don’t yield the projected outcome. The company should make all of its money in advertising or subscriptions, not in both. Dilution of focus is costly and provides yet another reason for failure.
5) Don’t invest in companies that rely heavily on partner support early on. This is the typical David and Goliath phenomenon. Partners sell once the company does in overwhelming numbers. The company should always have direct control of its business model first before they allow any partner to reduce its margins.
6) Invest money or time, don’t do both. I very much relate to Carl Icahn in an interview with Dan Primack (on PEhub) with regards to CEOs’ responsibility to make the numbers work, and not to rely on investors to “add value.” The CEO is in the driver seat, take him out if he doesn’t produce.
7) Look for fundamental changes in customer experience. The Ultimate Driving Experience is what sets BMW apart, not just the timing in their engines. Customer experience is much more than a pretty user interface. It is an overall experience that spawns disruptive purchasing.
8) Watch how professional the team operates pre-funding as an indication of their interaction post-funding and with customers. Real professionals do everything with a purpose, and I have mastered the art of detecting them. So well, that I can tell from a visit to a trade-show floor whether a company is going places.
9) Don’t categorize investment allocations based on past investments or trends. Every company is unique and requires an amount of money unique to its assets: people, timing, market, and ecosystem. If you don’t think you have a unique scenario, you probably don’t have a valuable investment opportunity.
10) Invest with a passion but don’t fall in love with the company. Investing is the ultimate flirting game, but it is usually a bad idea to get involved. Your asset value is the selection and performance of all the companies in your fund. Stick with what you do best.
From an investment perspective, I see much sub-optimization but not a lot of really great innovations these days. I do blame the current investment model for that sometimes. We, in Silicon Valley, have too many technology investors using the same rearview-mirror investment criteria. Although I have a lot of admiration for Apple, it is a bad sign when we need to leave real innovation in the hands of large companies like theirs.
The landscape for investors is about to change dramatically, no longer can they continue to invest in proprietary technology silos at single-digit valuations. They’ll soon need to broaden their experience (“in search of the Economist VC”) to understand the macroeconomic impact of marketplaces, platforms, and the effect of technology on other industries.