It has been a little while since I posted a new article in my series on Investing lessons from Venture Capitalists. Granted the investors I've profiled have moved well outside of the range of venture capitalists and include some great angel investors. As I've been participating more and more deeply in the angel community here in Seattle I am finding that the lessons I have pulled into these posts are even more relevant in my investing thought process than they have been in my public market investment thought process. Mostly because there are lots of other factors that can be controlled for in public investments while early stage investments have no ability to control certain things making the few things you can control even more important to focus on.
I met Rudy through John Sechrest and we put on an event together over the summer for the Seattle Angel Conference IV. I am managing the fund for the conference and you'll see a few more posts about the activities in the conference as well as thoughts I had during some of these events leading up to the due diligence part of the conference. Remember the "conference" has the due diligence period & the actual event.
I'll save all that for future posts. For now, I'll focus on Rudy. He is an incredibly insightful guy and is great at distilling his investing lessons into small consumable chunks. In fact he laid out his investing lessons based on my five things theory! Thanks Rudy, makes this post super easy to write! So here are the five things that Rudy laid out as the most important things (with the top three being the most important)...
It's the team!!
Rudy isn't the first guy to call this out, in fact nearly every investor I've profiled here has mentioned team in one form or another. Don't worry - I'm working on an investing checklist so you don't have to go read EVERY post... although if you wanted to learn a lot more you probably should. For example, Rudy defines team a little different than the others. He focuses on three things that the team has to have:
- Intellect - They need to be smart enough to solve the big problems they'll face. They shouldn't need the investor specifically to make the company go, the investor can advise, mentor, connect, but acting as operations means that the team wasn't right to start with.
- Drive - They have to have an incredible amount of hunger and drive. They have to have or have been willing to mortgage their house, max out their credit cards, and fully engage with making the startup go. This is sometimes overlooked as an important factor, primarily in terms of the length of time that the team needs to push for. We're talking 7-10 years of putting everything into the startup before a real big outcome can occur.
- Charisma - The team has to be able to charm people. No Charm, No Progress. They need to convince future investors, future customers, future employees that their vision and execution are worthwhile. They need to engage at a personal level with the people who will be trusting them to deliver and to do that easily, the team needs charisma.
What is it that you are investing in?
This one is actually not mentioned a lot by investors. There is a lot of product market fit talk and there is a lot of entrepreneur/product fit talk. Yet for some reason, I don't find early stage investors talking much about what it is they are investing in. Rudy puts this pretty specific as well. He simply states..d
Do you love the idea?
It doesn't get much simpler than that. He isn't saying do you think it sounds like an interesting product with a large enough serviceable addressable market. He is saying that you should see the pitch for the product and fall in love. There are blemishes, there may even be baggage, but there are no true downsides to the idea. It can't easily fail and you love it enough to love it 7-10 years from now.
The opportunity better be big enough
Rudy gets a little more into the numbers here, he is thinking statistical probability of success vs. failure. Is the opportunity in a market that is large enough to make the investment worthwhile in the range of possible outcomes? If the opportunity was in the consumer space, is it in a space where the number of people who would potentially use the product is large enough? Is it still large enough if five competitors come into the market, how about ten? Even if you select THE best team and THE best idea, if there is money to be made there will be strong competitors that reduce the original size of the market.
I was again amazed at the insight Rudy brought to this topic. His analogy was that you should be putting gas in the tank, not building the car. The company should already be together and they should know exactly where they are going based on where they had just been and you should just be filling them up so they can go to their next stop.
You should have a look at where they are going and double check they can see where the margins are. If they are gaining traction with a model that leaves them no money to buy customers, you may want to wait for another car to come along. On the other hand if they have come across a strong enough sales and marketing team and are driving to a place where they can buy customers at a lower price than the customers are paying them, you should fill up as much as you can. When a company has good traction, they are successfully arbitraging the difference between these two things.
If they are the right team with traction on a great idea in a large enough opportunity the question really becomes - can they grow big enough to capture the entire opportunity? Can the team grow the company at a fast enough pace and at increasing returns to scale? Does the model begin to fall apart as it gets bigger or does it begin to take advantage of a network effect?
A pretty concise top five investing lessons, but Rudy had more insights to share. I'll put those together in a part II post.