As a part of my book on angel investing, I interviewed all sorts of investors from angels, to venture capitalists, to private equity investors, to hedge fund managers, and everyone in between. There were a lot of similarities and a lot of differences and only occasionally did an investor offer some deep insight that was being uniquely offered by them. You’d think in such an independent practice like angel investing the styles would be drastically different as there are no schools teaching angel investing, no school of thought dominating the space, just a bunch of independent investors re-inventing the wheel over and over again.
I’ve just finished reading The BlackJack Life by Nathaniel Tilton, where Nathaniel describes his journey into being a professional blackjack player (coincidentally Nathaniel was inspired by Semyon Dukach who managed the famous MIT blackjack team and is now an angel investor who I interviewed for my book). The real interesting thing that Nathaniel talks about over and over again is the work that he and his team mate D.A. put into refining the process they used to actually be professional players and not card counting gamblers. The part about treating the endeavor like a business of its own is one that I found many investors ignored and a few emphasized a lot. This refinement of the process and the focus on investing as a business is one that is just coming to light for angel investors as we see more Micro VCs and more investors incorporate teachings from investors like Warren Buffett or innovative minds like Nathaniel Tilton.
Like Nathaniel, Mark Suster is an investor who is re-defining the minimum level of transparency and behavioral norms of investors. Mark adds a lot to the startup investment community thought process and is someone that all investors should at least listen to even if they don’t agree with Mark’s thoughts on a particular topic. It was no surprise then that I tried over and over again to get yet another introduction after continually running into scheduling conflicts with Mark. Thank you everyone for providing introductions, Mark was gracious enough to try and find the time despite being in the middle of a huge fund raise and investing in some really interesting new companies during the second half of 2014.
Needless to say… I have all sorts of prep work sitting here in my draft interview with Mark… but no Mark to interview. So I want to share with you some of the great thoughts and insights that I’ve pulled from the hundreds of articles and tweets I’ve read from Mark. These fourteen insights I thought were particularly useful – yet I still was left with 10-12 questions outstanding that would help frame some of Mark’s insights into the context of my book. Have a read through these first fourteen tidbits and then read through the remaining questions that follow.
Fourteen investor lessons from Mark Suster:
- Today’s hot company can often be tomorrow’s problem child. I don’t need to name companies for you to come up with your own examples
- You can’t reference check your way into a “yes.” If you don’t feel hugely compelled to invest then you shouldn’t. Reference checking is to confirm or disprove a strong, positive intuition you already have about founders that could lead to an investment or a pass.
- If you rush into investments with people you barely know you’ll have a much higher percentage of problem deals. You may catch a hot deal that blossoms and you feel psyched but you’re more likely to catch a few problem children that you end up having to fix
- If a situation sounds too good to be true it almost always is. That sounds simple, I know. But it’s very easy to be flattered into “here’s why we want YOU as an investor” by entrepreneurs and earlier-stage investors alike. A little Groucho Marx always helps.
- Motives matter. Why is this exact person building this business? It is an authentic desire, knowledge and skills set? What would this founder do if he got an offer to be acqui-hired quickly by Facebook? What would she do if things got really bad and she had to lay off 50% of her team to survive? If we got an offer to raise $25 million to grow would she take it or be too worried about exit price, dilution, valuation expectations, etc.
- Know how you’ll make money. I have a strong belief that the magic of being an early-stage investor is that you get a ringside seat to make investments in companies with great potential. When they really start working you have asymmetric information and can “lean on your winners,” which is an enviable investment position to be in. But … if you’re in a party round with 6 other investors your chance of getting to increase your allocation is limited. So if you’re an index investor that’s still great. If you’re a concentrated investor less so.
- Companies go through great changes as they level up. Each major change is an inflection point and a chance to get things really right or horribly wrong. You need to be very present in these periods of time. This is when founders need you the most – either are coach, mentor, interviewer, work off-loader or honest-mirror-reflection of reality. Being active, engaged, present, knowledgeable and having earned trust from the core team can make a huge difference on the eventual outcome of the companies. It’s these transitional times that can often determine the long-term arc of a business. Pay attention.
- Be careful not to spend all of your time on inbound. Inbound is seldom differentiated dealflow. If an accelerator is writing you they’re also writing 25 other VCs. Probably more. If your favorite angel investor is sending you what looks like a form email it likely is. If you say yes to every inbound meeting you don’t have the time to search out the harder-to-find, crazier ideas that are often lurking around university research projects or getting out to meet senior executives at tech companies to find out whom they’re partnering with.
- I don’t believe in paying the highest price to win deals. I believe in paying a fair price but if “highest price” is the key differentiator there are two key problems. 1: You clearly haven’t persuaded the entrepreneurs that you are value-add to their deal. And 2: I’m dubious of entrepreneurs who key buyer value is highest price. Building a company is hard and the chances of success are low. I’m looking for entrepreneurs that recognize that supportive VCs who bring relationships, experience, perseverance, tolerance and who are unflappable in difficult times are worth their weight in gold. People who solely value highest price as the decision factor exhibit something about their decision-making processes.
- Co-investors are critical. As in with the right ones you can weather big storms and stay the course. The wrong ones can leak information (yes, bad investors actually do this), can be short-sighted in difficult times, can chase the latest shiny objects, “why doesn’t your product look more like Pinterest?” and when the chips are down the worst ones often aren’t willing to support companies financially. It’s hard enough being an investor in the roller-coaster life that is startups. But investing alongside myopic co-investors can make your life miserable. You face choices like, “Do I put in money to the benefit of other un-supportive investors?”
- Along these lines … in bull tech markets like we’re in you often find non-venture investors entering our market. Hedge funds, other public investors, corporates, etc. Their money works the same way as mine does. The biggest difference from experience is that in bad markets people without venture capital experience or strategies are the first to the exit. When I work with entrepreneurs I work hard to make sure we know what the commitments are of downstream investors.
- Price matters. Anybody who says otherwise is a bullshit artist or somebody who’s only been an investor in a bull market. The industry is filled with both. Turns out it is very hard to sell a business for more than $100 million and exceedingly hard to get one whose value ends up exceeding $1 billion. The number of $200m, $300m, $500m, $1 billion valuations these days is just pure insanity in my mind.
- Just because the press says it is so doesn’t make it so. Usually the press doesn’t have total access to data and is often a lagging indicator of the market. I’m not talking negatively about journalists – I love the industry and profession. Just that as an investor you really can’t base your decisions on the press, “Company X is killing it!” nor be dissuaded the presses views about a company or industry.
- Be a non-conformist. Money is made most by people who bet on movements before they are known. Or by people who bet against a trend that the masses see differently. By definition this means others will doubt you. Have conviction. At our partner meetings the number one thing I look for in our decisions is the conviction level of the sponsoring partner. I also love it when I see really big ideas that seem a little bit too outrageous but where the entrepreneur seems just crazy enough to possibly pull it off.
Here are the remaining questions, the first one is sort of a no brainer, Mark has in fact answered this first one in some interviews… but this is the only question I get fresh every time from every investor I interviewed. I did try sending these via email, but email questions sort of suck as the answers are never as engaging as the answers in conversation and the interviewer never has an opportunity to follow-up on questions to gain deeper insight in the moment. I’d love to hear your thoughts on the answers or questions that are still left in your mind for Mark or any other angel investor.
Mark’s missing answers:
- How did you get into early stage investing?
- You talk about being at the right poker table – how do new angel investors who are less “well known” get to the right table?
- How do you balance domain knowledge with getting to the right tables? Often the most knowledgeable are not the most social
- At what point do you really know which are the winners and the losers?
- In one post you mention Ron Conway investing in some losers that looked like early winners – how can you tell when the truly great ones are making the right progress?
- How do you convey your value-add to entrepreneurs?
- As a new investor, how do you tell the difference between good co-investors and bad co-investors (before you invest)?
- How many investors are optimal before it turns into a party round?
- How can you gauge the right exit prices if exits are really 7-12 years in the future, a lot changes in that amount of time.
- What do you care about when it comes to deal structure and terms?
- What are your thoughts on AngelList and Syndicates?
- What should angel investors do to establish healthy relationships with VCs?
- What are three things early stage investors need to do to be successful?