Posts Tagged: fred wilson

What makes a great investor?

As someone who is still relatively early in his investing career, I often think about what qualities set successful investors apart from the rest. Good investing doesn’t just happen. And while luck may help at times, it’s not the answer. Here are few key ingredients that I consider important for being a great investor:

Live in the future

Paul Graham advised start-ups to “Live in the future, then build what’s missing.” Once you’re living at the leading edge of a rapidly changing field, you’ll see things that are missing…challenges or frustrations that need to be solved. And, once these problems are solved, they’ll seem very obvious in retrospect. This same advice applies to investors as well. You can only create above-average returns if you invest in companies that are ahead of the mainstream.

Have a well-defined investment thesis

Fred Wilson once wrote, “So many folks in the venture capital business are sheep that just want to follow the herd. They are momentum investors purchasing highly illiquid investments. That is a recipe for disaster.”

In order to not follow the herd, you need a strong set of convictions to serve as the foundation for making bets, and then following through on them. For Version One, I’ve created a map of what particular areas we should focus on and where they’re going over the next few years. Then, I can evaluate each potential investment within the context of this map/thesis.

Stick with it

Not every investment is going to be wildly successful right away and one of the hardest things to do in the venture capital is hence to stick with a struggling investment. However, if you’re going to be successful as an investor, you need to realize that once you are in, you’re in. There’s no turning back, or ignoring a flailing start-up until it just goes away. Of course, it’s much easier to stick with your guns, if you’ve made the initial investment based on your own core principles/investment thesis, rather than simply reacting to market trends and current momentum (point three).

Be both a cheerleader and a critic

There will be times when your portfolio teams need an enthusiastic backer and a quick pep talk. Then, there are other times when honest, sometimes even harsh, feedback is necessary. I think an investor needs to be a start-up’s biggest cheerleader and their most honest critic. You can’t just be one or the other: praise without honesty are just empty words. Yet, a constant focus on the negative won’t generate the results you want either.

Remember who runs the company

Successful investors are usually active investors; they show up at board meetings, respond to emails and phone calls from the founders, and constantly think about the company and the ways they can help. However, the exact level of participation is a delicate balance; an investor should never cross the boundary of getting too involved. At the end of the day, the entrepreneurs run the company; the investor is an active bystander. Founders make the ultimate decisions; investors can only advise.

Those are the five essential ingredients that I’ve been thinking about lately. If you have other thoughts, share them in the comments below…

 

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My investment thesis

Fred Wilson’s blog post on Dave McClure’s investment thesis a few weeks ago reminded me that I needed to do a better job on spelling out my own. I had done some preliminary work when I started W Media Ventures almost 3 years ago but it was very high-level only addressing the sector (consumer Internet), the investment size ($50K-$250K) and the geography (Pacific Northwest / Western Canada). As I have learned a thing or two since then, I now have a much better understanding what kind of entrepreneurs and ideas I want to invest into. So here is what I am looking for:

  • Early-stage consumer internet / SaaS companies located in the Pacific Northwest / Western Canada. Geography is a must for leading a deal but I do co-investments outside of that area.
  • Large addressable and capital efficient market: company addresses a large market (hundreds of $ millions +) and does not require more than $1-$3 million in funding to become a $25-$50 million (exit value) company
  • Strong founder team with a visionary and passionate (yet coachable) CEO at the helm. Team must include at least one technical person who can actually build stuff.
  • Differentiated product: no “me too’s” and strong technical focus
  • Easy-to-understand business model that does not depend on scale and can generate revenues within 9-12 months from launch
  • Initial traction with – at the minimum – an existing prototype/alpha version that is currently being challenged by users

In reality, no investor will ever only make deals that fit 100% with their investment thesis but it is important to have a consistent set of criteria against which investment opportunities can be benchmarked against. So here is mine, looking forward to feed-back!

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I will blog more and you should do so, too!

Call it the Fred Wilson school of thought but hanging at the Union Square Ventures offices in the past month has really convinced me that I should blog more. And I have already started to do so in the past weeks (here, here, or here). Why?

  • It is a great way of connecting with your customers / audience and spreading your thoughts. Take Mint‘s incredible success with their blog (leading to their $170 million sale to Intuit) or Fred Wilson’s blog at avc.com that attracts tens of thousands visitors every day. Or look at how Chris Dixon suddenly went from an angel investor mostly known in NYC to one of most followed seed investors in the country.
  • It is the easiest way to get feed-back: comments on blog posts are just one feed-back channel but putting out your thoughts usually starts a lot of new conversations that you wouldn’t have had before. So when I put up a post last week looking for the StartupCFO of Vancouver, I got 5 leads within a couple of days.
  • It helps structure your own thoughts and ideas. Blogging is a lot of work but it really forces you to think through a problem in a concise way.

I am most definitely not the first person to say that blogging is important but take this post as an encouragement if you have been thinking about starting a blog for a long time and just needed a little push. I needed it, I got it – you got it now, too!

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Build your own (site-specific) social graph

Facebook‘s success in building out the social graph is exciting and scary at the same time. Exciting as it has turned social into one of the key growth drivers of the web, scary as one company seems to control the “social infrastructure” that we all want to build companies on. I am pretty sure that Facebook will remain the only mainstream social graph on the web for the next little while but also think that more and more site-specific social graphs will emerge (check out the thoughts on this topic by Albert Wenger and Fred Wilson). So if you are a startup building a product based on a social graph, I would recommend to follow two strategies:

  • Use existing social graphs to build your own (site-specific) social graph by making it as easy as possible for people to find their Facebook and Twitter friends / followers that already use your service (or let them invite additional friends / followers to the service). Up to a year ago most sites focused on email invites to build the social graph but the uptake on this is considerably smaller. So this is really an “ease of use” question with the best implementation award going to Plancast in my opinion as they have really nailed the UI.
  • Help create new connections on your site by making it as easy as possible for your users to discover other users of your service that they should follow / friend. This is probably the area where most value could be created but not many sites have built anything interesting. Wouldn’t it be interesting if Foursquare pointed out people to me that frequently check into the same locations as I do? Or Disqus would recommend following people that comment on the same sites as I do? A big chunk of Facebook’s growth has been driven by their “friends recommendation” feature and interestingly enough, no other site has so far focused on the same strategy (with perhaps the exception of Linkedin).

Controlling as much as possible of the social graph will be extremely important for any site so leverage the existing social graphs as much as possible but really focus on creating new (useful) connections among your users.

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The power of social media or “How Michael got a job through commenting on a blog”

Today, Michael Yurechko started working for Carrie & Danielle. How Michael got to the company? He commented on Fred Wilson’s blog on a post that was discussing if you need a college degree to be an entrepreneur, Fred connected him to me as Michael is from Vancouver, I met with Michael, liked him and offered him a job. This is what social media is all about: connecting people and ideas beyond geographies and existing relationships, don’t you love the Internet? And don’t forget to comment on a blog the next time you can be part of an interesting conversation.