Posts Tagged: investment
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…
The products of start-ups sometimes evolve so quickly that the communication of those changes falls behind – websites suddenly appear outdated and stale compared to the real story. This is how I felt when I looked at the w media ventures site a few weeks ago and decided that it was about time for a relaunch. w media had changed in quite a few ways over the past couple of years and the website was still telling a different story:
- While I was exclusively focused on consumer internet companies when I started in 2007, this focus has expanded to SaaS (GoInstant) and mobile (Flurry, Kima Labs, Rewardloop) start-ups since.
- A similar expansion happend in the geographical focus. While I originally only invested in the Pacific Northwest and Western Canada, 5 of my last 6 investments were either based in Eastern Canada, New York or the Silicon Valley.
- What has stayed the same is the focus on investing in passionate entrepreneurs with deep domain knowledge, great product and design instincts and a desire to change the world.
Angel investors are crucial for every start-up ecosystem and Canada certainly needs more of them (especially of the super-angel kind!). But angel investing is not only good for the start-ups that benefit from early and risk-taking investors, it can also generate great returns for the investors. At least if they follow a few key rules. Mark Suster from GRP Partners published an excellent series of posts on angel investing in the past couple of weeks and I could not agree more with the 5 skills successful angel investors need to have: deal flow, domain knowledge, relationships with VC’s, deep pockets and access to buyers. From my own personal experience there are a few additional points to consider before launching yourself into angel investing:
- Budget for angel investments: determine how much money you want to allocate to angel investments over what period of time. Often people start investing without looking at the big picture and then end up with only 3 large investments before running out of money. In order to have superior returns and spread risk across a portfolio, you should invest in at least 10 deals. So if you want to allocate $1 million to angel investments, don’t invest more than $100K per deal, preferably even less to leave room for follow-on investments.
- Pace: once you are in the market, you will most likely be flooded with investments opportunities and in the beginning an apparent abundance of opportunity will meet a lack of patience on the investor side: you want to build up a portfolio and get your feet wet and all those opportunities look great. But take it easy, especially in the beginning. You will quickly learn how to differentiate the good from the bad deals but it will take time to build up this experience by looking at a lot of deals. So my recommendation is to rather watch and see in the first couple of years instead of getting into the action too quickly – you will most likely burn quite some money with the latter strategy!
- Entrepreneur vs investor view: a lot of entrepreneurs turned investors look at an investment opportunity with their entrepreneurial eyes and imagine what they could do with the business if they ran it. But this is unfortunately not the right way to think about this opportunity as it is much more important to evaluate if the entrepreneur who is pitching the idea is able to execute against it or not. In the end, he is running the company (and not you) and in most cases it is not the idea that defines the success of a start-up but the execution.
So keep all of these points in mind when you start doing angel investments and I am sure you will not only enjoy helping start-ups but also enjoy some healthy returns.
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