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When you invest early in a company’s life cycle, there is such a lack of information available, so much of an investment decision at this stage is based on the founding team and prior investing experience. The earlier you invest, the more experience you need.
Fred Wilson famously said it took him 10 years to become a “half-way decent” venture capitalist. In which case, I’m half way to becoming “half-way decent” (exactly the amount of exposure to start spewing advice, don’t you think?).
Lately, I’ve noticed a lot of people opining on how easy they think it is to invest in companies at an early stage. In the time I’ve been investing, I’ve found it to be hard work, really hard work. And honestly, it should be hard work.
When you invest early in a company’s life cycle, there is such a lack of information available to make a sound decision, that you really need to rely a lot on a combination of assumptions, personal experiences and, at the end, gut feel. The information entrepreneurs provide is never enough - not because they’re hiding something, but because they just don’t know. Early on, they’re seeing an opportunity at 30,000 feet and believe their product can fill the gap. An investor, on the other hand, should try and go deeper.
The information entrepreneurs provide is never enough - not because they’re hiding something, but because they just don’t know....An investor, on the other hand, should try and go deeper.
Prior to starting Lightbox, my partners and I made two angel investments together. Both investments took months to fully assess. We spent a lot of time with the founders - both in official settings like our office as well as over a meal. So much of an investment decision at this stage is based the founding team - if you can’t get comfortable with them, it doesn’t matter how good the idea is or not. And getting to know them takes time. In the first month alone, we must have met each team 8-10 times. Some meetings had agendas, while others were informal conversations. But we prepped for every interaction. We spent hours internally trying to better understand their verticals, why their model made sense, and where we felt the gaps were in their thinking. (India is a unique country. It demands a granular understanding of an industry in order to grasp what it will take to disrupt it.) It’s okay to take your time before making a decision. Both on the business as well as the founder(s).
By the way, as much as your analysis helps you, it helps the entrepreneur more! Entrepreneurs welcome relevant, pointed feedback and a constructive debate, irrespective of whether you invest. They usually get high level critiques from “would-be mentors” who are less concerned about specifics and more concerned about making their point.
But even after spending all the time in the world, at the end of the day, you have to make do with what you’ve got and take a call. And so much of that decision is based on prior investing experience.
And the earlier you invest, the more experience you need.
Angels, for example, are forced to extrapolate more about the market/model/team than any other investor in the lifecycle of a company. And extrapolation at that stage takes experience. In my opinion, a lot of experience. And not any old experience, but investing experience.
And investing experience comes from spending time on the job. Investing is a “learning on the job” kind of job. Prior experience in another field cannot fully help you become an investor. In fact, very little can prepare you for it.
So much of the decision is based on prior investing experience.And the earlier you invest, the more experience you need.
After being in this space for a few years, here’s my “half-baked” advice.
First, constantly speak with more experienced investors about opportunities. In fact, invite them to pitch sessions. Not necessarily because of their opinions (although that’s helpful), but because of the kind of questions they ask, the way in which they break down the opportunity, and how they conduct the meeting itself.
Second, read as much as you can as often as you can. The wonderful thing about our profession is that the greatest minds are still alive, and love to write about their learnings. There’s so much learning on blogs, podcasts and books about investing - and almost everything is relevant. So relevant in fact, that it’s sometimes hard to keep up.
Third, early in your investing career, “don’t be the first investor in a company”. The most difficult thing to do is as a first time investor is make an “angel round” investment. You’re taking 100% of the risk, with a high potential of no reward (a lose-lose for you and the company).
Instead, do slightly later rounds first. Gain experience where you’re not taking all the risk. Choose companies that have a record, where you can see the quality of the team through their execution (vs their belief in themselves), where you can see the economics of the model playing out (even if it’s only a bit), where you can get a better understanding of product-market fit, and most importantly where you can understand from previous investors why they invested. Take a small chunk of a bigger company rather than a big chunk of a non-existent company. And then use that as an opportunity to learn from that company and their investors.
The most difficult thing to do as a first time investor is make an “angel round” investment. You’re taking 100% of the risk, with a high potential of no reward.
The size of your equity holding is less important than the potential of the company.
And finally, don’t do more deals than you can manage. Without trying to be too idealistic about angels (I know…probably too late for that), angel investing should be as much or more about supporting an entrepreneur and their new venture than about building out a portfolio. The word “angel” can’t solely mean a financial resource. Being an “angel” has to include support, encouragement and mentorship. A purely monetary transaction doesn’t sound very angelic at all. In fact, it sounds like something the devil would do.
And speaking of the devil, the worst part of being inexperienced is making up for it by penalizing the entrepreneurs - setting onerous terms to massively protect your interests, taking ridiculously large amounts of equity, and giving half baked advice for sweat equity on the side. None of this is good for the company, the entrepreneur or the development of the start-up ecosystem. And as many newer angels will realize soon enough, what’s not good for the company isn’t good for investors either.
Unfortunately, in India, as the angel community grows, new investors seem to be in a tearing hurry to build out a portfolio. Even the media determines the best angels solely on the basis of how many investments they’ve made. How can that alone possibly be a measure of “good”? Having a large angel portfolio isn’t equivalent to skill or talent of an investor.
Having said that, angel investing is still nascent in India, as is early stage investing in general. We have a lot to learn and the eco-system will grow and develop. I hope, through this process, we’re able to inspire a generation - which will force us, as investors, to learn and develop.
We’re Calling it Operating Venture (till we think of something better)
Prashant Mehta and Sid Talwar, partners at Lightbox, talk about the highs, the lows and the stress of being an entrepreneur. It's a tough journey and it's good to know you have a partner.
Hitendra and I discovered this opportunity through an iterative set of conversations that took place prior to funding the business. It was this deep engagement and exchange of ideas, even before there was an economic incentive that allowed for a strong relationship with an open exchange of ideas to develop.
We are at the cusp of creating great technology businesses in India. It can’t happen without the right support from a great board. And a great board needs independent directors.
The best thing a startup can do for its brand is to invest in creating experiences that make people whip their phones out to tweet or instagram immediately. Your brand isn’t what you say about yourself, it’s what people say about you.
Those that make it through are not unscathed – they have battle wounds. The challenges of the first year take their toll… emotionally, organizationally, culturally. While the first year has likely felt like a sprint, it is important to remember that this is a marathon and it is impossible to continue to run a marathon at a sprint pace.
Handling a downturn has little to do with what you do when the downturn starts, but more to do with how you built during the boom. At the start of a downturn, if you’re asking “What do I do now?” it’s probably too late.
Your Product Is Your Business Model. Changes in one impact the other and in the best cases they play off each other.
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