Q: What are some of the most costly mistakes done by novice investors?
The #1 rule never to bend in startup investing:
Never invest in a founder that isn’t better than you
When I look back, this is really the only reason I’ve lost money
— Jason ✨Be Kind✨ Lemkin (@jasonlk) January 24, 2023
My biggest mistakes in SaaS investing actually in the end haven’t been truly costly because, in the end, power laws mean your winners overwhelm your losers if you do it right. A few winners more than make up for the mistakes. The real mistakes are just not getting in more winners.
But still I have screwed up a number of investments.
Here’s how:
- Confusing non-recurring and recurring revenue. The one time I did this, the start-up ended up going from $1m “ARR” to $0.1m “ARR” pretty quickly. Because it was all really transactional revenue. I should have done better diligence here.
- Investing when the CEO was a bit of a B.S. artist, and/or made something up. Being confident is good. Making things up is bad. Claiming something without knowing it correctly … about a customer I knew personally … was a flag. I shouldn’t have invested in this one. Even though the metrics were very impressive.
- Investing in a founder/CEO not better than me. I haven’t lost money here, but I won’t do this again because it limits returns. Being a founder-CEO is so hard. If you aren’t better than me, you’ll probably sell early or get burnt out.
- Investing when the CEO didn’t honor their commitments. I invested twice in start-ups where the CEO didn’t honor a commitment from the past. A big flag. Even when the commitment itself was fairly minor.
- Investing based on a good deal / cheap price. I did several investments that, due to special circumstances, were truly cheap. In both cases, I made money — 3x at least. But I didn’t make enough money for it to be worth it. Cheap isn’t a reason to invest.
- Not investing due merely to a high price. OK every investor can tell you this story. But not investing at $300m and seeing it worth $3b just a few years later … every investor has this story. You have to invest in your winners. Almost, at any price in Cloud / SaaS.
- Not just agreeing to a fair deal with 1 quick handshake. I course-corrected here early and quickly. Now, I just ask the founder what they want in terms of price, terms, etc. If it’s fair, I try to just agree to it. No upside to negotiating really in earlier-stage investing. At least, not for me. If it’s not a fit, it’s just not a fit, and that’s OK.
- Not buying every share I could. I haven’t made this mistake often, but often enough. I now buy every single share I can. I just ask “How many shares can I buy? I’ll take them all.” Because you really can only lose what you invest. But not buying every share you can in a winner is the #1 thing that caps your returns.
Those are the tactical ones.
And the biggest meta ones?
- Not investing when I knew it was a good one. When I knew I wanted to do the deal, I just got busy. Or confused. Or tired. Or overloaded. There are only so many truly good ones. One that will be great. Never let them go — when you know one is on the Zoom.
- Not investing in the very best people I knew that started a startup — no matter what the startup did. About 50% of the time when I had a chance to invest in the very best people I’ve ever worked with, I did. The reasons I hesitated were often around not knowing the other cofounders, or being worried about the space, or in a few cases, a high price when there was no revenue yet. But looking back, every single one of these has been winners. Next time, I will always invest in the very best people I already know and trust. No matter what their startup does. It turns out, you don’t even need to know.
An earlier look at the topic here:
