So I’ve been investing “institutionally” as a VC for about 18 months now (maybe really only 12, counting from the first check that really mattered). A little bit before that as an angel, but not that much. ‘Cause I sort of needed to decompress for a little while after I sold my last company.
And I haven’t yet returned a nickel of capital yet back to our investors, the “LPs”, which is the ultimate game.
And yes, while I lived through ’08-’09 as a founder and ’00-’03 as a start-up exec … still, as all the LPs say … I haven’t been a VC through a downturn.
But so far my bets have turned out decent, my paper returns are solid (in the Age of Unicorns at least), the MRR growth in aggregate is better than I ever did, and I’m now enough “in the money” on paper at least to have some learnings. And I don’t think I’ve invested in a single dog. So I’m not an idiot, at least.
It’s a super nichey thing to do, this VC thing, but perhaps by sharing my mistakes, it will be cathartic for some and perhaps help founders understand VC just a tiny bit better.
So here are My Top 8 mistakes, if you’re curious:
- #1 — Not Immediately Investing in the Truly Great Ones. Everyone tells you to start slow as a VC. The common advice is “it’s OK to not even do an investment your first year. Just learn.” Well, phooey. The deals we didn’t do to take it slow in my first 90 days were epic. Epic. When you meet a truly great one, and can afford the entry price — just do it. I learned. With Talkdesk, Algolia, Avanoo, RainforestQA etc. I was basically ready to invest (conceptually, not quite literally, i.e., pending diligence) within 20 minutes. If it’s potentially great and meets your criteria — just get it done.
- #2 — Not Investing the Maximum Amount. This took me a while to figure out. As an angel, you want to be thoughtful and spread your bets, I guess. Even as a new VC, you worry about losing too much. It turns out it doesn’t matter. Once you’re up even say “just” $30 or $40m million as a VC on paper, and trending up (at least on paper) … or whatever number that is some geometric multiple of capital invested … does it even matter if a $2m bet goes bad? Not really, if it went bad for the right reason, if it was an intelligent bet. Even more importantly, if you could have invested say $4m, but only invested $3m … dude. Same amount of work, less returns. Rookie move. You only lose another $1m. But if it hits … you can make soooo much more if you are early stage. This is the power law cr*p. Now, I always invest the maximum amount the founders are cool with.
- #3 — Looking for consensus. Consensus is just super hard in early-stage investing. No one can really get to know a 5 person start-up in a 40 minute Monday afternoon pitch. I didn’t do a few great deals looking for consensus. Rookie error. Painful one.
- #4 — Meeting with anyone that hasn’t already picked me. When I started, I did maybe 10 founder meetings a week. Now I do 1. Max. There are a number of reasons for that (more here), but I stopped meeting with any founders just looking to raise money, no matter how warm the intro or how hot it sounded. I learned that for early-stage investing at least, VC is a double opt-in, at least for me. They pick you. Then you try to pick well back. If they don’t know me, of me, who I am, what my values are … forget it. Meet with another guy, with a bigger fund, with a longer track record. Again, please don’t tell the LPs about the 1 meeting a week thing.
- #5 – Trying to Create Deals. I know some VCs are great at this but clearly I am not. I tried in the early days to get founders that I believed in to take money when they weren’t looking. I batted 0.000. I’m done there. Others can make this work. You go do your pre-emptive rounds. At least, clearly, it didn’t work for me.
- #6 – Spending Time On Anything Outside My Sweet Spot. I know VCs are supposed to learn new things, but I just want to learn new things within SaaS. Not other stuff. No ad tech, no blockchain, no space craft things, no ecommerce (unless it’s software with 75%+ gross margins), no Facebook platform plays. There are big winners there. A lot of this is interesting. It’s just if I can’t figure it out in 20 minutes, then I can’t learn from mistake #1 above.
- #7 – Trying to Actively Do Two-Handed Deals. In the old days (like a few years ago), founders were willing to sell more on a percentage basis, and that made it easier for 2 VCs to invest at the same time, a so-called “2-handed deal”. It’s still true in early seed rounds, but not so much for The Next Guy. It’s rare now that the companies I look at have room for two VCs at the time, because each VC wants to buy >10%. A second hand can help both founders (more help, more sources of capital) and me (derisks the investment, at least, maybe, if someone else can also help carry the company financially), but I stopped trying to do most of these deals. If it works out, great. But now I just assume I’ll be the only guy in the round, 8 times out of 10.
- #8 – Worrying At All About Price. This isn’t a Top 5 point, but I decided to stop trying to negotiate anything really. I’ll tell you the price I can afford, and give you very simple founder-friendly terms. One board seat for all the institutional investors, don’t care about anything else except investing in great companies at a price I can afford, or really, that fits our investment model. If that doesn’t work for you, totally cool. It’s easier just to let it go then and work on the next one then, then try to force something on stage / price / structure that doesn’t quite fit. This doesn’t mean be cheap, or anything at all like that. It just means be Zen and let the ones you just can’t afford go. I don’t have a Billion$+ fund so I have structural limitations. The square pegs don’t ever seem to fit into the round holes here, at least, not for me.
My Top 8.
But perhaps, just a little bit, cathartic.