Early stage learnings of being an early stage investor, 2 years in
It’s been a while since I’ve written a piece on anything! I decided that over this past birthday weekend of mine I would get back to writing and sharing my learnings with the world in hopes that they are useful to even just one person. A recent conversation with an entrepreneur from my alma mater who benefitted from my 3+ year old blogs was the tipping point in diving back in!
Since I last wrote in 2017— Fam, my former company, was acquired by Draftkings in 2018, my friend & I started an angel investment fund, and after spending time at Draftkings I ended up joining an angel investment, Pison Technology, as COO to help further build out their business.
While at Draftkings, I was able to work with some of the brightest individuals around and I learned a great deal thanks in part to some people who I am proud to have as mentors to this day. I am very grateful and fortunate to have had the opportunity to grow as a professional and as a person during my time at DK. My former cofounders from Fam, Kevin and Frank, also spent some time there and have now went on to do some amazing things.
As mentioned earlier, I also had the opportunity to start an angel investment fund with a good friend of mine, Julian — we initially called it Nimble Venture Partners (currently in the process of rebranding under a new name). Since we founded this investment vehicle, I’ve been able to learn a lot from the entrepreneurs I have come across. Most of the companies / entrepreneurs I speak with are referred to us because they’re looking for advice pertaining to building their startup, e.g. fundraising, product, etc.
By no means will I try to proclaim any mastery in this piece, but instead I want to lay out some principles I’ve found to be helpful in navigating the “investor” waters for the first time over the past two years— both to myself and to the entrepreneurs I try to help. It is important to note that our investment strategy to date has been that of an “angel investment” nature, $25k-$50k average check size. If we were writing much larger checks with a formal fund structure (we have no outside LPs) then some of the following initial learnings may take a different flavor.
Try not to formulate any immediate bias toward a particular “category” or market, at least at first.
Before Julian and I took on this endeavor to begin investing more proactively, we took the time to speak with many VCs and angels alike who spend their time on early stage tech. Most of them said they have a category they like to focus on, and I guess that may make sense given their respective area of expertise and formal “fund” focus. After all, my experience as an entrepreneur and professional (consumer tech and enterprise AI / deep tech) lends itself to its own areas of focus too. A few though did mention that we should be nimble as we develop our early pattern recognition and further nurture the network that will guide us when making investment decisions.
Thus far, we’ve kept an open mind and have decided to remain “category” / industry agnostic with investing. One can argue that this increases the likelihood of noise at the sourcing level, but that is where I think you can setup filters to quickly eliminate inbound that may not be worth investigating, e.g. technical founder requirement, post-MVP launch, etc. So far this has worked pretty well for us and has challenged us to learn about industries that we never really had exposure to before.
As we move forward and as we find what industries we may have proportionately higher “value add” advantages in, I could see us focusing more investing into said industries. For example, majority of our investments to date have happened to be in enterprise SaaS and digital health tech.
Aside returns, the north star of an early stage investment effort should be to build immense compounding pattern recognition
Before we started more formally investing, I spent several weeks setting up coffees / video chats with former investors of mine, both angels and institutional, as well as other angels whom I had the opportunity to meet along the way over the past several years; Julian did the same with his network. I won’t name all of them here, but you know who you are and thank you if you are one of them that have generously offered your time and insights over the past two years.
The most common piece of advice I received across these conversations was that focusing on immersing oneself as much as possible into the different approaches, business models, products, and so on that an investor comes across is paramount to developing arguably the single most important trait of a good investor — pattern recognition.
Obviously I’m not “experienced” enough to list every way pattern recognition may be important to early stage technology investing, but some pretty accomplished people brought it up in their own way. For example, at scale pattern recognition can cut through all the noise and optimize for how an investor spends her time, as time is finite and the number of potential deals can be infinite.
Don’t underestimate the magic of good founders.
In many of the early coffee chats I took and still take (albeit virtual nowadays), many seasoned early stage investors (pre-seed, seed, Series A) place unprecedented emphasis on the founders. Even once before being a founder myself, I never fully appreciated why this was the case. Of course I know that founders are expected to will the impossible into existence, that they are expected to invest an inhumane amount of time into their company, that they have to be crazy enough to see the world in a way that 99.99% of people do not, but it never really hit me to realize why this was such a large part of the equation.
Over the past two years partnering with 20+ companies, I’ve had the opportunity to gain a first hand understanding of what investors would mean when saying that. Some of this piggy backs on the last section of pattern recognition, but it is worth noting that the founders are by far the most important part of the equation early on, in many cases orders of magnitude more important than the market. This article published on the a16z blog by Tren Griffin highlights the market component as being the most important. Depending on how you slice and dice it, the argument for this can always be made (and especially if one is writing $10M+ checks and needs there to be a very large outcome for it to make sense), but there are countless examples of how founders built a sticky wedge in a market that many did not think “was ready” for disruption, and all because they were incredible founders.
There were plenty of lodging options available, both hotel and bread & breakfast related, when Airbnb was founded and many VCs said there was no need; there were plenty of camera apps & messaging services available when Snapchat was founded and many VCs said there was no need; there were plenty of social networks available when Facebook was founded and many VCs said there was no need— the list goes on. Many great investors dismissed the aforementioned startups by over indexing on their interpretation of “the market” very early on.
From my POV (and of course hindsight is 2020) many investors did not focus enough attention on how relentlessly focused the founders were on creating an obsessively sticky wedge in their respective industries and just how sticky these wedges actually were. These seemingly niche, small wedges were turned into massive, world changing products & companies that returned billions of dollars to investors — all because of the founders and the team they built around them. I still probably over index on market without even realizing it, but there is surely something to be said about developing a palette for a particular kind of founder and allowing this to balance an assessment; I will be sure to publish my own experiences on this topic in the future.
Work hard to support and add value to the startups you invest in, and earn your right to follow on invest
Based off of qualitative and quantitative data points that I’ve garnered from direct conversations with veteran VCs, angel investors, and from countless hours of miscellaneous reading material, it is clear that most of the time the majority of aggregate dollar returns stem from follow on investments in “the winners”. For example, you invest an initial check of $25k in ACME, Inc.’s seed round. ACME continues to grow and because you’ve worked hard to earn the trust of the entrepreneur or because you have pro-rata rights (or both), you are able to invest a much larger check in their Series A and so on. In the end, assuming a successful liquidity event (IPO, acquisition) and assuming you’ve invested more in sequential rounds of financing, a larger proportion of the aggregate returns on ACME probably came from the larger dollar amounts that were invested in the later rounds.
Of course I’m making many assumptions here, but the point is, more often than not you want to make sure you’ve earned your right and the trust of the entrepreneur to invest more money as a startup grows. I use the word “earn” because it is important to keep in mind that as an angel investor (and any early pre-seed / seed investor for that matter), the entrepreneur’s reliance on you to fund the business ceases to exist — this coupled with the fact that the entrepreneur needs to raise more money from better aligned investors (larger VCs writing larger checks) makes for a difficult scenario for any investor to be offered a sizable allocation in subsequent rounds. Dilution is a real thing to any company / founding team and it makes sense that not everyone can be offered an allocation to invest as the company grows and becomes a highly sought after investment prospect — the hotter a company becomes, the more investors that want to get a piece. For “hot” companies, there will never be enough to go around.
The best way to earn this right is to work your ass off for the entrepreneur and always be available to help whenever a need may arise — make the time to help them hire key personnel, formulate a fundraising strategy, be a sounding board for their upcoming board meeting, the list goes on. I’ll be sure to publish a separate piece on the best ways I’ve found to be most helpful for the entrepreneurs we invest in — a lot of these insights came from my own experience as an entrepreneur, observing some of my own prior investors, and by helping CEOs and founders on the other side as an angel investor.
Closing thoughts
Overall, it has been fun and rewarding chatting with hundreds of entrepreneurs over the past couple of years and working with a few handfuls of them alongside my partner Julian. I’ll be sure to post more detailed thoughts on some of the points I covered here and on many other things tech related as time goes on. Reach out to me at hello@giuseppestuto.com if you ever want to chat about anything tech or if you need any advice on the early stages of starting a company (or if you’re just thinking of starting one!). We’d love to help.
Giuseppe
