I Am Not Your Investor
#CapitalAtRisk
Skewed by $£€
It is not only politics that is about relationships, startup investing is too. By becoming an Angel Investor in startups it means you are getting involved with a founder and a company right at the beginning. Around 80% of UK companies fail within their first year and, according to the latest figures from the Office for National Statistics, only 42.4% of businesses started in 2013 were still trading five years later. If one of your portfolio does not fail then it is likely that it will take a long time, and a lot of ups and downs, before the founder can give you a return on your investment. I don’t know about you but I would not want to rush into a relationship with odds like that.
But doesn’t being an Angel Investor mean you have to decide on the spot whether to invest or not? Maybe you are at a demo day or pitch event and if you cannot decide straight away then the founder will think you are indecisive, not very founder-friendly or just not that bright.
How, as an Angel Investor, do you build good, trusted relationships with startup founders when building those relationships can get skewed because there is money involved?
One way is to deliberately build a Non-Investor Relationship first. What’s the point of deliberately not investing in the startups you see when your aim is to be a successful Angel Investor? I will try to explain…
Everything has a price
Starting a business is easy. Growing a business is difficult. Starting, growing and exiting is likely to be the biggest challenge a founder will ever face.
The guaranteed result of starting a business is that, at some point, the founder will want to give up. Not only will the founder want to give up but they will be under huge pressure to give up. Friends, family, parents, their partner and their kids will all question if that thing they started is really working. Will it ever? How do they know it will? Can you prove it will?! Those questions do not stop and as the months and years go by they only get more and more difficult to answer.
Not everyone is willing to pay the price for what they want. And will a founder’s nice pitch deck tell you one way or another? Sadly, not.
If starting, growing and exiting a startup is so difficult, then a good idea might be to figure out who the most persistent, resilient and disciplined founders are…
Help & Observe
For me one benefit of having a non-investor relationship is that I can try to help lots of founders, mostly through 9others, without expecting anything in return. With 9others there is no investment expectation and it is a place for founders to come together, share a challenge and help each other out. I try to help as much as I can with advice, connections and even some more formal coaching, but it is really somewhere the network can help the network. If a founder gets involved in 9others it allows me to help where I can, find out where I can’t and observe how they conduct themselves. Plus, if nothing else, they get the benefit of being part of a helpful, global network.
Don’t Worry. Be Curious
Eventually everyone will show you who they are — you just have to wait. Part of building a long term relationship with someone is to get to know the real person. And you can allow them to get to know the real you.
Investors think they have to be super-smart and super-quick. But if I am a non-investor then I don’t have to be. What that does is that it allows me to ask daft questions like a genuinely interested, I-want-to-be-helpful person and not an I-need-to-appear-smart person. One of the best things you can say when being pitched is, “Hang on a sec — run that by me again…”. A good founder will then be able to reword their pitch and, importantly, check to make sure you have understood it. This is an important skill to test as founders have to pitch not only to investors but customers, potential hires, partners and of course potential acquirers in due course.
Investors also think they have to be everyone’s friend. But if I am a non-investor then I don’t have to be that either. I can be much more candid about whether I understand the business and whether I think the founder is going about fundraising in a sensible way. Something else I can do when aiming to be a non-investor is to challenge the founder about their various assumptions. As with many aspects of Angel Investing the questions, and how the founder handles them, are much more important than the answers.
If you agree that it is a good idea to be a non-investor for a long time before investing then how can you go about it? Well, I have some rules. The most important is Rule #1…
Rule #1
Rule 1: If I meet you for the first time and you are raising investment then I will not invest in this round1.
There are a couple of reasons I have this rule.
I am dealing with an investment right now. I typically invest in 3-6 companies each year so in all likelihood I will be just starting, just finishing or in the middle of a live investment.
I only deal with one live investment at a time. Such is the diligence, care and attention I want to give investments I do not juggle more than one at a time. I start one and stick only with that one until it is completed.
I build these non-investor relationships and it is likely that I know who the next two or three investment opportunities will be. So with that in mind the quickest I will get to anything else is probably at least 6 months away. And if the founder I just met is any good then they will probably have this investment round all wrapped up by the time I can properly look at it.
I admit it can be frustrating for founders. But it is for me too. I’d love it if I knew after one meeting that the founder will definitely, 100%, be the next superstar. Wouldn’t that be good?! Well that is impossible, at least for me.
It turns out, once I’ve stated my Rule #1, one of two things happens…
The founder disappears. They say something like, “OK — but if you know of anyone in your network who would like to invest please introduce us”. This is a naive thing to say because if it’s a ‘no’ for me then the founder is asking that I pass an unknown quantity onto someone else. What I’d effectively be saying is, “Hey, I don’t like this deal but you should take a look”. Not very compelling eh? I don’t make those kind of introductions so the founder probably thinks I am not very helpful, am never going to invest so they disappear and I never hear from them again. (There is an exception to the pass-it-on intro, which is a deal in a niche that I’m not into and never will be but I know a specific investor who is all about that niche).
The founder relaxes. They drop their guard, realise this isn’t going to be a one-shot pitch meeting and we begin to have a proper conversation. If I think they might benefit from meeting other founders and I want to get to know them better then I will mention 9others. If they have one I asked to be added to their ‘friends & family’ email list (and if they don’t perhaps that request will prompt them to start one).
As a result of this rule and being clear about it I try to get to know lots of founders without getting in the way or holding them up. I share more about 9others, about this blog and my portfolio plus they can see what I share and talk about elsewhere online.
And after all this what happens? At some point the founders I like and who end up liking me and thinking I can contribute might raise their next round. Hopefully if I have done enough to show that I will be helpful and am enthusiastic about their prospects then they will want me involved. Just four examples are:
Coconut — I first met Adam in 2015 a year before he co-founded what would become Coconut. Adam is the friend of one of the brightest university friends I have and he said Adam was off-the-chart-smart so that was a good start. I liked the way he thought about the future of work and became an investor in 2017 (and again in 2018 and 2020).
Stitched — Elly first came to a meal with 9others in April 2017. Clearly very thoughtful and intelligent, Elly had been a software engineer, had retrained as an interior designer, had worked at one of the top firms in London and was beginning to wonder what Augmented Reality could do for bespoke interiors. We got to know each other, I tried to help out along the way and when they opened up their round in mid-2019 I was keen to be involved so invested.
What3words — When launching what3words in early 2013 Chris came to a few meals with 9others in a row. He wanted to test out how he talked about the product. Inventing a new addressing standard is pretty obscure but I immediately loved it so I worked with Chris later that year to recruit team members and to connect him with investors and overseas partners (the global 9others community came in very handy then). Back in 2013 I did not have any money to invest but I happily became an investor this year in their latest round.
My next investment is someone I have known for well over five years. Now that the next round is on the cards it really is a no-brainer for me. More on this in the coming weeks…
My Whiteboard
Someone asked me recently how many approaches I get each year. I said I have no idea. I said I do not have a storefront so I am not really in that game. If I wanted to be it would not be hard to get thousands of in-bound pitches to filter through, but that is not my objective here. I think it is crazy that people make such significant decisions based on what someone is trying to sell them.
What I do have is a whiteboard with the names of 14 companies on it. There are four with stars next to their names — those companies are the ones I think already are, or could become, STAR Businesses. There is one company on my whiteboard for which I’ve known the founder for over nine years. The newest relationship is someone I’ve known for 19 months but only met in person twice.
I am hunting and farming, not sitting back hoping something good will land in my in-box.
Don’t have someone else’s Rule #1
As Mike Maples Jr said, “A great venture capitalist is one who gets great returns.”
That is the objective here — to get great returns.
To be in with a chance of great returns I have to make a judgement call on whether I think the founder, in their current company, will be successful.
To make that judgement call I have to get to know the founder well and for me that takes time.
This is difficult because I could do things the easy way and I would look busy. I could set out my storefront, get lots of pitches and have people email me all day long pitching for investment. That would have the added benefit of making me feel good. Doing it that way I would feel wanted, significant and worthy of attention.
But I cannot work like that. I have to do the work.
Rule #1 is by far the most important for me and I’d encourage you to explore your own rules. In future posts I will talk about the other rules I have too.
Will it work? I would dearly love to know now whether this approach will bear fruit — it would certainly calm my nerves at times. I have confidence though because of the investments I have already made, the decisions I made on the ones I was initially excited about but passed on and because I have a very long term investment horizon. I am not here to convince anyone and I am not in an undue rush.
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Important: None of these posts are investment advice. If you are thinking about investing you should seek the advice of a suitably qualified independent advisor.
#CapitalAtRisk
This rule was inspired by Guy Spier. His rule is that that he will never buy anything that anyone is trying to sell to him. You can hear him talk about that investing rule and others in this video (the bit about this particular rule of his starts at 28:00, here).