Founder and Managing Partner
You just raised a small fund, or recently became an Angel investor, great! What do you do now?
If, you’re like me, then you’re not an institutionally backed mega-fund, you’re not a founder who exited who already knows the ropes, you’re just a person with a small fund behind you and you want to start sourcing, vetting and executing some deals.
The big funds you read about, boast 100:1 pitch to deal ratios and talk about their unicorn exits, and how they add value to their portfolio companies. You hear about how cut-throat it can be to get in the best deals, but your war chest doesn’t compare with some of the big funds. This intimidated me when I first began too.
The angel/seed stage investing world is fairly collegial from what I’ve seen. You can get into just about any deal, if you go about it the right way. I’ve learned enough to be dangerous in the last year or so, and am hoping this can point a new investor in the right direction a little bit.
I’ve mentioned this in another blog post, it is really important to start learning. You can’t possibly know what you don’t know, but you can start identifying unknowns and that is a key focus for me on a daily basis.
Go to this epic blog post by Ramen Profitable, and realize what you’re not reading, that you should be reading, then add those blogs and newsletters to your routine.
Listen to the Twenty Minute VC podcasts as they come out weekly. The topics covered will help you to start identifying the unknowns as I mentioned above. So many of Harry’s episodes are interviews with first time fund managers. Those episodes are golden for us new-comers to the space.
I see all these big funds, they have strict policies on how they invest in this and that, but not those things over there. That’s great, but as a first time investor, I’m not that set in stone about it so I developed “guideposts” of sorts. Directionally, I’m always aiming to stay between those left and right limits, but frequently, I find myself slightly outside of them, and I think that is ok.
Frankly, I think you will develop more than one thesis and it will happen over time. You will likely have one or two investments that begin to go well, you find that you can add a lot of value, then you begin to learn the industry and find your way onto an industry conference board of governors and all of a sudden, you have a thesis around a space that seems to be a fit for you. Good outcome.
On the other hand, don’t let your guideposts prevent you from seeing good founders and learning about their businesses. Who knows, you may find a high growth market, that you really like and can add value in, that you had not really thought was a fit for you when you first started out (this happened to me at TC Disrupt SF 2016 when I found my way into the Mobalytics deal.
You want to have a “lighthouse” of sorts in the distance guiding your boat, but you may tack left and right and at times appear to be way off course, and that is fine, as you are finding your way. I hate using Navy analogies, because well Army just BEAT NAVY, but this one just made sense.
Identify the areas where you can add value to founders. For someone with my background, that happens to be finance. I try to help founders by taking some of the CFO load off of their shoulders, and helping them think through positioning for the next round and how operational decisions will impact their P&L and balance sheet. Maybe you are a former CTO, or a former VP of sales, or some other background — all of those are great, just identify where you can help, offer help, and don’t overstep your bounds by giving advice on things you aren’t up to speed on. You will find that your experiences working with founders will create new areas of expertise and you can help in more areas in the future. So, this all goes back to number 1 — learn as much as you can along the way.
Go spend time with founders in your area. Let them tell you their struggle and learn about their successes. Understand your local startup ecosystem, who the players are, and what are the dynamics you need to consider.
The first ten pitches I took were referrals from the founder of my first deal. These were “friendly pitches” with founders who understood that I’m a startup too that is just finding my way. There is a lot to learn, you need to figure out how to listen to a pitch, how to come up with good questions, how to take note of the important things during the meeting and how to identify who you will work well with. This all comes with practice.
Coming full circle from number 1 above, don’t be in a hurry to do deals. I felt a bit of pressure early on to do deals and I felt like a kid in a candy store with the number of deals I was seeing. Slow down, take your time, learn a lot, invest a little and the rest will come to you in time.
A solid VC attorney who can help you learn, assist you in reviewing terms and documents, and can be there for you to stop you from doing anything stupid is worth far more than his/her weight in gold. In fact, more than one is ideal. I’ve worked with a few and they have all been great. While they have helped me do legal diligence, evaluate deals, get market knowledge and even drive deal flow, the greatest service my attorneys have provided me is psychological. I get a lot of great feedback on how I’m going to market, and how to handle certain dynamics in the startup ecosystem from my attorney. I actually think he is underpaid, but don’t tell him that.
Go meet with a local accelerator or two, put some money in (small % of your invest-able assets) and use it as a learning experience. You get to see how they source and vet entrants to their program, how other investors and mentors critique startups at pitch practice, host office hours and meet a lot of entrepreneurs, and you get to invest alongside them in some of their deals. Regardless of how good or bad they are at picking winners, you get to learn, go see point 1 above.
Go see what people are doing in other markets, gain some market awareness, figure out who the guys in SF are that are 12 months ahead of the guys in Tulsa doing the same thing.
You can spend quality time with a large number of founders, see a lot of deals and network with other investors at conferences. Here are the conferences I’m going to in 2017:
Get into some deals with established investors, preferably ones who can write follow-on checks (and who you can learn from). Some of the more well-established investors out there may think this is a waste of time, but I think getting access to partners at top funds to see my portfolio companies as they advance from seed to later stages is worth it. Plus you never know, that relationship check deal may turn out to be your unicorn.
Go find the 2–3 folks in your local startup community that are the cornerstones, the advocates for the community, the people that seem to be the most supportive and helpful to all founders. This can be bloggers in the startup ecosystem, or the CEO/owner of a co-working space, or an established founder/investor in the area. Spend time with those people, let them be deal flow sources for you, and let them tell you how you can help.
Your local development shops are full of smart people, who have probably started businesses, invested in startups, held board seats, run businesses, helped struggling businesses along, and have a ton of insight into who is who in your local startup community. See #1 above, good relationships here are key to learning as much as you can.
This relates to #1 a bit. Great learning tool. Also gives you increased exposure and lets you learn from watching more experienced investors from a front row seat. Most of these $50mm — $100mm funds will let you invest alongside in deals they lead so they can even end up helping you source some opportunities.
New investors in the space often discuss how they can eventually get into deals with this famous investor or that fund. Frankly, the way to do it is partner with the future generation of great investors early (be an LP in some first time fund managers’ funds).
We are in the game of identifying winners, so invest with, and in, the funds you think may be the future Andreessens and Saccas. Then one day people will be wondering how you got into the club of folks who get all the best deals. You were early — shocker, that’s the name of the game!
There are inevitably a few angel investors in your market, and hopefully an institutional investor or two focus on early stage investing. At a minimum, there are some family offices that invest in early stage opportunities. These people can help you avoid the local zombie companies (startups that have been surviving, not thriving, for years). They can also help you with deal flow as well, considering they have developed their own deal flow funnels. Learn how they source, and what they look for, then pick and choose which parts of their process may work for you.
In summary, this business (VC investing) is all about meeting people and learning. I think those are the independent variables in the equation of VC investing. Most everything else is a dependent variable (deal flow, deals done, returns, etc.).
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