You talk about this stuff like you read it in a book.
-Ward Abbott, “The Bourne Supremacy”
I’ve been investing in or a part of startups for about 6 years. Given the volume and intensity here at SV Angel, I feel like it’s been in dog years. We’ve been a part of a prolific number of startups so I feel like I have been able to develop a unique and advanced “pattern recognition” when it comes to startups (and having Ron Conway as a mentor and advisor is a huge plus too, obviously).
That said, I’ve only been doing this for 6 years. I have a ton to learn. And I don’t say that out of any sense of false modesty. If technology cycles for investing are about 14 years, then I’ve only been a part of a third of one technology cycle. And one thing I’ve learned the hard way is that there are some lessons that only time and experience can teach you. As Ward Abbott would say, there are some things that you can’t learn from a book.
Here are six things I’ve learned to commemorate the six years. Some I knew about already - for example, don’t invest in science projects - but you don’t really internalize this unless you’ve felt the pain.
Growth != Value. Growth is a prerequisite for a startup. We at SV Angel in particular look for these early signs. And there are many companies that can show explosive growth. But at least in the consumer internet world, there are very few companies that can translate that growth into value. Growth is necessary but not sufficient for success. That involves (at times) taking all the data you’ve amassed from your first growth stage and using that to create something larger and valuable. It’s transforming oneself from a “product” company to a “technology”-driven one. It’s really hard. For every Facebook and Twitter, there are literally tens that had similar trajectories and flailed ultimately. We’ve invested in a few.
Complexity != Value. This is the proverbial “investing in a science project.” Sometimes you can become so bedazzled at the science or wizadry and think that that’s sufficient for success. Or the team is so exceptional technically that they will come up with something sublime. That’s obviously not the case. As Max Levchin says, just because something is hard doesn’t mean it’s valuable. Everyone knows that “best technology” doesn’t always win. But sometimes you think you have the exception. And sometimes you need to learn this the hard way.
One is Enough. We’ve passed on some companies because we thought one of the founders wasn’t that compelling. And those companies turned out to be some of the best. One potential takeaway is that it’s ok if one founder is “so so” so long as one has the potential to be great. (But doing this is hard per the last point below). This is a semi-false analogy, but if you look at companies like Apple, Google, Facebook, etc., they had many co-founders but ultimately there was one that led the company.
Mental Toughness is Hard to Measure. Bill Belichick preaches “mental toughness.” He values that over skill, ability, speed, strength or other qualities. I think this applies to founders as well. The problem is that this is very hard to measure in a short period of time when you are considering investment. Unless you know the founder from before, it’s hard to predict. We’ve invested in some folks who we thought were good but they turned out to be great because they were just tougher. Their threshold for pain was higher. The converse applies as well.
Nonlinearity is non-intuitive. Many have said that humans have a hard time internalizing or comprehending non-linearity. For example, it’s easy to describe Moore’s Law but it’s hard to grasp or predict what may come as a result. As a corollary you can easily fall into the trap of using “pattern recognition” to invest in a startup, thinking you can use the past to forecast the next big thing. But by definition, the next big thing is nonlinear and therefore literally impossible to predict. Even while it was happening in their earliest days, no one could have predicted that the next Microsoft would be a search engine; or the next Google would be a social network. And using this lens, at the earliest stage of investing, you can put too much stock into false negatives or even worse, dismiss certain startups as unable to monetize or just a feature.
“Success is a lousy teacher.” Bill Gates said this. He said that it seduces smart people into thinking you can’t lose. As an investor, in my opinion, one of the worst things to have is early success. Especially on a non-realized basis. In the past few years many investors - both individual and institutional - saw huge increases in their investments due to subsequent financings. But this was all paper gains. Again, it’s easy to learn this from a book. But when you invest in these companies and you see those “gains”, it can seduce you into thinking you’re a great investor. As I say (and have learned), it don’t mean a thing until you got the bling.
This post is a work in progress.