I wrote before about lessons I learned while investing. Here’s another. I don’t know if it’s a lesson; probably, more like an observation.
I like investing in products that I use or love. Here’s the problem with this. This doesn’t always work out well. And regardless of the outcomes, it can shade your decision-making process, which is even worse.
This is a classic example of an anchoring bias. You let an initial data point (“do I love the product?”) affect or infect your decision-making process afterwards. Sometimes it works out well like a Vine, Instagram or Twitter. But I can say from experience that more often than not – and this is by a wide margin – it doesn’t work out so well.
The converse is also true. Sometimes you look at a product and have a ‘blah’ reaction either because you don’t like it or you’re not the initial target user. So the whole investment decision process has a ‘blah’ undercurrent. You say things like, “I’m worried about market size” or “This feels niche” because you’re not the target market (at least initially). You can overlook or even worse, ignore the data. I’ve done it and it’s painful.
This also highlights one difference between investing individually and investing as a fund (i.e., investing someone else’s money). When investing your own money, loving a product may be both necessary and sufficient for investing. You can decide within minutes. You may not even need to meet the founder! There may be a quasi-“double bottom line” reason for investing – financial return and investing in something you love. Even if you lose your money, you still had some psychic return. (And most individual angels generally invest a tiny portion of their cash so a loss isn’t that painful.)
But when you invest other people’s money, you can’t be that flimsy. It may be a necessary condition for your investing style but one probably** needs to dig deeper to see and evaluate other data to make a sound judgment.
**I say “probably” here because there are some investors and people who have such a good eye and are able to project their individual needs and wants to a larger market need.