Invest in Lines, Not Dots
Everyone seems to be in such a rush to get shacked up these days.
In normal times investors will look for “traction” before investing. We want to make sure we’re in love. This sometimes frustrates entrepreneurs who just want to “get back to running the business.” But if you understand it you’ll see that it is perfectly rational and it should also influence how you form relationships with investors. And remember, if we get married you’re stuck with us, too.
The first time I meet you, you are a single data point. A dot. I have no reference point from which to judge whether you were higher on the y-axis 3 months ago or lower. Because I have no observation points from the past, I have no sense for where you will be in the future. Thus, it is very hard to make a commitment to fund you.
For this reason I tell entrepreneurs the following: Meet your potential investors early. Tell them you’re not raising money yet but that you will be in the next 6 months or so. Tell them you really like them so you want them to have an early view (which is what all investor’s want). When you’re with them lower the bar by telling them, “we haven’t shipped product yet, we have lots of decisions still to make, but we’d like to show you our prototype” or obviously if you’re more advanced show what you have and what your roadmap looks like.
Most importantly tell them what you plan to achieve by the next time you see them. Hopefully by then you’ve made good progress. You’ll be able to give them an update on key hires, pilot customers, key tech innovations — whatever. Keep these interactions low-key and short. Quick coffees, whatever. Swing by their offices to make it easy for them to say yes and promise not to take up more than 30 minutes for the update (and stick to it).
I spoke about this more in depth in these two posts: 4 things I look for in an investment & how to manage VC relationships. And don’t allocate two months of each year to “hardcore funding activities” but allocate a regular amount of time each month to it like any other job function. Like it or not — finance is a major job function in any company — startup or public company.
The thing is, by the time I get to know you I start to see patterns. Note that “performance” on my chart is a loose term for my definition of perceived progress that can take the form of product, customer adoption, employees, investors, press or whatever. It is basically a perception that you are making progress in your business and not standing still.
All of these meetings don’t actually require you to prove that you’re “killing it” over night. It’s a chance for us to build a relationship and for the investor to see how you think and how you respond to adversity. How can you prove tenacity, resiliency or ability to pivot in a single data point? I funded Ad.ly having seen Sean Rad perform over a 1-year period at Orgoo, which didn’t succeed. I didn’t invest in Orgoo but by the time he launched Ad.ly I knew his capabilities and knew I wanted to work with him.
I had 15 meetings or more with Evan Rifkin over a 2-year period of time long before I invested in Burstly. In fact, long before he had even founded Burstly. I knew he was one of the most talented entrepreneurs in LA and he has exceeded my expectations since I invested. Presumably during this interactions Evan also decided I wasn’t a Dick so the meetings cut both ways.
I spent the past week in New York. The profile of one of the hottest companies I met was as per the graph below.
The deal is moving a bit too fast for me and is becoming frenzied with interest. But I really think this company has a good shot at becoming a monster. It’s a killer CEO, great product, market ripe for disruption, experienced product team and great CMO who has relevant experience from her former life. I’ve been watching from the sidelines for 6 months and waiting to meet the team. Given a few more data points I would have liked to have invested but given the market speed it looks unlikely.
So here’s the thing:
- Investors — The market is moving uber fast on deals. Investors are writing checks for dots. This is happening with both angels and VCs. If you invest in dots don’t be surprised when the trend isn’t in the direction you would have hoped. Pattern recognition requires a pattern. Dots produce bubbles. And some argue that bubbles have positive externalities for entrepreneurs — maybe. But many bubbles wreak more havoc than positive effects. And those of us who have lived through the past 2 funding bubbles saw all this at close range. And many I’m having the debate with are on their first time around.
- Lines vs. Dots — Over on HackerNews somebody cleverly wrote, “Surely someone will invest in the ‘dot’ and he’ll miss the chance. He seems to assume there is no competition. Or maybe what is a dot to him was already a line to someone else (because they met earlier)” — this is my point exactly. If you’re an investor looking at dots somebody else may be looking at lines. Meet entrepreneurs early and watch how they perform — maybe even at their previous startup. I always ask to meet people before they’re officially fund raising — well before actually. It helps me spot patterns.
- Entrepreneurs — you might be pumped up with that super quick round done at a high price. But just remember that raising money is a bit like Ireland in the 90’s — no divorces allowed. I know VCs and sophisticated angels can be difficult, slow and price sensitive, but I also know that in tough times unsophisticated investors can be a right pain in the arse. For some companies — they become deal breakers on further funding rounds. By definition if somebody is investing in you as a dot (limited thought, limited due diligence, maximum price) they are a dot to you, too. You can’t really know them in 2 minutes yet you’re letting them own part of your business.