These last few weeks have been really hectic. For a while, it seemed like I wasn't looking at any new deals whatsoever. I resigned myself to working on the companies I had signed up with but also could see that my work with them was starting to taper off in an expected fashion.
But then it changed. All of a sudden, a flurry of new opportunities came down and I found myself meeting with companies every week. It actually got fairly hectic, meeting up with entrepreneurs and actually going through some due diligence processes with a few companies. But one by one they dropped off my radar. As they dropped off my radar for a variety of reasons, some interesting observations came to light about the way startups and investors strategize with each other.
The Entrepreneurs' Perspective
The most sought after entrepreneurs/startups get deluged by requests from angels to invest in them. Typically, they are also pursued by venture capitalists who also like what they see and want to participate. The availability of money to these entrepreneurs creates an situation where they can pick and choose the money they receive. I've seen them go in these directions:
1. They go directly for the big VC investment and skip angels altogether. Let's face facts: raising money sucks. It's time consuming, you get a lot of negativity from people who don't believe in you, and you'd much rather be building something than begging for money. So why not skip all the nonsense and just take the big money and go back to building your business and hiring people you need.
2. They take the VC investment but only bring on some angels who are either high value or friends. Similar to 1., they get the big money but only bring on those people they like or those angels that can help them later.
3. They delay VC funding to push up their valuation, and only pick a handful from the crowd of angels wanting in. The most bold of entrepreneurs who are on to a good thing will press their advantage by not taking big money now, which could mean they have to give up more of their company at this point, and wait to build their business a bit more which raises valuation for later and, thus, gives them a larger advantage for not giving up so much of their company later in exchange for a large VC raise. They instead raise a smaller amount (ie. $500k - $1MM) which gives them the ability to run for enough time to build their business to a more valuable state.
4. They want angels who are active investors and can bring value to their company. More and more I speak to entrepreneurs who only want angels who can help them in their business versus just bringing money alone. It makes sense; angels who can help are more motivated to help because they have skin in the game. It does make for a tough environment for those angels with only money to give.
5. They are limiting the number of angels and/or investors. Managing a lot of investors can be troublesome to entrepreneurs. Simply cutting all the paperwork (ie. stock purchase agreements, stock certificates, etc.) can cost more money. Collecting the money can be tough for those angels who are dragging their heels in transferring the cash into your account. Dealing with nervous investors can be a draw on resources as you need to respond to their requests for information and calming their anxieties about whether or not you're going to make money for them.
This all goes out the window for those entrepreneurs who don't have something hot enough to attract lots of investors.
The Investors' Perspective: Herd Mentality, Joining the Herd
As an investor, I want to get in on the great deals. Finding deals that are good but are hidden can be really tough. It's more often that there is a common opinion about a startup and that everyone wants to get a piece of the action.
I try to do my own due diligence. I also try to form my own opinion about a startup. But I do find it difficult to ignore what others' think about a company. Over these last few weeks, I've looked at bunch of deals where there was a large number of investors trying to get in. But I've somehow lost out on a number of them. Why was that? Some observations:
1. Herd mentality is inescapable. For some reason, when many people think you have a hot deal, then you tend to think so too. They must know something you don't, or you bank on someone else's expertise, or you just don't have time to do all the due diligence yourself. Thus, I tend to look more seriously at deals with lots of interest, even when I tell myself I'm going to be disciplined enough to do all the due diligence on my own.
2. The investor herd piled in, wanting to invest into a startup. It's a common scene around the valley. The hottest deals get shopped around the most popular and prominent angels who are all high value and high profile. They have lots of money and value to bear on a deal. But they also have their friends who come in on the deal. So a combination of being able to keep in an entrepreneur's mindset and haivng the herd not forget about you, thus keeping you in the entrepreneur's mindset, helps to get you into a deal...or not. I have not been really part of any investor herd before so it was literally impossible for me to stay in an entrepreneur's list of investors as they get deluged by a huge number of people and can barely manage the flow of communication. I know I've been dropped off investor lists because of not being part of a herd.
3. Joining a herd became a worthy goal. As I thought about reasons why I missed out on deals over these last few weeks, I started thinking about how I could join a herd. I don't like to bill myself as a guy who can do lots of investor intros now, but knew I could get there in a few years as I worked with more and more people. But now I think about the networking aspect more, and using entrepreneurs to introduce me to some prominent angels and VCs around the valley. Slowly but surely, I am starting to not be forgotten amongst the investor herds, which is a good thing. So far, I think a combination of personality and value has helped me stay in the mindshare of herds. I meet people and show them that I'm a cool guy and not a wonk, and that my experience can actually help a company that we may all be investing in, and things seem to be happening.
4. I am trying to standout in a herd. If you demonstrate that you can bring high value to the company, staying in the list of investors for a given entrepreneur becomes easy. I can sometimes stay in a deal where other investors with lesser or no value to a company beyond just cash get dropped. I have found a great variance in entrepreneurs in whether or not they find value in what I could bring to their companies. If entrepreneurs don't find value in what I bring, then the probability becomes much greater that I will get dropped from their investor lists.
5. I need to constantly follow-up on deals I want in on. In the past, I've relied on entrepreneurs to contact me when they're ready to talk investing. However, a number of them have dropped me simply because I didn't do my part to stay in their mindshare. Shouting loud via email or phone works well and helps a lot.
Lots to keep track of in the ecosystem of investors and entrepreneurs in order to not be forgotten amongst the herds of investors roaming Silicon Valley.