Some of our team and I were having a chat about what does it take to be an awesome investor.
When I first started investing back in 2006, I was arrogant enough to think that, being a veteran from Yahoo and having worked on so many web products, that I was good enough to invest in internet startups. I thought I could pick well because of my knowledge in UX/design/product, and I could give a startup an advantage because I could help them in UX/design/product. On this background, I set out to try to raise a venture fund in 2006. But LPs kept telling me that while they liked our pitch (fund + accelerator - sound familiar?) and liked that my partner and I were operators by background, they didn't invest in us because they didn't think we had enough experience in managing investments.
"Managing investments"....what did that mean exactly? I thought I knew everything I needed to know already! So after a few months of getting the same answer, I stopped raising and went out to angel invest on my own and get this so-called "managing investments" experience.
Years later, after burning through a ton of my own cash, I realized what they meant by "managing investments." It was definitely knowledge that I DID NOT HAVE even after working at Yahoo for so many years and the experiences I had. But spending a few years burning through a lot of cash and making a lot of mistakes, I now have a better sense for what makes for an awesome investor versus my limited naive view of the world back then.
Bringing it back to my chats at Launch Capital, I then brainstormed a list of qualities which I think make for an awesome investor and what would make an LP want to invest in. Here they are below:
- Track record, increasing IRR, value of startups in portfolio to date. Exits!
- Personal and professional network
- Previous experience, work, hobbies; new experience - what are they immersing themselves into now that is hopefully translatable into something investible?
- Ability to negotiate deal
- Personal brand as it pertains to investing - what are they doing to improve? blogging? speaking engagements? mentoring? etc. etc. it can even be putting personal money into fund(s) to get more deal flow. or getting aligned with a research lab at a university.
- Understanding the ramifications of deal terms
- Presentation and defense skills of a deal
- Proper preparation for a deal
- Due diligence completeness, up to a point (meaning can they decide when it's not worth it to keep going on DD, or reached point of diminishing returns)
- Exit engineering - hardest skill ever. ability and connections to negotiate and execute an exit
- Deal flow and sourcing - proprietary? unique?
- Breadth/depth of information re: building businesses in typical sectors
- Ability to say no, and being able to say no whenever without any emotion.
- Make hard decisions, like cutting off $ to a startup, or firing someone like the CEO.
- Ability to serve effectively on a BOD. could start with board observer or shadowing a director who is on BOD.
- Ability to smooze a founder and get them to love him/her
- Good intuition in the area of deals, and people. spotting bullshit. knowing when something "smells" right
- Ability to clearly communicate what they are looking for in a deal (knowing that this is individual and everybody will have their own thing - uniqueness here would probably be valuable to an LP more than startup).
- Typical and special skills to help startups with, in breadth and depth.
- Ability to do research fast.
- Responsive to startups and enterpreneurs, and team members. excellent communicator.
- Participate in building brand of the organization in addition to their personal brands
- Ability to spot new trends and not just get excited about existing or old trends. ability to imagine a new trend and defend it, potentially even build evidence for it.
- Hungry to learn, curious about everything. ability to take random topics and become expert at it (enough to be dangerous). loves to read. ability to absorb lots of information from around the world and different sectors and assimilate.
- More optimism than pessimism about deals. optimistic in general about the world. not overeager naive optimism but measured, deliberate optimism.
- Ability to adjust decision process by startup stage versus applying decision critieria to everything
- Being able to work within constraints (ie. $4M pre valuation limit) and find ways to be successful.
- Company evaluation, from product to oppty to financials.
- Discipline to keep to strategy. Intelligence to know when something isn't working and needs to change.
- Get shit done no matter what!
Having said the above, there is one quality I have found that trumps all of the above - that is....
All you have to do is have the trust of a wealthy benefactor(s) and you are off to the races as an investor. Why do I say this? Look around town. There are a ton of new funds popping up. I have no idea where these people are coming from. Even their experiences were less than mine when I started back in 2006 but yet they have a few million dollars to invest. How could someone like that achieve raising their own fund? It's because they had the trust of one or more LPs to give them that start. And I have seen some great investors not be able to close their funds, even when their qualities were pretty good on the characteristics above. How can that be? I again theorize its that somehow they have not gained the trust of potential LPs to invest.
What kind of trust are we talking about? Trust that you won't run away or waste their money. Trust that you will not do stupid things. Trust that you will make them money. Trust that they can find you whenever they want. And so on.
So while you develop those qualities above, which can only enhance your standing with potential LPs, it is ultimately the building of trust that will get their commitments to let you invest on their behalf.