David Weisburd here.
Earlier this week we talked about value-add and how investors can benefit the companies they invest in.
Today, I want to cover the opposite topic: the things investors do that detract value from startups.
If you think this is not an important topic to understand, think again. In fact, two very prominent Silicon Valley investors are on the record talking about this very thing.
Vinod Khosla, venture capitalist and self-made billionaire, famously said that 70-80% of Venture Capitalists actually detract value from startups. Michael Siebel, the President of Y Combinator, the top performing startup accelerator in the history of Silicon Valley, claims that simply writing a check and not communicating with the founder until a liquidity event makes you an A-minus investor, with not much room to improve upon this and a lot of room to damage the relationship.
Why does this topic matter? Outside of the sad fact that the entrepreneurial journey is already difficult enough without having investors detract value, this affects you a lot as an investor, too.
After all, the entire lifeblood of an investor is his or her personal deal flow… and acting in a way that annoys entrepreneurs can kill your deal flow overnight.
With that in mind, let’s dive into the top 3 ways that investors detract value – and exactly how you can avoid them.
As we discussed in the previous article on value-add, the most effective way to provide value-add to an entrepreneur is by asking him or her what they need help with.
Nothing is more annoying to an entrepreneur than unsolicited advice, unsolicited introductions, or any other “help,” regardless of how good the intentions are.
#2) Keeping the Founders from Pursuing Great Businesses
In his book, “Good to Great” Jim Collins states that “good is the enemy of great.” The founders and executives that could be building great businesses are not failing but rather limiting themselves by making businesses that are simply good.
This is not surprising when we examine it from first principles, as founders who have the capacity to build $10 billion or $100 billion companies are highly capable founders that can easily build a $100 million company.
As angel investors, our entire success is based on power-law returns… not singles and doubles. The difference between a $100MM exit and a $100B exit can mean the difference between making $1 million and $1 billion. The result is literally 1,000X or 100,000%.
If that is the case, then why doesn’t everyone focus on creating great businesses?
The reason for this is that many entrepreneurs get a lot of pressure from investors and other stakeholders and this causes them to settle for good when they could be reaching for great.
Unfortunately, this often happens even if the payoff for being great would be 1,000X that of being good, and even when there is a 10 or 20% chance of achieving that great result (making it 100 to 200X more rational of a strategy). The reason for this is typically investors that lack the patience to back great businesses – which, of course, take longer to build.
If you want to be both a good and a value-added investor, it’s important to invest responsibility (diversify, diversify, diversify) and let your founders swing for the fences.
Don’t bother your entrepreneurs about when you will get your return back or pressure them to provide a 2X-3X return. Not only is that kind of behavior annoying to entrepreneurs… But it can also kill your deal flow and limit your success.
#1) Making the Entrepreneur Work for You
For whatever reason, some angels believe that entrepreneurs work for their investors. While this may be fundamentally true from a corporate governance angle, this is not how it works in the real world.
The top 1% of startups (the startups you want to exclusively focus on) do not need your money, and in fact have investors competing for the privilege of making an investment. If you are not constantly competing to get into your opportunities, you are most likely subjecting yourself to adverse selection.
The most surefire way to kill off your future deal flow is to constantly ping your entrepreneur asking for updates and information.
To put it simply, the entrepreneur’s job is hard enough already.
Our lifeblood as investors is our deal flow, so if you’d like to maintain a great reputation and get access to the next Google or Uber, at the very minimum, avoid making those three common (and dangerous) mistakes…
Entrepreneurship is a brotherhood, so you can be 100% sure that entrepreneurs will speak with each other and with your co-investors. Within a year, you will have a reputation (whether good, neutral, or bad). Cultivating that reputation is the absolute best way to ensure you’re always at the front of the line when the next Uber comes along.
I’ll be back soon, so don’t go anywhere… And let me know your thoughts in the comments below.
Very best,
David
P.S. – Today, we’re so excited to celebrate the one-year anniversary of the Angels & Entrepreneurs Network. That means that today is the final day to become a Founding Member. Our subscribers receive fully researched startup deal recommendations, special reports, training videos, and much more. Just click here to learn more.
Earlier this week we talked about value-add and how investors can benefit the companies they invest in.
Today, I want to cover the opposite topic: the things investors do that detract value from startups.
If you think this is not an important topic to understand, think again. In fact, two very prominent Silicon Valley investors are on the record talking about this very thing.
Vinod Khosla, venture capitalist and self-made billionaire, famously said that 70-80% of Venture Capitalists actually detract value from startups. Michael Siebel, the President of Y Combinator, the top performing startup accelerator in the history of Silicon Valley, claims that simply writing a check and not communicating with the founder until a liquidity event makes you an A-minus investor, with not much room to improve upon this and a lot of room to damage the relationship.
| Liquidity event:
A merger, acquisition, IPO, or other event that allows startup founders and their investors to cash out some or all of their shares. |
After all, the entire lifeblood of an investor is his or her personal deal flow… and acting in a way that annoys entrepreneurs can kill your deal flow overnight.
With that in mind, let’s dive into the top 3 ways that investors detract value – and exactly how you can avoid them.
Avoid These 3 Mistakes at All Costs
#3) Unsolicited Advice, Intros, and “Help”As we discussed in the previous article on value-add, the most effective way to provide value-add to an entrepreneur is by asking him or her what they need help with.
Nothing is more annoying to an entrepreneur than unsolicited advice, unsolicited introductions, or any other “help,” regardless of how good the intentions are.
#2) Keeping the Founders from Pursuing Great Businesses
In his book, “Good to Great” Jim Collins states that “good is the enemy of great.” The founders and executives that could be building great businesses are not failing but rather limiting themselves by making businesses that are simply good.
| First principles: A bottoms-up thinking process that starts with known facts and builds an intuition based on facts vs. mainstream opinion. |
As angel investors, our entire success is based on power-law returns… not singles and doubles. The difference between a $100MM exit and a $100B exit can mean the difference between making $1 million and $1 billion. The result is literally 1,000X or 100,000%.
| Power-law returns: A system in which the lion’s share of returns come from a very small proportion of the total investments made. |
The reason for this is that many entrepreneurs get a lot of pressure from investors and other stakeholders and this causes them to settle for good when they could be reaching for great.
Unfortunately, this often happens even if the payoff for being great would be 1,000X that of being good, and even when there is a 10 or 20% chance of achieving that great result (making it 100 to 200X more rational of a strategy). The reason for this is typically investors that lack the patience to back great businesses – which, of course, take longer to build.
If you want to be both a good and a value-added investor, it’s important to invest responsibility (diversify, diversify, diversify) and let your founders swing for the fences.
Don’t bother your entrepreneurs about when you will get your return back or pressure them to provide a 2X-3X return. Not only is that kind of behavior annoying to entrepreneurs… But it can also kill your deal flow and limit your success.
#1) Making the Entrepreneur Work for You
For whatever reason, some angels believe that entrepreneurs work for their investors. While this may be fundamentally true from a corporate governance angle, this is not how it works in the real world.
| Adverse selection: A situation in which buyers and sellers have different information, resulting in one participant benefiting at the expense of the other. |
The most surefire way to kill off your future deal flow is to constantly ping your entrepreneur asking for updates and information.
To put it simply, the entrepreneur’s job is hard enough already.
Our lifeblood as investors is our deal flow, so if you’d like to maintain a great reputation and get access to the next Google or Uber, at the very minimum, avoid making those three common (and dangerous) mistakes…
Entrepreneurship is a brotherhood, so you can be 100% sure that entrepreneurs will speak with each other and with your co-investors. Within a year, you will have a reputation (whether good, neutral, or bad). Cultivating that reputation is the absolute best way to ensure you’re always at the front of the line when the next Uber comes along.
I’ll be back soon, so don’t go anywhere… And let me know your thoughts in the comments below.
Very best,
David
P.S. – Today, we’re so excited to celebrate the one-year anniversary of the Angels & Entrepreneurs Network. That means that today is the final day to become a Founding Member. Our subscribers receive fully researched startup deal recommendations, special reports, training videos, and much more. Just click here to learn more.
Follow @angelsandentrepreneurs
David ,
Thank you for your sound advice, you made it clear and concise. I can understand why an entrepreneur could be annoyed at an investor who constantly needed up dates or wondering when or if they would get a return or giving unsolicited advice. Thanks again and I will definitely heed you advice.