What I learned from investing in 138 early-stage startups
Originally published at www.seedrs.com on July 19, 2017.
The future will, of course, be different to the past or present, and startups have proven they can impact that. Startups and scale-ups don’t have a vested interest in the past so they can think and act radically different to established organisations, hence the talk about disruption being universally accepted now.
I continue to be excited by startups because there are lots of problems and things still to fix in the world. Companies with emerging technology components are an established way to address this. Some of them may have an opportunity to engineer a component of an improved future that we will all want to live in. One that is more fit for purpose. That’s the tech utopian vision, at least.
That’s why investing in early-stage companies is exciting. It’s the possibility even when counterbalanced by the risk profile.
With this in mind, here’s some of the things I’ve learnt from investing in over 130 early-stage startups over several years:
- it’s not about the idea
- it’s about the market
- it’s about the teamit’s about momentum
- don’t get bushwacked by flashy videos
- revenue curves are king
- there are always bulls
- there are always hawks
- make up your own mind
- know and balance your bias
- co-invest with institutions
- follow-on and double down
- don’t double down on your losers
- early-stage valuations are what you can justify
- funds are likely to invest in the really early-stage of the spectrum
- do your own research, don’t follow the crowd
- learn how early-stage startups work, what makes them succeed or fail
- understand the type of shares you’re buying
- focusing on unicorns is for VCs and the press
- only invest what you’re happy to lose 100% of (take into account tax relief)
- expect to get nothing back
- talk to your investments, help them
- forecasts are fairy dust, look at fundamentals
- place bets, don’t try to pick winners
- just because you don’t get it doesn’t mean it’s bad
- EIS and SEIS are awesome
- SEIS stage is a quantum higher risk than EIS
- money is just numbers, don’t be emotional
- miracles are for fairy tales
- spray and pray can be an almost strategy
- making decisions will contain conscious/unconscious bias (be aware)
- investing in something that fails doesn’t make you the dumb money
- being a founder is one of the hardest jobs there is, be nice but balanced
What’s a good investment?
For me it’s all about the team and momentum. Can they execute and learn and run fast enough to find their fit before the money runs out? Is there a beachhead market they can be successful in to hit milestones and extend their runway? Then, is the space or problem they’re currently trying to address ugly enough to warrant a new solution or could there be one at a near term point?
I’ve looked at a lot of pitches over the last five years and worked/spoken with a number of startups across lots of verticals. You get a sense of how open the founders’ eyes (particularly the early-stage ones) are to the challenges ahead. I personally like to see an openness in the founders that the idea they go in with might not be the one that comes out.
What is risk?
Risk, of course, is inherent. I don’t think we should be afraid of taking risk. Pretty much any investment you make has risk. It doesn’t give me the same knot in the stomach it used to.
So if you compare early- and mid-stage startups to say, publicly traded equities, they’re actually in some ways quite predictable. They’re trying to find a fit in a particular market, with a hopefully narrow value proposition. They’re not plugged into the global economy or beholden to it in the same interconnected way that dividend paying stocks are. They’re insulated from headwinds in some ways, especially if they’re revenue generating from early on.
Investing in early-stage or mid-stage companies is risky, that’s a fact. However, when you understand the processes involved at each stage of an early venture then it actually feels less risky than you would automatically assume. Look closer at how they have performed and executed relative to the stage they’re at, for example:
- reaching idea validation through experiments that have (at least) some directional evidence or resulting insight
- gained early traction with a sub-segment of customers
- who are their first hires and what do they bring
- found a scalable channel with appropriate unit economics
- have they built a product that people love
- found strategic partners, or an advantage through partnerships
- tested and expanded into new channels
- have they leveraged network effects successfully
- how have they grown revenue and reinvested it
- what roles they’ve hired for, in what order
- launched in adjacent markets or new products to expand their range
Most are not going to succeed, so understanding these elements of the process will help you to build a healthier portfolio as well as asking thoughtful questions of the founders. If you treat early-stage investment as part of a balanced and diversified approach then you de-risk yourself to some degree
It’s currently too early to tell but there’s starting to be a few compelling data points to say it’s going ok so far. About 90% of the companies I’ve invested in are still active after several years, which is significantly higher than what I see working around the industry at large. We’re starting to see better transparency about further rounds the startups make, so that’s a good indicator of how it’s going. There’s also going to be added liquidity with secondary markets which is quite an exciting and much-anticipated development.
Personally, I think it’ll be a few more years before we have the evidence, and to what degree it did or didn’t generate returns. I won’t be disappointed if it doesn’t because I don’t put in anything I’m afraid to lose and it’s about more than just money. For me at least, it’s worth the risk.
Adam is on a mission to build better startups. He’s growing a worldwide community of creative people all learning to code with SuperHi, and helping other startups find their voice and grow through Spindizzy.
If you enjoyed this article, he occasionally writes other things here.