What makes a great tech investor
Way too often entrepreneurs rank potential investors by only one factor; expected willingness to invest. A willingness to invest is essential but there are other factors to consider before taking someone’s money, and here are six:
1. Entrepreneurial experience. I believe the most important thing to look for in an investor is whether or not that person has been an entrepreneur themselves. It will make a huge difference in how you will communicate and move forward.
“Having been in the same shoes simply means that they understand your problems and challenges much better.”
This is especially true when things are not going as predicted. A former entrepreneur is used to the bumpy ride of being involved in a startup, but an investor who is an ex manager of a big corporation might expect it to be business as usual and start putting pressure on you straight away.
In my first two startups 1calendar and Iconfinder I tried this myself. Our investors SeedCapital and VF Ventures were mostly non-entrepreneurs who had barely tried to raise capital for a startup themselves or had any startup experience at all. They either came from investment banking, old tech companies, or had been mid-level managers in an unrelated industry. Best case was maybe a semi-successful entrepreneur who then turned investment manager due to lack of better alternatives.
They would treat your startup like a kindergarten. They would try to micromanage you, block a sale of your company, or spend hours discussing completely irrelevant topics and require more reporting.
“These are the type of guys that gives investors a bad reputation.“
Investors that have been entrepreneurs themselves will in general come with better advice, have a better network, be more patient and have more focus on the important stuff. More importantly they won’t waste as much of your time, so check if the investor has had their own successful startup before anything else.
How to spot -> Simply check their LinkedIn and see what startups they have been part of and what the outcome was. If you are not sure if one of the companies they were part of were a startup, then assume that it wasn’t. If it’s not clear that they have raised a lot of money or exited a startup then assume that they haven’t.
2. Are passionate about startups. Many founders are under the wrong impression that all investors are super enthusiastic and eager to learn about your startup and be part of its mission to inevitable success. Frankly that’s quite far from the truth.
First and foremost they are investors because they are trying to make money and they might just treat your startup as another stock in their portfolio. Some investors don’t care about what you are building or who you are – they are mostly interested in finding out if you have an undervalued asset that they should acquire.
This type of undesirable behaviour can be seen through the typical corporate boss turned angel investor type. Personally I met an angel group in Los Angeles called Tech Sharks and I have to admit that the name was pretty apt for them.
“These guys were literally investor mobsters trying to rob you off your startup.”
Coincidentally, a friend overheard a conversation between two of the angels after I pitched to their group and the things they said were truly upsetting. It wasn’t about how they thought my business could become big, but rather how they could pressure me into selling a big piece of the company for a cheap price and how they would go about manipulating me into believing they had my best interests at heart.
Again, these are the type of guys that give investors a bad reputation. So make sure your investors are in the game because they enjoy working with startups and not just out of greed. The keyword here is passion.
How to spot -> Do they have a strong presence in the startup ecosystem, do they blog about startup trends and do they participate in startup events? These are some of the indicators you can look at even before meeting them.
3. Has a great reputation. The saying “You’re only as good as who you surround yourself with” really applies here. If you have investors with a great reputation you will be perceived as being a better startup and getting new investor on-board for the next round will be much easier. For a first time entrepreneur the reputational hierarchy within VC’s and angel investors can be really hard to spot, but trust me it’s there. AngelList have a little list here for anyone who is curious.
“Investors are a bunch of lemmings all looking at what the others, especially the top dogs, are doing.”
With top dogs I mean the most successful funds like Accel, Sequoia, Kleiner Perkins and the most successful angels like Kevin Rose, Ron Conway, Naval Ravikant etc. So having a top-notch investor can make a huge difference. Reputation can sometimes be overrated but generally better reputation comes for a reason – these guys know what they are doing which is surprisingly often not the case. They also know a lot more investors and hence can help you get through to the people you need to raise your round of funding.
If the investor you are looking to take money from doesn’t have a big name yet – maybe because he or she just started out – do your own thorough due diligence and make sure who you are dealing with. Talk to founders of startups that the person invested in and basically check everything you can to find about their background.
How to spot -> Do they have a lot of praises and followers on places like AngelList? Are they from a brand name VC or have worked for one? Are they super investors who have done a ton of investments? Are they speakers at conferences or does it seem like people flock around them at startup events?
4. Lets the entrepreneur run the business. It’s great to get advice and utilize the network of your investors, but that’s about as far as it goes when it comes to getting their help. In many cases investors will be relatively passive and only engage if you ask them to, but there are definitely examples of the opposite.
The worst-case scenario for an entrepreneur is having an investor who is trying to micromanage the startup. In some cases the investor will ask for a ton of nonsense reporting and board meetings every 4-6 weeks making you prepare extensive presentations and material.
In other cases the investor doesn’t have time himself and instead get someone else to step in and tell you what to do. In the case of VC’s they might force you have weekly meetings with their associates, who will then report back on what’s going on. They will be monitoring every step you take and try to tell you what to do as if they knew better.
In the worst cases, investors have kicked out the founders or ask them to step down so they can have someone else take his or her place. This new CEO is probably someone they already know and who they think has better management skills or who they can easier control. As they saying goes:
“Trust is good, control is better.”
The amount of influence an investor will try to inflict on a startup is fairly equivalent to either how good or how bad things are going. To put it in other words: The more average your startup is doing the less you should expect to hear from your investors. If you are doing worse than expected they will react out of fear and try to cut their financial losses. If you are doing better than expected they will react out of opportunity and try to optimize for a bigger gain.
This behaviour isn’t completely logical since the logical thing would be to apply resources where they have the biggest effect by following a simple input/output principle. This applies to any of the investors portfolio companies and not just the ones doing good or bad. From a founders perspective this is just a thing to keep in mind if you wonder why your investors suddenly start asking you for more reporting when things are going as planned.
How to spot -> One way is simply to look at the amount of investments the VC or angel you are dealing with have made. If they are doing a ton (like 500startups in SF or Passion Capital in the UK) they simply don’t have time to micromanage anything and will leave you to do your job in most cases. Otherwise, you will have to ask around and do your own due diligence, but it will be well worth the time spent.
5. Knows your specific industry. “We invest in startups that can disrupt industries and target companies in web and mobile technology, life science and cleantech”. If it says some like that on the webpage of the VC you are going to pitch you might just reconsider and spend your time on something else.
“Having a diverse portfolio is great for investors, but often a disadvantage for the entrepreneurs.”
Even though the VC’s have different partners for different investment areas they won’t be as targeted as a fund that just invest in one thing and where all the partners come from similar backgrounds and experience. Some would perhaps argue that you should chose an investor that has an even more narrow focus like financial technology, mobile, design, or whatever space your startup is in.
When it comes to angels this is even more significant. VC’s typically come with a background from startups, investment banking, consultancy or sometimes the general tech industry. Angels can come from literally anywhere as long as they have made enough cash to consider investing in startups.
A good angel could be the founder of a company you are looking to do business with or someone well known and respected in the industry you operate in. The angel should also be someone who understands the dynamics of the industry you are working in. A tech startups is not just a tech startup. Disrupting the banking sector takes a lot more time and cash than launching a daily deal website and there is huge differences between a b2c dating app and a b2b invoicing platform.
How to spot -> Whether an investor understands your space requires a lot more than just looking at their LinkedIn, so there is no easy way around it this time. You simply have to do your own due diligence and have a thorough talk with them. Ask them critical questions and see how well they actually understand what you are pitching. You will surely be surprised about how little they might know simply because technology changes so fast.
6. Doesn’t lead you on. Investors are a bit like stock traders trying to gather insider information about a company before investing. This means that they will try to lead you on and gather as much data about your startup before committing their money. They will say they are interested when really all they are doing is watching from the sidelines and waiting for someone else to pick it up before committing.
“They are just trying to buy themselves a free ticket to the party and not being straightforward about their intentions.“
This is especially true for inexperienced angels who are just out there trying to get a feel of the market and how stuff works. These type of guys should be completely avoided because all they will do is waste your time. Even some lower rank VC’s will keep asking you for meetings and more data without ever having other intentions than maybe invest in one of your competitors.
How to spot -> If you hear stuff like: “I will invest, but not lead”, “I think you guys are almost ready to raise”, “Who else is in the round?” or “If x person commits I’m also in” then you should know that the chances of them investing is probably less than 5%. Don’t waste your time with them unless they are serious and can give you a deadline for when they can invest or what’s missing before they can.