Three Lessons Learned in Three Years of Investing

It’s been a little more than three years since I took my first tentative steps into the world of investing in early stage tech startups. I was a bit apprehensive. I wasn’t sure if my experience and skill as an operator running large companies would help or hurt in my new career.

Today, I’m so glad that I made this transition. I love the intellectual challenge of looking at new ideas and the thrill of interacting with unfailingly optimistic founders every day.

Here are the top three lessons I’ve learned or relearned about investing in order of importance.

1. Don’t invest in technology that you love but customers and investors don’t. I definitely relearned this one. My very first investment was in a company building a product that I loved and actually had tried to build. However, a quick survey of customers and investors would have revealed that while everyone liked the technology, no one was willing to pay for it.
2. Don’t select a founding team that needs your help. Rather, choose one that appreciates your advice. This is really important for someone transitioning from an operating to investing role. It’s great for one’s ego to be able to help a founding team through their business or technical challenges but not so great for one’s investment. The best investment is in a founding team that solicits your advice (and that of others) and subsequently synthesizes the best approach based on all the available information.
3. Don’t skip asking probing questions because a reputed investor has already made a commitment. There are many super-smart investors but no one is infallible. Every investor is subject to the same power law distribution; a very small number of companies in the tail dominates the returns for a given fund. It is impossible to know a priori which ones will succeed. I found that if I asked the same tough questions of the founding team regardless of which established investor had endorsed them, I had a better chance of making a good investment. For example, I was looking at a company that was applying machine learning in a market that had seen little innovation in a long while. It was a big risk because the customers were quite slow to adopt new technology. I was in the middle of assessing the capability of the team when a Tier 1 VC showed significant interest in investing in the company. One of its conditions for investing was that the company needed to change its go-to-market strategy. I expedited my due diligence and made an investment. Eventually, the Tier 1 VC did not invest. The new go-to-market strategy took a lot longer to materialize, the team turned out to be not strong enough and the company almost died a premature death. After a struggle of more than a year during which I made a bridge investment and the company made a critical new hire, we regained momentum. In retrospect, I should have continued my due diligence, especially in assessing the team. I would have most likely been able to influence the company towards a positive result in a shorter time.

These lessons have changed my approach as follows:

1. I allocate 70% of the weight of my decision to the founding team, 20% to the product and 10% to the market. I believe this is appropriate for the early stage investments I make.
2. I am less likely to invest in an area in which I know a lot technically.
3. I try to be even more careful with due diligence with a team when there is a top investor involved. I am ok with losing a deal by not hurrying to make a decision.

I look forward to continuing my career in investing for the foreseeable future. I hope to keep these important lessons in mind as well as find new ways of unearthing exciting companies that want to “make a dent in the universe”.