In my recent post "Why Am I So Lucky? Why You Need to Be Sure You’re Not the Sucker" I talked about how VCs (or other investors) get deals sent to them and how to interpret a referral.
I tried to make a simple point: People have motives when they send you a deal. Sometimes those motives are positive (they really want the chance to work with you, they think you have unique skills) and sometimes they are less positive (their first-tier of "go to" referrals passed on the deal, they don't want to write another check themselves, etc.).
As I said in the post, I really appreciate referrals and I take meetings introduced to me from a wide variety of people. I simply wanted to make the point that if a deal referral seems "too good to be true" it probably is. If the deal is from out of your geography and/or out of your focus area or a deal is being referred by a well-know investor who normally co-invests with similar syndicates, at least ask yourself, "Why am I so lucky to be getting this call."
Finally, I mentioned the case of an angel investor friend of mine who had a very senior industry professional contact him on LinkedIn to try and raise $500,000. My friend is very accomplished (much more than I) but he is relatively unknown in certain tech and digital media crowds. I advised him to start that conversation with a bit of skepticism.
Many people understood this thesis but some took it to mean more than I had intended. What I didn't say was I was looking for my deals to all come through well-known investors, be "club deals," or have positive signals.
In fact, I have a long history of saying the opposite.
- I wrote here about the importance of proprietary dealflow
- I wrote here about why I avoid party rounds
- Of course I've talked about wanting to get to know entrepreneurs over long periods of time (lines, not dots) -- my most referred to post
- And I have repeatedly talked about entrepreneurs I've courted for years waiting for the right time to invest: Ethan Anderson / MyTime, Kara Nortman / Moonfrye, Sam Rosen / MakeSpace, Nick Halstead / DataSift (whom I kept a constant 18-month dialog with before investing) and so on.
Since so many people assumed that, "I don't want to be a sucker" meant "I only want to do deals with smart co-investors let me be clear."
I don't give a shit what other investors think about a deal or market. How else could I have invested in Maker Studios when every investor told me that content businesses were bad investments and that YouTube wasn't a viable business channel or Invoca when everybody told me that phone calls were dead?
I seek out great entrepreneurs. End of story. I try to know people that others don't yet know. I avoid Demo Days like the plague and have publicly said so. Why trod over the deals everybody else it looking at, at the same time they're looking at it? By the time it's hit demo day I'm too late.
I look for passionate entrepreneurs who have a love for the industry they're serving. I look for whacky ideas that seem implausible or cause me to say, "Huh. I never thought of it that way."
I looked at drones before anybody wrote any checks into or said anything publicly about drones. I regret not having invested in the company I met because it was exactly what I was looking for in a team and market.
I've spent the last couple of years trolling in ideas in healthcare information systems (back end, ugly, complicated) more than "quantified self," which I believe in, but believe I have less proprietary knowledge or relationships and is now a crowded space.
We did a seed deal this week that would surprise you. It's in an area that has no hardware and no software and definitely isn't a company you'd read about on TechCrunch. I would talk about it (I don't care if you think the idea is stupid) but frankly I don't want to because I don't want to encourage competition in this field of investment. I'm certain we'll talk about it soon enough. The founder wants to change the world and has a Phd in a science where I believe he just might.
My friend Rob Go wrote the following comment on my last blog post
I think the great investors avoid being the sucker, but don't worry about looking foolish because of independent thought either.
I couldn't agree more. I don't care if people think my investments or foolish because time and returns will be the true arbitrator. More to the point, I don't mind if a few of my investments actually end up becoming foolish. If I don't have a few of those it means I'm not trying hard enough. Fred Wilson said it best in his post about loss ratios in VC.
My investment philosophy:
- Invest in moonshots more than incrementalism
- Avoid the herd
- Be willing to invest in things that uncool or unpopular if you find an entrepreneur whom you believe in and who has a thesis for how to disrupt a big market
- Find complicated markets where 3 Phds who just graduated from Stanford or MIT couldn't easily copy or think of the idea because it takes some domain knowledge, real-world relationships or know how
- Don't worry about what others think of your investments (other than LPs who need to be persuaded that you have a logical investment strategy)
- Be willing to lean in, talk about your portfolio and investment ideas and be willing to be challenged.
I remember being a strategy consultant where you had to pretend to know everything and be right all the time. I hated that job and that feeling. I think the VC industry tends to pressure new entrants to feel like strategy consultants did. Too smart. All knowing. Infallible. I am none of these. VCs don't need to be perfect.
I don't pretend anymore. I know what I know. I'm willing to learn what I don't. I'm willing to take chances on ideas that might seem hard or strange. I don't care if others scratch their heads.
I'm not afraid of failure. How can we back entrepreneurs and espouse willingness to fail if we ourselves aren't?
In short - I am looking to find differentiation. And that will never come by following the crowd.
This article was originally published on Mark Suster's blog, Both Sides of the Table.