American venture capitalist Fred Wilson famously said it took him 10 years to become “half-way decent” at his job. In which case, I’m just half way to becoming “half-way decent” (Exactly the amount of exposure to start spewing advice, don’t you think?).
Lately, I’ve noticed a lot of people talk about how the easiest way to become an investor is to invest in companies at an early stage. In my experience, I’ve found this to be hard work, really hard work. And honestly, it should be hard work.
When you invest early in a company’s life cycle, there is so little information available to make a sound decision that you need to rely on a combination of assumptions, personal experiences, and gut feel. The information entrepreneurs provide is never enough—not because they’re hiding something, but because they just don’t know. Early on, they’re seeing an opportunity from 30,000 feet above and believe their product can fill the gap. It’s the job of the investor to go deeper and break down the opportunity into components that can be assessed objectively.
Before started Lightbox, my partners and I made two angel investments. It took us months to fully assess the opportunities. We spent a lot of time with the founders—both in board rooms as well as over drinks. So much of an investment decision at this stage is based on the founding team—if you can’t get comfortable with them, it doesn’t matter how good the idea is. Getting to know them takes time. In the first month alone, we met each team around 10 times. Some meetings had agendas, while others were informal conversations. But we prepped for every interaction, spending hours to better understand their verticals, why their models made sense, and where we felt the gaps were in their thinking. (India is such a unique country that it demands a granular understanding of an industry to grasp what it will take to disrupt it.)
By the way, as much as your analysis will help you, it will help the entrepreneur more. Entrepreneurs welcome relevant, specific feedback and a constructive debate, irrespective of whether you invest. They usually get critiques from “would-be mentors” who are less concerned about specifics and more concerned about making their point.
Keep in mind that even after spending all the time in the world to make a decision, at the end of the day, you have to make do with what you’ve got to take a call. And much of that decision is based on prior investing experience.
The bottom line? The earlier you invest, the more experience you need.
Angels, for example, are forced to extrapolate the market/model/team more than any other investor in the lifecycle of a company. Extrapolation at that stage takes experience, in my opinion, a lot of experience. And not just any experience, but investing experience. Prior experience in another field cannot fully help you become a savvy investor. In fact, very little can prepare you for it.
After being in this space for a few years, here’s my two cents for would-be early-stage investors.
First, constantly speak with more experienced investors about opportunities. In fact, invite them to pitch sessions. Not necessarily because of their opinions (although that’s helpful), but because of the kind of questions they ask, the way in which they break down the opportunity, and how they conduct the meeting itself.
Second, read as much as you can, as often as you can. The wonderful thing about our profession is that the greatest minds are still alive, and love to write about their learnings. There are blogs, podcasts, and books about investing, and almost everything is relevant.
Third, and most important, early in your investing career, don’t be the first investor in a company. Not only is it the most difficult thing to do, it is also extremely risky for everyone involved. You’re taking 100% of the risk, with a high potential of no reward (a lose-lose for you and the company).
Instead, participate in the later rounds first—gain experience without taking all the risk. Choose companies that have a track record. You will be able to see the quality of the team through their execution (vs just their belief in themselves), the economics of the model playing out (even if only a bit), get a better understanding of the product-market fit, and most important, understand from previous investors why they invested. Take a small chunk of a bigger company rather than a big chunk of a non-existent one. Then use that as an opportunity to learn from that company and its investors.
The size of your equity holding is less important than the potential of the company.
Finally, don’t do more deals than you can manage. Without trying to be too idealistic about angels (I know … probably too late for that), angel investing should be as much or more about supporting entrepreneurs and their new venture than about building a portfolio. The word angel can’t solely mean a benevolent financial resource. Being an angel has to include support, encouragement, and mentorship. A purely monetary transaction is not angelic. In fact, it sounds like something the devil would do!
Speaking of the devil, the worst part of being inexperienced is making up for it by penalising the entrepreneurs by setting onerous terms to protect your interests, taking ridiculously large amounts of equity, and giving half-baked advice for sweat equity on the side. None of these bode well for the company, the entrepreneur, or the development of the startup ecosystem. And as many investors realise soon enough, what’s not good for the company, isn’t good for them either.
Unfortunately, in India, as the startup community grows, new investors seem to be in a tearing hurry to build their portfolios. Even the media judges the best angel investors solely on the basis of the number of investments they’ve made. How can that alone possibly be a measure of good? Having a large portfolio of angel investments isn’t equivalent to skill or talent of an investor.
That said, angel investing is still nascent in India. For the ecosystem to grow, learn and develop, investors must do that first.
The author is the co-founder and partner of Lightbox, a venture capital firm focussed on early-stage investments in emerging technologies. The views expressed are those of the author and do not necessarily reflect those of Fortune India. Fortune India does not assume any responsibility or liability for the same.