Friday, August 23, 2013

Why You Have To Be A Value-Added Investor

One of the tempting illusions about angel or VC investing is that you can relax once you've made the investment.  After all, if you've picked the right startup, isn't that 90% of the battle?

Alas, this is just an illusion.  In fact, once you've made an investment, it's critical that you demonstrate your value to the entrepreneur.  Let me walk you through the logic:

1) To make money, you want to invest in the best entrepreneurs and their startups.

2) The best entrepreneurs and their startups are usually hot deals; investors can be lemming-like, but if a company has a great team, a great product, and is growing at 100% per month, it's not that hard to smell value.

3) Hot deals are a seller's market; the entrepreneur can pick and choose from among interested investors.

So the question is, how do you get an entrepreneur to pick you?  That's where adding value comes in, and more specifically, adding value in the future.

Ultimately, if you're competing to get into a hot deal, entrepreneurs will make decisions based on the value they believe an investor will provide in the future, rather than the value an investor has provided in the past.  It may seem ungrateful, but it's the reality.  Moreover, investors act the same way.

Some VCs rely on track record and brand to prove their ability to add value.  But for most of us, that isn't an option.  Furthermore, the best entrepreneurs aren't starstruck in this way.

In general the best way to prove you'll be able to add value in the future is to have already helped the company.  The second best way is to have helped people the entrepreneur trusts.

Who is an entrepreneur going to pick?  The investor who's offering a slightly higher valuation, or the investor who has helped build three different companies whose founders the entrepreneur trusts?

VCs that tried to buy access to Series A opportunities by spraying-and-praying seed investments but without adding value discovered this to their chagrin.  If they didn't add value for the entrepreneur during the seed stage, there wasn't much reason to favor their Series A offer.

Entrepreneurs should focus first and foremost on building traction.  If you have traction, you'll always be able to raise money.  The equivalent for investors is adding value.  If you repeatedly prove your ability to add value to your investments, your money will always be welcome.

* This post was inspired by a TechCrunch editorial by my friend, the great Ben Narasin: http://tcrn.ch/14qn2DH

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