Saturday, September 13, 2014

The Value of Investors: Why I Focus On Helping Entrepreneurs

From Peter Thiel's recent Reddit AMA:
"As an investor, I think one must always maintain a certain amount of humility. There is only so much we can do to help the companies in which we invest. And because of this, the act of making the investment (rather than the ability to fix things later) remains by far the most important thing we do."
I think Peter's statement is largely right, but the nuances are important.

1) "There is only so much we can do to help the companies in which we invest."

When it comes to startups, the founders and employees have far more impact--positive and negative--on the chances of success than the investors.  Great investors have great track records because they have demonstrated great judgment, not great company-building skills.

On the other hand, I do think that investors could and should (but don't) help entrepreneurs more than they currently do.  A lot of folks like to talk about how hard it is to be an entrepreneur, and how depression is common among startups.  Yet far too few investors show any interest in helping their entrepreneurs deal with these issues.  Part of this is that the entrepreneurs don't always feel comfortable revealing their concerns about the business, but entrepreneurs feel that way because they don't trust their investors (which is largely rational, considering how often founders get ousted by investors).

As an investor, I certainly want to help the company, but I think it's far more important to help the entrepreneur.

2) "The act of making the investment (rather than the ability to fix things later) remains by far the most important thing we do."

I would argue that this statement applies far more to the Peter Thiels of the world than the Chris Yehs of the world.  What I mean is this: Top-tier investors have the brand and financial wherewithal to focus on those entrepreneurs and companies that are obviously great.  They can pay the high prices for quality, and have the ability to beat out other investors for the right to invest.

This is absolutely one of the best investment strategies from a risk/return standpoint, given Silicon Valley's unicorn economy.

Unfortunately, peripheral players like me can't play this game.  I don't have the money or the reputation to play.  My strategy has to be to invest in deals that top-tier investors won't even consider.  If the deal is one a top-tier investor would consider, I'll either never get in, or I'll only get into their rejects and dregs.  (Note that there is one exception, which is being allowed into deals by personal friends or by an investor who wants my particular expertise, but this is hard to scale)

Instead, I need to find deals that are off the radar, either because of stage, geography, or both.  These deals usually require a lot more work to find, and a lot more coaching to develop.  Being a "fix it" guy is a harder road to travel, but it's the one that's available to me.  And if I make a transformative investment (like Peter did with Facebook) that then unlocks the other investment path.

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