#1 Before investing in anything, the wise investor has an answer to this question: "What percentage of these type of investments fail?"
In tech related VC or angel funded companies, that number is 80% and may be more as this slice of the market is woefully under reported. People do not take out full page ads to announce they have lost all their bait.
Do you have the money, the temperament, and the skill to get involved in an industry in which more than 80% of your investments are going in the shitter? Can you handle it if your first 8 investments self-immolate whilst you are waiting for the promised mythical winner that is going to bail you out?
#2. The second thing is to understand where your money sits on the cap table and in that world. Here's where the money comes from:
1. Bootstrapping
2. Friends and family
3. Angels
4. Organized angels -- a group of pooled angels with some infrastructure
5. Seed funds
6. Series A, B, C, D -- each of which have a different stage of growth
If you are an angel know you are slightly above friends & family, but below the professional investor class. You are nobody once the VCs get involved.
A lot of the seeming courage ballyhooed by big VCs is because they are using OPM.
#3. Be selective AF. Anything that spooks you -- say NO.
A quick NO is as useful as a quick YES from your perspective. Know what the red flags are from your perspective and follow them religiously. You will sleep better after a NO than a YES.
A deal that looks too good is often a pipedream.
#4. FFS, know something about the industry. If you know something about time travel -- then explore. If you know nothing about time travel, pass on the deal. See #3 above.
#5. Know where you are on the business cycle. Big commercial real estate developers used to say:
"When the dentists get in, get out.
When the insurance companies get out, get in."
Is the business cycle your pal or is it insurmountable? Are you a dentist?
Forgot who it was that I read years ago, when I was working for a family office group, but I remember the numbers being somewhere along the lines of more than 1,000 submissions ea year to his company, the vast majority filtered by his staff before being presented to him. Something like 16 deals a year that he personally reviewed. Said he seriously considered about two every three years. That comes down to 1 in 1500, and he had a staff of more than a dozen people working for him in various capacities.
Thus, your suggestion to align with some others makes a hell of a lot of sense to me.
Family offices can be their own VCs, but they have to commit resources and act like a VC not a family office. One LA Family office I know has been successful investing in startups. About a 50% hit rate they say. That's really good. Beneficial. The problem with family offices is they see it as a boutique investment, not a core strategy. They don't commit the time or resources to it and often outsource it to the "cool kid in the family" instead of a pro investor who has run the course a few times. Even then, pro investors might not be a fit.
Five thoughts acquired at full tuition:
#1 Before investing in anything, the wise investor has an answer to this question: "What percentage of these type of investments fail?"
In tech related VC or angel funded companies, that number is 80% and may be more as this slice of the market is woefully under reported. People do not take out full page ads to announce they have lost all their bait.
Do you have the money, the temperament, and the skill to get involved in an industry in which more than 80% of your investments are going in the shitter? Can you handle it if your first 8 investments self-immolate whilst you are waiting for the promised mythical winner that is going to bail you out?
#2. The second thing is to understand where your money sits on the cap table and in that world. Here's where the money comes from:
1. Bootstrapping
2. Friends and family
3. Angels
4. Organized angels -- a group of pooled angels with some infrastructure
5. Seed funds
6. Series A, B, C, D -- each of which have a different stage of growth
If you are an angel know you are slightly above friends & family, but below the professional investor class. You are nobody once the VCs get involved.
A lot of the seeming courage ballyhooed by big VCs is because they are using OPM.
#3. Be selective AF. Anything that spooks you -- say NO.
A quick NO is as useful as a quick YES from your perspective. Know what the red flags are from your perspective and follow them religiously. You will sleep better after a NO than a YES.
A deal that looks too good is often a pipedream.
#4. FFS, know something about the industry. If you know something about time travel -- then explore. If you know nothing about time travel, pass on the deal. See #3 above.
#5. Know where you are on the business cycle. Big commercial real estate developers used to say:
"When the dentists get in, get out.
When the insurance companies get out, get in."
Is the business cycle your pal or is it insurmountable? Are you a dentist?
Good luck.
JLM
www.themusingsofthebigredcar.com
Thank you, to both Jeffs, very informative.
Forgot who it was that I read years ago, when I was working for a family office group, but I remember the numbers being somewhere along the lines of more than 1,000 submissions ea year to his company, the vast majority filtered by his staff before being presented to him. Something like 16 deals a year that he personally reviewed. Said he seriously considered about two every three years. That comes down to 1 in 1500, and he had a staff of more than a dozen people working for him in various capacities.
Thus, your suggestion to align with some others makes a hell of a lot of sense to me.
Family offices can be their own VCs, but they have to commit resources and act like a VC not a family office. One LA Family office I know has been successful investing in startups. About a 50% hit rate they say. That's really good. Beneficial. The problem with family offices is they see it as a boutique investment, not a core strategy. They don't commit the time or resources to it and often outsource it to the "cool kid in the family" instead of a pro investor who has run the course a few times. Even then, pro investors might not be a fit.
Good for you "gumpa". Info packed post.