“I remember Ron [Conway] came over to me one day. I was looking at a business deal. He said, “What are you looking at?” I said, “I’m looking at all these numbers.” He basically picked up the plan, tore the numbers off the back, threw them in garbage can, and said, “I never waste time with numbers.” – Bob Bozeman
This one quote says it all, entrepreneurs slave over a business model that one investor says is required only to hand it over to the next investor, who heaves it into the compost bin. After getting involved with the Seattle Angel Conference I quickly realized there was a gap in the learning process for new angel investors and entrepreneurs raising money. The gap wasn’t around what the right terms were or what should be in a pitch deck. There are countless websites, investors, consultants, and advisors itching to help entrepreneurs and investors with the basics of startup finance. Books from authorities like Dan Shapiro’s Hot Seat< and Jason Mendelson and Brad Feld’s Venture Deals are both designed to do just that for entrepreneurs and angel investors. Great forums like the WTIA’s First Look Forum help entrepreneurs prepare their business to present to investors and let investors get an early peek at the next wave of innovators.
What I kept finding was missing was more insight into the different personalities and approaches to early stage finance. There was no mental model for the types of investors that are out there with an interest in early stage finance. As I struggled to help new entrepreneurs and investors identify the different types of investors so they could focus on the type of investor that would help them be successful, I found a scarcity of resources. I kept asking other investors who always quoted some news story they read about an investor and they’d claim that was why they took that approach. I’d ask entrepreneurs how they picked investors to approach and it was by recommendation or practically random in most cases.
I kept thinking to myself, if the Northwest startup ecosystem is going to continue to grow, the money that the startup ecosystem is creating has to get recycled at some point or else the system just breaks down. Whether that be through successful entrepreneurs re-investing in the ecosystem, successful investors, or even successful members of the tech industry who’s benefiting from the innovation being unleashed by early stage companies.
It may not be obvious at this point, but I’m better with story than code, so opted to approach the problem by interviewing as many successful angel investors as I could talk into speaking with me and writing a book on what I learned. Wow! What I found was a treasure trove of advice and some pretty obvious differences in investing styles that can be fairly easily categorized into more of a momentum or trend investment style and a value or metrics investment style. There’s also a group I bundle together as alternative investment styles as they fall outside the norm, but are taking innovative approaches and having success.
So how do we build and find more wild successes like Zillow, Tableau, Juno, and Concur? Here’s a basic framework for investors and entrepreneurs to use to think about the types of investors.
- Momentum or trend investor – investing in the next wave of innovation and picking the best entrepreneurs to succeed if that next wave becomes the standard. You might be picking the right company to win at wireless power or the at-home robot-assistant market. Big ideas, new innovations, not a lot of traction.
- Value or metrics investor – investing in great operators with a clear path of past execution and numbers to prove it. We’re not talking discounted cash flows here, but we are talking about 12-18 months of operating history. You’ll likely not be the first money into the company, someone else already did the heavy lifting there whether it be the entrepreneur or another investor. You may be investing after the momentum or trend investors, or you may miss those deals because they go so fast.
- Alternative investor – investing with different approaches than the mainstream investors. Using techniques such as revenue redemption, share buybacks, purely online deal discovery and investment, and so on. You may be investing for profit and impact, you may be investing purely as an LP for a local angel or venture fund, or you may be investing syndicated transactions for deals around the world.
All of these approaches to investing can yield great success and there’s definitely some differences within each of the three categories. Use this tool to help you refine the investors you’re approaching, are they even likely to care about your business? Use this tool to help you become a better investor, do you have investors that demonstrate the type of investor you want to be that you can learn from?
Are you an entrepreneur or do you know someone who is?