Invest in Lines, not Dots

Posted on Nov 15, 2010 | 85 comments


Everyone seems to be in such a rush to get shacked up these days.

In normal times investors will look for “traction” before investing.  We want to make sure we’re in love.  This sometimes frustrates entrepreneurs who just want to “get back to running the business.”  But if you understand it you’ll see that it is perfectly rational and it should also influence how you form relationships with investors.  And remember, if we get married you’re stuck with us, too.The first time I meet you, you are a single data point.  A dot.  I have no reference point from which to judge whether you were higher on the y-axis 3 months ago or lower.  Because I have no observation points from the past, I have no sense for where you will be in the future.  Thus, it is very hard to make a commitment to fund you.

For this reason I tell entrepreneurs the following: Meet your potential investors early.  Tell them you’re not raising money yet but that you will be in the next 6 months or so.  Tell them you really like them so you want them to have an early view (which is what all investor’s want).  When you’re with them lower the bar by telling them, “we haven’t shipped product yet, we have lots of decisions still to make, but we’d like to show you our prototype” or obviously if you’re more advanced show what you have and what your roadmap looks like.

Most importantly tell them what you plan to achieve by the next time you see them.  Hopefully by then you’ve made good progress.  You’ll be able to give them an update on key hires, pilot customers, key tech innovations – whatever.  Keep these interactions low-key and short.  Quick coffees, whatever.  Swing by their offices to make it easy for them to say yes and promise not to take up more than 30 minutes for the update (and stick to it).

I spoke about this more in depth in these two posts: 4 things I look for in an investment & how to manage VC relationships.  And don’t allocate two months of each year to “hardcore funding activities” but allocate a regular amount of time each month to it like any other job function.  Like it or not – finance is a major job function in any company – startup or public company.

The thing is, by the time I get to know you I start to see patterns.  Note that “performance” on my chart is a loose term for my definition of perceived progress that can take the form of product, customer adoption, employees, investors, press or whatever.  It is basically a perception that you are making progress in your business and not standing still.

All of these meetings don’t actually require you to prove that you’re “killing it” over night.  It’s a chance for us to build a relationship and for the investor to see how you think and how you respond to adversity.  How can you prove tenacity, resiliency or ability to pivot in a single data point?  I funded Ad.ly having seen Sean Rad perform over a 1-year period at Orgoo, which didn’t succeed.  I didn’t invest in Orgoo but by the time he launched Ad.ly I knew his capabilities and knew I wanted to work with him.

I had 15 meetings or more with Evan Rifkin over a 2-year period of time long before I invested in Burstly. In fact, long before he had even founded Burstly.  I knew he was one of the most talented entrepreneurs in LA and he has exceeded my expectations since I invested.  Presumably during this interactions Evan also decided I wasn’t a Dick so the meetings cut both ways.

I spent the past week in New York.  The profile of one of the hottest companies I met was as per the graph below.

The deal is moving a bit too fast for me and is becoming frenzied with interest.  But I really think this company has a good shot at becoming a monster.  It’s a killer CEO, great product, market ripe for disruption, experienced product team and great CMO who has relevant experience from her former life.  I’ve been watching from the sidelines for 6 months and waiting to meet the team.  Given a few more data points I would have liked to have invested but given the market speed it looks unlikely.

So here’s the thing:

  • Investors – The market is moving uber fast on deals.  Investors are writing checks for dots.  This is happening with both angels and VCs.  If you invest in dots don’t be surprised when the trend isn’t in the direction you would have hoped.  Pattern recognition requires a pattern.  Dots produce bubbles.  And some argue that bubbles have positive externalities for entrepreneurs - maybe.  But many bubbles wreak more havoc than positive effects.  And those of us who have lived through the past 2 funding bubbles saw all this at close range.  And many I’m having the debate with are on their first time around.
  • Lines vs. Dots – Over on HackerNews somebody cleverly wrote, “Surely someone will invest in the ‘dot’ and he’ll miss the chance. He seems to assume there is no competition. Or maybe what is a dot to him was already a line to someone else (because they met earlier)” – this is my point exactly.  If you’re an investor looking at dots somebody else may be looking at lines.  Meet entrepreneurs early and watch how they perform – maybe even at their previous startup.  I always ask to meet people before they’re officially fund raising – well before actually.  It helps me spot patterns.
  • Entrepreneurs – you might be pumped up with that super quick round done at a high price.  But just remember that raising money is a bit like Ireland in the 90′s – no divorces allowed.  I know VCs and sophisticated angels can be difficult, slow and price sensitive, but I also know that in tough times unsophisticated investors can be a right pain in the arse.  For some companies – they become deal breakers on further funding rounds.  By definition if somebody is investing in you as a dot (limited thought, limited due diligence, maximum price) they are a dot to you, too.  You can’t really know them in 2 minutes yet you’re letting them own part of your business.

And we all know how Vegas weddings turn out.

 

  • http://bothsidesofthetable.com msuster

    Thank you, Scott. You're right. I'm not talking about demonstrable progress in customer numbers or revenue per se. I'm talking about enough data points to know you. 3 of my deals in the past year were pre-product launch. So by definition I was judging different data points.

  • http://bothsidesofthetable.com msuster

    One of my favorite lines in one of the most classic movies. And sometimes I feel like that in investments. But I usually follow it up by spending a bunch of time together. Love, but verify …

  • http://bothsidesofthetable.com msuster

    Oooh. I like that line. I might steal it!

  • http://bothsidesofthetable.com msuster

    hear, hear

  • http://bothsidesofthetable.com msuster

    Trust me – it is the improvements in team, concept & product that get people excited.

  • http://bothsidesofthetable.com msuster

    I guess like everything in life – most people need to learn it for themselves. Unfortunately.

  • http://bothsidesofthetable.com msuster

    ;-)

  • http://bothsidesofthetable.com msuster

    LOL. Sorta. But I'm selective.

  • http://bothsidesofthetable.com msuster

    Thank you for the feedback. Very kind and appreciated.

  • http://bothsidesofthetable.com msuster

    didn't see a user name. Is that the password?

  • http://bothsidesofthetable.com msuster

    Yes, and good analogy. And how 'bout Vick!

  • http://bothsidesofthetable.com msuster

    I think many angels will do dots – especially in November 2010 and especially once you have your “anchor” angel that provides “social proof.” But that doesn't make it good. As an angel I still prefer lines.

  • http://bothsidesofthetable.com msuster

    Unfortunately it's hard because most early investing is local for all the reasons I describe PLUS once they invest they want to be near you. It sucks, but it is so.

  • http://bothsidesofthetable.com msuster

    Thank you, Dan. And VC-to-VC relationships and trust also take time. I'm learning that, too. The people I work with the most have done 2-3 deals with me and we tend to see each other or speak on the phone often. And as I told you when I last saw you, I've also discovered the “sharp elbow” of others. I'm learning.

  • http://bothsidesofthetable.com msuster

    Exactly, exactly, exactly. That, and you have a killer team! ;-)

  • http://bothsidesofthetable.com msuster

    Hmm. I'll have to check it out. From the wiki article it seems quite abstract, no?

  • http://bothsidesofthetable.com msuster

    Many people believe what you say. I'm not one of them. The key to me is lowering the bar, keeping the meeting casual and focusing on the relationship.

  • http://bothsidesofthetable.com msuster

    shame I missed you – I was just in NY! I'm back in December – maybe then. Dance card in LA pretty full rest of 2010. Stay in touch.

  • http://www.twitter.com/biggiesu Mike Su

    Holy cow that was a fun game. In hindsight it's truly the perfect environment for him – finally has a steady coach, real receivers, patience in the pocket, and maturity. Oh, and he still has those legs and that cannon of an arm. He must have chucked that first pass 87 of the 88 yards!! The Philly in me doesn't want to get too excited, but HOLY CRAP I'M EXCITED!!!! :D

  • martinowen

    Sorry Mark, it was feeble attempt at a play on words – a joke if you will. Ahem…win a few lose a few.

    See Dwntwn1973 for explanation

  • philsugar

    No, not at all…I was simply pointing out that I've never done either. So I've only been an interested observer. You are right on the money it is a big responsibility and one that should not be taken lightly. People are treating it like a one night stand, but the fact is you are going to be saddled up with this person for a long time through good times and bad.

    All I'm saying is there have been a handful of situations where I've been asked to acquire an angel backed company that wasn't living up to expectations, not failing, but not doing well. I will give you that means I've only seen the negative selection, that is where my comments come from.

  • Dave W Baldwin

    Thanks. To avoid that, I'm trying to find comfort levels in building the right combo of anchor and syndicate.

    Luckily, the fellow I referred to has agriculture in his background like myself….meaning both sides understand the risk/reward scenario…and as you allude, you have to keep the shared risk issues in mind and then be able to refer to them in a mature manner.

  • http://twitter.com/weddingPRkellee Kellee Khalil

    Sounds good! :)

  • http://twitter.com/kidzmet Kidzmet

    Do you recommend initiating the courtship process pre-revenue? What about after the company has taken the initial alpha analytics data points/focus group data and morphed into a business model with the same customers? Should we reconnect with angels that had expressed interest in the initial model even though the new approach is markedly different–or initiate meetings with a different set of angels?

  • JimChiang

    Agreed – VC fund raising should be considered a dating game, which is what it is. It's not a quick transaction.

    Jim
    http://www.neocontext.com
    Blog at: http://blog.neocontext.com

  • http://twitter.com/AbsoluteBrand AbsoluteBrand

    Great read Mark!

    My business mentor once said, “it's easy to get caught up in the honeymoon, but oh so difficult to get through the divorce.” Oh course he was referring to business not marriage. Or was he?

    Thanks again,
    sound advice

  • Saul_Lieberman

    Hmmm… Ad.ly, Burstly… it might not hurt to add “ly” to the name of your startup.

  • http://bothsidesofthetable.com msuster

    as early as possible.

  • http://bothsidesofthetable.com msuster

    ha. i told both of them not to do it … shows that they don't listen to me! ;-)

  • tbiz

    That's kind of what I expected, thanks for the reply.

  • Jeff Lunsford

    Well put. Same principles apply in M&A…

  • http://twitter.com/footballutd footballutd

    Wrong account!

  • http://twitter.com/srhas Sam H

    Don’t make printers that take 30 seconds to walk round

  • http://twitter.com/davestone Dave Stone

    Wasn't trying to imply rushing into a deal takes a man, more the understanding of it all :-)

    Indeed many a story has been told against rushing, usually involving an older & a younger bull O.o

  • http://www.stealthmode.com hardaway

    Because I always play with my own money, I can't invest in dots. I'd be in the poor house. And I am getting resentful at entrepreneurs who think they are so hot that I should hurry to risk my money on them. It's MY money, I made it, and I don't really want to lose it if I don't have to. Even if it means I lose out on some things.

    But I'm a woman. I'm older, and perhaps that's why I have the philosophy I do. Glad to see I am not entirely alone.

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