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.

 

  • martinowen

    I once had a student who tried to sell an innovative printer technology to Apple (in days before the introduction of the LaserWriter). It was based on lines. In 30 seconds Jobs walked around the prototype and said “we are investing in dots not lines”. A message for those with truly disruptive technology.

  • http://www.jasonwolfe.co.uk/ Jason Wolfe

    Interesting view on projecting an individual's history forward. Do you personally look only at “entrepreneurial” data points, or do you look at what an individual may have done in a corporate life? I only ask because I know that a corporate lifestyle can often mask some great talent (having a job and running your own business are hard things to compare).

    Also, unless you're aiming for your entire readership to pitch to you (and you alone), how much of this thinking would you say is shared by other VCs? You seem pretty enlightened to me. Is that common?

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

    Rational—maybe. Sometimes frustrates entrepreneurs.. you mean, always ;-)

    As with everything in this world there's pros & cons and I fear maybe if you're attempting to be a line between the dot some will call you out for being too meta. Maybe there's something here to separate the men from the boys as it were..

  • http://discourseandnotes.com Dan

    It's so refreshing to read a grown-up perspective in what increasingly seems like a childish atmosphere.

  • Susan Walter Sink

    Some marriages last a lifetime even as partners change. Having spent many years working for entrepreneurs in the software business and dealing with VC's in early stage companies, the best ones to work with always made a point of knowing the team and did quite a bit of mentoring along the way. They also made sure team members got additional training when they saw weak spots individually or collectively. The great VC's learn to teach along the way and it's a pleasure to work with them over many years in different companies and enjoy the benefit of a long relationship built on mutual trust. Unfortunately I've met my share of entrepreneurs and investors that share a common goal of getting to the money fast.

  • http://naamanetworks.com/ David Bloom

    Goes neatly with your previous post. Investors see one success- Groupon, 4SQ, AdMob, whatever. Dots. Then try to turn it into a line. I swear if I had a geo-targeted social local group buying ad network for moms I would have been funded months ago. Every dot probably has a grain of truth but to see where that truth lies- the line before the line is drawn- is the real trick.

  • damonoldcorn

    “But just remember that raising money is a bit like Ireland in the 90′s – no divorces allowed.” other than picking on a minnow like Ireland this is a really good post…… only kidding. Biased as we founded http://www.iibn.com LDN/NY/DUB a not for profit and boy are we needed at the moment.

    Luckily for us over the 20years we have always had to build relationships with potential investors over a longer period of time , their choice normally …but as you say when you hit the hard times and you always do over 5+yrs that will stand to you when dealing with it together. Guess though if you are offered money particularly in Europe and are not a rockstar entrepreneur ….you will still bite someones hand off.

  • http://arnoldwaldstein.com awaldstein

    Mark…I agree, but doesn't this in essence call for investing locally?

    Lots of work and time to connect in the flesh a bunch of times unless you are geographically adjacent. We get to know each other online but there is nothing like a glass of wine together to really know the person.

    You should consider a post on this.

  • http://hdemott.wordpress.com Harry DeMott

    It all depends on the velocity of data.

    In the public equity markets – there is a ton of data – not only are the companies producing it – but the market is opining minute by minute.

    No need to get married – a quick fling is available for everyone.

    Move down to the over the counter debt market – and you better know your hook-up a little better – because chances are he or she is spending the night – and may not leave for a few weeks – and maybe not in the same condition you found him or her.

    Get to your market and you are looking at a committed relationship. You need to know each others names, and feel good about co-habitating for a long time – even to the point where you are unlikely to hook up with anyone else that looks like the company you are in bed with.

    Seems like investors these days are treating marriages like they are disposable and non-exclusive.

    Founders may like this – as the courting is over quickly (and heck who doesn't like to be the center of attention – a wanted asset, etc…) but they better be happy doing this over and over again, because that's exactly where the great preponderance of them are heading.

    Maybe the new angels motto should be :”We're your friends with benefits!”

  • http://bothsidesofthetable.com msuster

    And the lesson is what exactly?

  • http://bothsidesofthetable.com msuster

    In normal times I think most investors prefer lines. In exuberant times they chase “hot dots” with hot being defined as good press, social proof and entrepreneurs whose last job was at the right place.

    Yes, I might look at previous history but actions at the startup speak louder than previous accomplishments at non startups IMO.

  • http://bothsidesofthetable.com msuster

    I don't follow. I don't think it takes a “man” to rush into a deal without knowing the entrepreneur or learning about how they make decisions.

  • http://bothsidesofthetable.com msuster

    this is great commentary and I totally agree. thank you.

  • http://bothsidesofthetable.com msuster

    I wrote both at the same time so maybe that's why ;-)

  • http://bothsidesofthetable.com msuster

    ha. I spent a lot of time in Ireland in the 90's as my first company was founded there. I was so surprised to learn about the divorce laws. I also lived in Italy. There you had to be separated for years before you could get divorced. So people did what people do – they still moved on and found new partners. They just lived without the protection of the law. Which I found strange as as society.

    Yes, I think there isn't enough startup money in Europe. Unfortunately. As a result it's probably also less frothy.

  • http://bothsidesofthetable.com msuster

    I always talk about the importance of investing locally. I have done 6 deals. 5 were in Southern California and 1 in NorCal. And the latter was an entrepreneur I funded in SoCal who moved!

  • http://bothsidesofthetable.com msuster

    LOL.

  • http://twitter.com/yesware Yesware

    The entrepreneur is the one who is most hurt by the “spray and pray” dot-style micro-VC funding that's getting attention these days. Doing a startup is tough, and early investors can be the difference between success and failure. No matter how much they Tweet about you, if investors are all about dropping checks and moving on, they aren't going to be much help with hiring, partnering or strategy. The more traditional, relationship-based approach you are advocating is more sustainable in the tough times. And there will be tough times.

  • http://www.kevinkruse.com Kevin Kruse

    “The best fertilizer is the farmer's own shadow.”

  • http://twitter.com/ebellity Emmanuel Bellity

    “Meet investors early” in your other post is actually what made me approach VCs a few weeks ago. It's not easy, it's like taking hits for the team, except the team (co-founders, users community and clients) are not really there yet. So you look like a naive alone entrepreneur and the only thing you can count on is coming back in 6 months looking better. Which is actually extra-motivation.

  • http://www.kevinkruse.com Kevin Kruse

    Think Mark's point of view is good, old-school wisdom. It's said entrepreneurs should get a bank loan BEFORE they need the money. Entrepreneurs can't think of funding as a one-off, or do-it-when-cash-is-out, it's constant. Always be courting bankers. Always be courting VCs/Angels. Don't expect good things when you have no relationships and 90 days of cash left.

  • http://markgslater.wordpress.com/ markslater

    great post. and an entrepreneur should seek exactly the same type of relationship.

  • philsugar

    It seems we have to go through this every ten years. I believe the reason is this:

    There is only one thing worse than a person with no experience.

    Its a person that's had only one great experience and thinks that is how the world works every time.

    Believe me when the chips are down you want somebody that has been there before.

    The worst person to have to deal with is somebody that's just been taught a lesson and just got punched right in their suck hole.

    They can't believe what just happened and flail around like a wounded animal.

    If your angels have never experienced a blowup, an asset sale, and a cram down….it is going to suck so bad if you're the one introducing them to that experience.

    Look I know everybody is 100% certain that their particular deal is going to work out (I am of my own) but in this case the stats don't lie, most will not so like all things you want to protect your downside.

  • http://www.canvera.com Dhiraj Kacker

    the post has been up for 8+ hours and am I the only one ROFL http://bit.ly/dnGtRM !!

  • Guest

    Is the company Hashable? :-)

  • http://twitter.com/aaroncray Aaron

    Cliff notes Suster:
    Suster to Entrepreneurs… I'm Looking for Some Man Dates: I'm not a ho but if you put enough effort into it and show me your a classy guy i'll put out :-)

  • Dwntwn1973

    Apparently it's that Apple wanted a dot matrix and not a graph plotter printer … ;-)

  • Dwntwn1973

    Apparently it's that Apple wanted a dot matrix and not a graph plotter printer … ;-)

  • http://www.yardley.ca/ gyardley

    Ha, that was my guess as well.

  • Fred H.

    Really terrific advice (as always), Mark. I also took the time to watch the WHOLE 2 hour video from your evening at Columbia. Reading what you write is helping me tremendously as I build our new venture. But, watching your presentation gave me a whole new appreciation for your wit/wisdom. Thank you. Truly.

  • Russ Dollinger

    Excellent as usual; masters make it look easy.

  • http://about.me/nukegold Nuke Goldstein

    How about a gut-feeling based investment? Did you ever meet a team or saw a technology with only a dot or a very short line and just say “Fuck it” I'm in? (http://www.youtube.com/watch?v=yQXKOxGhMuA)

  • http://twitter.com/BrowseMob Matthew Hurewitz

    This is exactly how I'm finding my experience(s). We've found the B2B sales cycle with larger companies takes FOREVER. While we're working on setting up a pilot program with an apparel company, we've begun private beta (for user feedback and sample data point for ROI projections). At first, we didn't want users without a pilot program in place. But, being able to go back to customers / advisors / investors with a graphical representation of what we've learned from people using our product definitely has a positive slope. By the way, creating a nice line is also an effective way to manage the startup to-do list.

    Shameless plug for private beta Browsemob.com invite code “GAPONLINE”.

  • Dave W Baldwin

    Good response. Caught up with an interested Angel who is trying to sort some of his current losses hoping to get down to the deal in near future. Somewhere, when I reminded him of my turning down money when I realized someone was too heavy into Real Estate and so on, followed by the only team you can have is the right founders matched to investors who have a comfort level. People appreciate honesty and being straight up.

    Do like the 'flail' metaphor.

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

    Sounds like the pendulum swinging. For the longest time, VCs were at a disproportionate advantage going into the relationship, it was like they were the one bachelor and they got to pick the bachelorette amongst dozens, and entrepreneurs would kick, claw and do whatever it took to get the VC to give them the rose. Now things have swung the other way, where entrepreneurs are holding the roses and investors are kick, clawing and doing whatever it takes to be chosen. However, I think this is where your marriage analogy kicks in – most enduring and successful relationships to me are founded on mutual attraction. The girl who has had men tripping over themselves to be at her side probably isn't as mentally committed to a guy because she doesn't have to work much for it nor does she appreciate what she has (and of course vice versa). But in a relationship where there is a stronger foundation built on mutual trust, respect, admiration and desire, well, that will stand a much better chance of going the distance. So hopefully we'll soon end up somewhere in between, where neither side is the other side's bitch, and we can all just focus on building real businesses.

  • philsugar

    No matter what anybody says nobody is good at losing money. Nobody truly embraces sunk cost.

    You can only strive to be less bad…you can try to control your emotions through knowledge and experience but nobody is totally truly dis-passionate, to be so would be a horrible fate.

    If you are investing with no due diligence without regard for valuation you will have loses and its obvious you are oblivious to the pain of these loses.

    The best you can hope for on the company side is the investor has been so successful in the past that they'll simply write you off with disgust because their time is so valuable going forward and they have other things to do rather than deal with your shit.

    As I said the worst that can happen on the company side is you have a crazed lunatic that prevents you from moving forward in all sorts of unimaginable ways. I've seen it all….calling your employees, customers, investors, and potential partners…….. trying to change management, trying to hold up any deal unless they get super special terms. I guess the marriage example holds true here…..you can have a crazy ex that becomes hell bent on destruction, your mutual friends will do the only sane thing…….distance themselves from the situation because they know when the shit bomb goes off the don't want to be anywhere near.

    Again on the two fringes (super success, and extreme failure) it doesn't really matter much, but no, its not different this time most deals are in the middle.

  • http://www.victusspiritus.com/ Mark Essel

    I enjoyed this post for the external perspective. From a first hand point of view learning feels like a continual upward trend, but current success is anything but consistent.

    The relevant perceived value of a team fluctuates. Early prototypes are discarded after failing to show much promise. Early team members move one, new partners appear. What can you do but refocus, review best prospects, and build again.

    The most inspirational folks I know don't pause too long, they keep building and leave judgment to potential customers/users. Only when something shows signs of adoption is it worth reviewing more carefully and iterating. Hearing “X frustrates me, can you make it do Y” from several alpha testers is one signal.

  • Travis

    Mark,

    I'd love to hear more insights as to how this relates to Angels and company's raising seed rounds. It seems that Angels would have different criteria for their “lines” that may simply constitute “dots” to a VC like GRP.

    For example, my startup has made some great progress in the last couple months getting our product together and streamlining our future plans, business model, revenue streams, etc. We're planning our private beta soon and looking to raise a seed round. In my opinion, this is the perfect time to introduce ourselves to VCs so they can plot our first “dot” so we can build that relationship for our Series A.

    But I'm interested in how you see this process from an Angel perspective. Do you think Angels are more apt to invest in “dots”? Obviously in our current environment it's happening a lot, but is it that way historically also?

    Thanks for the great information!

  • Joshua Hays

    How to you establish these relationships if they are “long-distance relationships”? My startup is in Central Florida, where not much but Mickey Mouse goes on. How would I find you (or someone like you), introduce myself, and show that I want to form a meaningful relationship? Great article by the way! :)

  • Scott Morrow

    I think the logic, which I hear a lot from “entrepreneurs”, is that for truly disruptive technologies you can't demonstrate “lines” or trends in a nice neat package the way Mark describes in his post. (Note: I don't think this sentiment is actually what Mark was suggesting in his post–it's not necessarily linear progress he's looking for but rather “progress” over a period of time across a number of important areas–product, customers, team, etc.) Rather, the change in these disruptive businesses is dramatic and marked by a step function of progress at some unforeseeable point in time. The logic is you can't really map out or plan for success with such endeavors and, therefore, line-oriented progress, and the measurement thereof, is unrealistic and futile.

    This line of thinking drives me nuts! It think it's such a cop out to say you can't make measurable progress even when pursuing disruptive technologies/businesses. Sure, the actual “tipping point” for ground breaking businesses feels dramatic when it occurs but if you track the events and steps leading up to that point in companies such as Twitter, Quora, Mint, etc it's clear that success didn't truly happen over night. Rather, these businesses made a series of product, technology, business development, and personnel steps in the right direction which culminated in the change that's deemed ground breaking.

    Granted, I am a self-described operator who finds comfort and satisfaction in well defined business models and tracking measured progress of key metrics towards well articulated stretch goals. I embrace at a fundamental level the “line” way of thinking. I realize that some people may view this as myopic thinking for an early-stage start-up. That somehow this approach and mindset is limiting and lacking creativity. I disagree. Good businesses are built and based on sound operational principles and the best entrepreneurs are those who know how to mesh their big picture thinking within an operational paradigm.

    Great post, Mark. I think this is one of your best of the year.

  • Dave W Baldwin

    Yeah, we also had a laugh over something I sent to him back in the Summer…regarding some Aquisition where the ownership of all the players was listed…none of it made any sense, especially for those that were the seed vs. Series A or B. Talk about sloppy.

    He likes me because I don't bullshit. So, we'll just need to see when his comfort level is coming back into view.

  • http://twitter.com/lushfun crimson

    I have to move fast to make a dot. The frenzy of irrationality is simmering perhaps it will boil more soon and then…

  • philsugar

    I have never taken Angel money or made an Angel investment (I have invested in companies that I actively was involved in, but that is not being an Angel) because I don't think I could handle either.

  • Dan Levitan

    Great post Mark! Successful entrepreneur/VC relationships require time and alignment. You've captured it very well here.

  • http://www.JamesSiminoff.com Siminoff

    Great post Mark! It is funny when people say they can not believe how quickly we did the Unsubscribe round they overlook the fact that I have been laying almost 10 years of ground work or what you call a line. Sure our round took a few days from open to term sheet but that was because I had spent years with Saar, Josh, Scott, etc. building the relationship and showing them what myself and team were capable of.

    It is one thing I love that Jason Calacanis always says something like “another overnight success X years in the making”

  • Glennesmith

    akin to love at first sight. It happens but it's not the norm.

  • http://twitter.com/JulesMaltz Jules Maltz

    Great post Mark. I got excited when I read the title – I was hoping it would be about Flatland (one of my favorite books) – http://en.wikipedia.org/wiki/Flatland

    I like how you mention that some people's dots are other people's lines. Good reason to get there early.

  • http://keithbnowak.com/ Keith B. Nowak

    Can an entrepreneur be too early in initiating speaking with an investor? My experience gels exactly with your advice of basically building relationships with investors by showing progress over time. However, can you start this process too early? I've heard other investors advocate only starting to talk to investors once you are ready to raise money and that an early view without traction may lead to a “bad taste” in their mouths that they cannot get rid of later.

  • Dave W Baldwin

    You're right, it is a big responsibility.

    Didn't mean to come off as if I was soliciting…wasn't. Just liked your post.

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

    Love this post! As an entrepreneur new to the NYC tech scene, I am blown away by the funding frenzie. From other startups I speak with, I'm hearing about a great deal of companies getting funded with no real proof of concept or traction, but tons of hype. If funding is the ultimate commitment of marriage, your ideal partner (VC or Angel) should be individuals that understand you and can serve your needs long term, not just what sounds good now (cash money).
    Mark, I'll be in LA for 10 days I'd love to get my first date/dot. I'll bring cupcakes, don't worry no coffee!.
    Either way brilliant post! :)