How I Invest

vc-chest-300x201I was speaking recently to the team at NuOrder, an LA-based company we’re an investor in about “realism in startups” — an impromptu talk I have given to any of our portfolio companies who ask.

During the Q&A I was asked about how I make investment decisions in early-stage businesses. I was asked again in an LP meeting later in the week and then again at a founder breakfast gathering we hosted yesterday. I answered in the same way I always do so I thought I’d just write it publicly.

“I fall in love.”

Yes. I know that sounds trite but it’s the best way I can describe my early-stage investments.

I fall in love with both the founders and the concept. If I don’t do both then it’s highly unlikely I will invest. I know now that investments will consume many hours including late nights / early mornings and weekends. I know there will be good times and bad. I know there will be victories, set-backs and even some fights.

How else can I begin this multi-year journey if I’m not in love?

Maybe some people can be dispassionate financial investors. I cannot. I spend hours thinking about the products, competitors, market opportunities, recruiting and financing of these businesses. I feel personally committed and engaged. I often form very close friendships with the teams — even if I know that I still have a fiduciary responsibility and at times could even be at odds with the economic interests of a team. But frankly, if you’re honest, that’s the same exact situation every CEO/Founder often has with all of their team members, too.

For the most part I think life is too short to work with people you don’t deeply respect, admire and like or on concepts you aren’t deeply passionate about.

As a starting point I have to believe the founder has the attributes of an entrepreneur that matter most to me: Tenacity, resiliency, inspiration, perspiration, attention-to-detail, competitiveness, decisiveness, risk tolerance and integrity.

I have to believe the founder is cost-focused, mission-driven and aligned on cultural values to me, which mostly relates to integrity and how to treat other people. I like over communicators who err on the side of transparency and candor. I need to know when we’re in tough times that we’re in it together, with mutual respect and trust in each other to be good actors.

Of course I also have to the concept. It’s not enough to love the founding team. I don’t pretend to have all the answers about what is the best type of investor or the best type of investments so please don’t take this as my saying this is how everybody should invest. But I have a strong preference for:

  • Non obvious ideas. Often as I describe to people privately why I invested the first reaction is not to immediately get it.
  • Reasonably technical concepts. At heart I’m still a tech nerd from childhood and I love to see how technology is changing business and society. I am much more attracted to technical product teams than to new business concepts or commerce types.
  • Innovator’s Dilemma. I love businesses that aim to massively reduce the costs of products or services in a way that makes a product or service vastly more accessibility and in which incumbents would have a hard time competing. I prefer to compete more with other startups than with giants.
  • Mission driven, commercially focused. I tend to love concepts where the founder is driven by a larger mission but understand the need to earn financial results to have an impact. I work with two companies that aim to change education but both are indirectly aiming to do so. When you talk with the founders privately the list this as their motivator. I work with a few computer vision companies. One believes it can predict certain diseases through observation even though this has nothing to do with the core mission of the company. The other is driven by the need to increase privacy in providing its service relative to competitors using cameras.
  • Early stage. I think I’m better at the product stage of a business and helping with strategy, marketing, pricing, feature sets and so forth than I am at evaluating later-stage businesses based on financial results and business metrics and priced accordingly. I know investors who are great at this (including several of my partners) — but that’s not me.

I have fallen in love several times in the past 2 years and in a strange set of circumstances most companies prefer to stay below the radar screen for much longer these days so most of them have not been announced. That’s hard, too, because when you’re passionate about companies and teams it’s hard to conceal it! But obviously I respect the wishes of those teams.

Anyway, since I’ve now been asked three times in the past week I thought I’d just write publicly what I often say privately. No magic. But hope it helps you think about how one investor approaches his job.

(Cross-posted @ Both Sides of the Table)

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2x startup Founder & CEO who has gone to the Dark Side of VC. His first company, BuildOnline was sold in 2005, his second, Koral was acquired by Salesforce.com and became known as Salesforce Content, while Mark served as VP Product Management. In 2007 Mark joined GRP Partners in 2007 as a General Partner.  He focuses on early-stage technology companies, usually looking at Series A investment, and blogs at the aptly titled Both Sides of the Table.