Over the last 10 years, I had been doing — or should I say dabbling in — angel investing. With time and some hard knocks, I ended up with a simple philosophy.
If I liked the founder(s) and thought they had the execution capability and they wanted me to invest, I would. It is hard to spend any meaningful amount of time on this when you have a full-time job — and I had what I call a more than a full-time job at Microsoft during this time. So, it was more like spending an hour or two with the founders and either you invest or you don’t.
A VC investment is a long-term relationship
When I joined Madrona Venture Group in November 2015, I was excited to spend more time digging into the new startups and possible investments that had taken so little of my time in the last ten years. I quickly learned that, far beyond the pure scale issue, there is a world of difference between angel investing and venture investing. It has been a fascinating learning experience so far, and I wanted to share some of my learnings and key take-aways that are specifically important for entrepreneurs as they think about growing their company and possibly seeking funding to accelerate their growth.
- Investing in a start-up as an angel investor is different than as a venture capitalist. There are a number of common attributes that you look for when you invest in a start-up – team, idea, execution capability, addressable market opportunity and the like. At the same time, some of the angel investments that I have made in the past aren’t necessarily the ones that I would make as a venture capitalist. One difference at the angel investment stage is that we are looking to find entrepreneurs and investment opportunities that will not only be great angel investments but have the potential to be great venture investments as well as big, lasting companies. But as an angel investor scaling to have a meaningful return can be a different equation than as a venture investor. For example, a $50M exit as an angel investor is exciting whereas that may not move the dial much for a venture fund that needs to return hundreds of millions of dollars to its investors.
- Every start-up is not necessarily right for VCs and not every VC is right for a start-up. There are many reasons why a particular VC may not be the right fit for a particular start-up and vice-versa. As an entrepreneur, do not take it personally or think you are going to be unsuccessful when a VC says “no”, though there is always value in trying to understand why someone doesn’t invest. As an entrepreneur you want to consider, do you want to build a business that you control solely, do you want to slowly and organically grow and/or do you want to stay small? If so, VC backing might not be a good fit. A VC investment is a long-term relationship, particularly with early stage VCs. Like any other relationship, having a high level of trust and comfort level, a strong alignment of vision and the willingness and ability to be open and respectful in working through disagreements and strategic misalignments are critical for a successful partnership. You want to feel that right off the bat with your investors because, at the end of the day, we are all on the same team focused on building a long-term, sustainable and successful business.
- Valuation is an art, not a science. On the one hand, valuation is very important and on the other hand it isn’t the most important thing. I like to say focus on the valuation but don’t fixate on it. There are many things that go in trying to determine the valuation including status of the product, customer engagement and traction, usage and adoption rates, revenue, track record of the founder, etc. The key thing to remember is that 100% of zero is still zero and likewise a smaller percentage of a ginormous pie is still very meaningful.
- Raise money from the “right” people for the “right” reasons. There is no fixed formula for when to raise money or how much to raise or at what valuation to raise. One principle that I like is “If the trajectory of the business is going to be significantly better with additional cash, by all means go raise the money.” When you think about which VC to partner with, money is important but is only part of the equation. The value that the partnership will bring to you (strategy, connections, mentorship, accessibility) is equally if not more important. For example, at Madrona, we invest a lot of time, thought and people resources in systematically helping our portfolio companies grow. This value-add is both at the company-specific level and across all our portfolio companies as we connect people and learnings across our portfolio.
- Time and money are equally important resources for a venture capital firm. From a venture capital perspective, the size of the investment does not necessarily dictate the amount of time they spend thinking about your business, but if this size is too small, it can discourage VCs from investing. For example if there is room for a 500K investment in a round, but the VC firm usually likes to invest at least $2-3 million in each company, the firm has to decide if it is going to devote the time and resources to an investment that feels smaller and likely has less ownership in a company. While money is a limiting factor for everyone, time is an equally important factor as VCs consider how they can best help all the companies in the portfolio.
As I think about these last few months – every interaction has been one of learning this new and somewhat different world – but what is consistent is the prevalence of cool and innovative technology, great businesses and excellent founders in our ecosystem here in the Seattle region. I’m excited to see where it will all go and remain optimistic about our future as a major tech hub of the world.