On this episode of The Full Ratchet Nick covers the first element of Best Practices for Seed & Angel Investing. This series will be covered in five sections from before you begin until you are managing an active portfolio. These sections include:
- Before you begin… An Overview of Seed Investing
- Developing an Angel Investor Strategy
- Finding startups to invest in: Deal-flow
- Evaluation & picking startups
- Structuring the Deal & Terms
Today we will cover the first item, and we will address the remaining sections in coming episodes.
With that said, let’s launch in…
Welcome everyone to the Full Ratchet episode 22. Very happy to have you listen as today is a unique episode where I’ll be covering part one of Best Practices for angel and seed-stage investing. A lot of you in the audience have recently reached out to me about this subject and I appreciate the e-mails. Absolutely keep them coming… it’s great for me to hear what topics you want covered and what provides the most value.
The best practices that I will review today are an aggregate from the Full Ratchet interviews as well as a breadth of content that I’ve absorbed over the past few years. I’ve chosen to focus on the experts viewpoints and not that of my own, but I will share my perspective where appropriate. I have some experience with a range of these items, but there are some that I don’t and in that case, I will include the best practices that are most often promoted by those with breadth and depth of experience. For those loyal listeners, some of this will be review, but trust that there is new material as well.
Section 1: Before you begin… an Overview of Seed Investing / “What game are we playing?”
- What is “Seed?”
- Success Rate
- Speed & The Fast No
- Consensus vs Black-swans
- The Role of Angels
Many investors will talk about how they pick from the gut. That ultimately, you have to trust your gut when picking. If you’ve read Malcolm Gladwell’s book, Outliers, he talks about factors that contribute to high levels of success. In another of his books, Blink, he discusses the ability for experts with deep domain expertise, to make immediate decisions or assessments without spending time thinking about those decisions. One of the key takeaways from Gladwell’s works is that it takes time, immersion, study and a lot of practice to become great at anything. Sort of the 10,000 hours rule. He talks about how the Beatles spent years and years playing music together in mediocrity before they began releasing the albums that we all know so well today. He also outlines a situation in Blink, where a statue, that passed all tests of authenticity, was immediately identified as counterfeit by an expert… without any specific reason as to why it was fake.
And from my own experiences, a friend of mine talks about the thousands of deals his seen in our angel group and how evaluating each of these deals has made him tremendously faster and more confident with his decisions. So you will find that experienced angels and Venture Capitalists that have exceeded the 10,000 hours, maybe multiple times over, are able to make fast decisions b/c much of this analysis is built-in. They don’t have to consiously walk-through each evaluation item… it becomes second-nature. Doesn’t mean that their evaluation process is going to produce great outcomes, it just means they can do it more efficiently. So the reason I call attention to this is because choosing from the gut is certainly a viable approach, if you’ve seen thousands of deals. If you are like me, the more prudent approach is to learn the best practices and key evaluation criteria and put them into practice. Will I arrive at the point where I can make gut calls on the non-obvious NOs ?…. I hope so. But until then, I owe it to myself, the startups I invest in, and my co-investors to due my homework and make decisions without reservation.