On this special segment of the Full Ratchet, the following
investors are featured:
Each investor describes their investment thesis and
how they evaluate startups for investment.
Nick: So for this installment of My Venture Strategy, we have Troy Henikoff. Troy, in addition to running TechStars, I know you’re a venture investor yourself. If you had to sum up your early stage investment strategy or philosophy, how would you describe it and how it is unique or differentiated from other venture investors?
Troy: Yeah, so many people look at a particular vertical. Healthcare is hot. Obamacare, I want to go after healthcare companies. Or they talk about horizontal platforms. Oyo know, software’s a service where it’s at. Or mobile first is where it’s at. In my experience, when we’re dealing with these very early stage companies, there’s one thing that stands out for me above all others in correlation with success. And it sounds ridiculous when I say it out loud, but it is the companies that have an ability to focus on customer acquisition. And understand the process of acquiring and retaining customers. So many times, I see entrepreneurs who are smart, who know their industry, know their niche, have the technical capability to produce a product. They show it to me, it’s on their smartphone. It’s on their computer. It’s awesome! And they’ve no idea what a channel strategy is, customer acquisition, how to get and retain customers and they’re gonna fail most of the time. And so I look for the businesses that that think about this not as a cool technology, but think about this as a customer’s problem that they’re solving and have a way to reach those customers and acquire them and retain them. Those are the ones that are gonna win.
Nick: On today’s special segment, we have Gil Penchina. Gil, can you talk about how you evaluate and select early stage startups, and how that may be unique from other venture investors?
Gil: I think everyone looks at it the same way, so I’m not sure we’re particularly novel in how we evaluate deals. What we do is we evaluate the team and we evaluate the product and we look at how big the market is and the market opportunity, and we look at how they’re doing. These are all, actually really incredibly boring, predictable ways of doing it. I think the only thing we do that’s different is we’re a big faster and we try to do as much of it as we can by email so that you, the entrepreneur, aren’t sucked into a whole series of meetings with the hangers on and associates and partners and sometimes these things can drag out for months. And we tend to try to move a little faster.
Nick: You’d done investments at seed, A, and B. Does the importance of either of those three branches change as you move throughout the fundraising cycle?
Gil: Definitely. You think about it, in the very early stage, before there’s a product, all you’ve got to go on is who’s the team and what’s the idea and what’s the market. As it gets traction, products and product market fit clearly are credibly important. And then as it grows, eventually—Fastly, which is a company has grown and now raised fifty-three million dollars and as you start getting the guys who write the bigger, later stage checks, they’re all finance guys. They don’t even look at the product. They’re just crunching spreadsheet after spreadsheet after spreadsheet trying to say “What’s this gonna look like in the public markets?”
Nick: For this installment of venture investor strategy, we have Jerry Neumann. Jerry, can you talk about how you select early stage startups within your sector, and how that may be unique from other venture investors?
Jerry: You know, I like to say that I am a team investor, that I invest in people. I think, when you meet a team, you can really tell if they know what they’re doing or not. They really understand the sector really well. Do they talk to people in the sector, do they know people in the sector, do they understand their customers’ pains very well—can they do something interesting technologically? Do they understand where the competitors are? All these things, right. You talk to people and you can figure it out from the people whether they’re really on top of their market. And my best investments have always been the ones where I was most impressed with the team, really from the first meeting.
I don’t think that makes me different from other investors. I think the thing that may make me a little different is event though I’m a team investor—people always say they’re either a team investor or a product investor or a market investor—I think you need to be all three. I think there are enough companies starting out there where you can invest in a great team with a great product in a great market. Being only one of them? Doesn’t make sense to be only one of them. There’s so much deal flow out there now, you can find a company which you think is tops in all three.
Nick: When you look at your portfolio, retrospectively, do you find that some of the big successes have been the unusually strong teams?
Jerry: Oh, yeah. I—well, look, I mean, that’s like saying “Which of your children is best looking?” I only invest in companies where I think they have strong teams. I think the ones that have been disappointments are the ones where I was wrong. So, in a couple of case, you think that team is really strong and they have a weakness which you’re pretty sure—it might be a weakness, it’s a red flag. And they’re gonna overcome it. And then you realize that maybe you’re a bit optimistic on overcoming that red flag.
So some things like—I won’t invest in single person startups anymore. There were times—and I’m early stage, so usually invest in two people and an idea. Single person startups, the red flag is can this person actually convince anybody to work with them? There are no one person billion dollar companies. You know, one of the primary jobs of the founder is to hire people who are hopefully even smarter than they are to build a great company. And so can they? And single person companies, well, the red flag is you don’t know. You just don’t know. And I’ve made that mistake a couple of times in my career, where you back the single person founder and then they just can’t hire people. They can’t convince people to join them. And it’s—you know, it becomes a problem.
The team is awesome but you need to make sure you’re actually sticking to your principals when you do it. It’s easy when you’re optimistic to say “You know, it’s perfect but there’s this one red flag and I’ll just ignore it” but I think that’s come back to bit me a lot of times.