Investor Stories 13: Why I Passed (Wilson, Carter, Ahmad)

*Please excuse any errors in the below transcript

Nick: On our special segment investing series today, we have Joanne Wilson. Joanne, can you tell us a story of a startup you chose not to invest in, why it was that you passed, and if there was a key learning that now informs your approach?
Joanne: I wish I could say there’s one that “Damn, I’m sorry I missed on that one.” I don’t know, but there’s one at the very beginning when I started this, I had the ability to invest in one company that actually become really big. And it was a note, and I thought they should be doing equity. I didn’t believe in the note. But then I learned, wait a second, everyone does notes in this angel investing stuff. So that was a lesson learned. But in general, I meet so many different entrepreneurs every day, and sometimes people come in and talk to me and I think “Wow, great business! Too bad it’s yours.”
Nick: Wow…
Joanne: And so, you know, and other times people come in and I go “Wow, you’re fricken amazing. This is such an awful business.” So…you know, I do think that the lessons have been where wrong decisions have been made in the companies, or companies have closed… How to keep the door open has really been a learning lesson for me and entrepreneurs… You know, in general, every day’s a learning lesson. And there’s no real in particular great story except the one person where I may want the money back. But, in general, you know I feel like all these entrepreneurs that I’ve invested in are an extension of my family, and all I want to do is see them have success at the level they want to see their success at. And some are bigger, and some are smaller.
Nick: Sort of a shame when that business founder fit or that product found fit just isn’t there.
Joanne: It is, but you know, you hear less about that but there’s more of that than there is success stories.

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Nick: On today’s special segment, we have Jeffrey Carter. Jeffrey, can you tell us a story about a startup that you chose not to invest in, why is was that you passed, and if there was a key learning that now informs your approach?Jeffrey: There’s one I passed on that I really wish I would’ve written a check for. My reason for passing was probably not a good reason, and the startup is FarmLogs. Came through HPA, I had a chance to write a check, and I’m trying to raise a fund. I’m raising a fund with West Loop Ventures, and so I wanted to differentiate myself form the group, make sure that I had enough outside deals that weren’t group deals. And so I passed. It was a great company, I knew the space really well. I think the future of the company is bigger than what they’re letting on right now. So that’s one I passed on that I really wish I would’ve done. And that was a Y Combinator company as well.There’s some that I passed on and I glad I passed because either the companies failed or they just haven’t really gone anywhere. I think the ones that I pass on, usually they have to do with the fact that I don’t think the founder can sell or build a team, or the company feels that it’s solving too small of a problem. It doesn’t feel like it can get big so it’s sort of restricted by the vision or the parameters that people set up.And sometimes the other reason that I would pass is I like to have a relationship with the founders. I don’t mind if they disagree with me at all. In fact, sometimes it’s healthy. But I think in many cases, they’re just so averse to considering any other viewpoint. They’re not what’s called coachable. And so if you can’t work with a founder, it doesn’t behoove you to invest at a seed level, because it’s just gonna be a rocky relationship no matter how good the company every becomes.The other reason that I passed—I passed on some deals that I thought were some absolutely spectacular deals, and I’ve passed because of the valuation or the structure of the deal. And in some cases, although this has changed for me, in the first few years, when I was investing, I would only invest in the Midwest because I wanted to invest close to me. And now that’s not necessarily true. So I invested in a company in Toronto last year, getvideostream.com. If you have an Android phone with Chromecast, it’s amazing product, amazing team.I passed on a deal out of Auburn, California. They were raising their early stage round. Great team, great products, I really loved everything about it, except it was in Auburn, California, so I passed. A year later, the same entrepreneur came back to be and said “I would love to have you in this deal. Do you want to get in?” I said “I really do,” but the price was significantly higher, and I still got in. I got in, I didn’t the deal. And that company is Riskalyze, and he’s blowing the doors off everything. He’s a great entrepreneur, a great company. Since we invested in the last round, he set up an Atlanta office, he’s probably hired another thirty employees and he’s just doing really well. So I learned from my mistake.But it was might focus saying I’m only gonna do Midwest, not dissimilar from the uncoachable entrepreneur, that stopped me from investing in the company. So it wasn’t him, it was me.Nick: It’s interesting, we had Dave Berkus on the program, and he had a rule that, I think, his investments had to be within flying distance of his single prop plane, and I think he passed on Amazon. He had a seed opportunity.

Jeffrey: Oh, wow!

Nick: Yeah. With one of his—

Jeffrey: Get a better plane! [both laughing]

Nick: Time to upgrade to the jet!

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Nick: For this installment of Why I Passed, speaking with Imran Ahmad of OCA Ventures. Imran, can you tell us a story about a startup that you chose not to invest in, why it was that you passed, and if there was a key learning that now informs your approach?
Imran: This is always a tough thing for venture capitalists, because there’s a lot of good deals that you end up passing on that—Bessemer calls it their unportfolio, I believe, where it’s companies that you really wish you’d hit. The Facebooks of the world, the Starbucks of the world, etcetera. So for me, I’d say—and I’m not gonna name any names—but I’d say a company I passed on was a loyalty program. And this was something that I thought was very capital intensive, it was something that, at the end of the day, you’re building a two-sided network and a two-sided model and it can be incredibly difficult to do, and it was a crowded marketplace. There were a lot of people doing it. The barriers to entry weren’t that significant, in my mind, when I initially evaluated it. Obviously the company’s proven me wrong, today.
And what you learn from these types of processes is that at the end of the day if you find a very strong entrepreneur who’s got the gumption and the team and the resources to get stuff done, a capital intensive business is not necessarily the worst thing in the world. These things can be overcome. A business where there’s a lot of competitors and a lot of people at play, it’s not the worst thing in the world. There’s gonna be a leader that emerges and fragmented markets are usually good things. When I was in private equity, we would look for fragmented markets, develop a platform and start rolling up a bunch of businesses within that platform. It’s not quite the same on the venture side of the equation, however, finding a fragmented market and then putting a bunch of money in backing a clear-cut leader allows you to really—not necessarily put all the other companies down the space, but have one true leader emerge.
How many food delivery startups are there? Yet GrubHub and Seamless eventually emerged victorious. And so those types of business models are tough to avoid, and it’s anyone’s game. Venture capital is, again, a risky business but it also has a little bit of luck that’s involved and you’re gonna pass on deals and that’s just part of the game.
Nick: So you mentioned entrepreneur gumption and you talked about sort of these local businesses. So now that you’ve had that experience passing, what do you do next time around when you see that business again? What are the things that you’re looking for that are gonna push you to yes?
Imran: Due diligence. It’s, uh—it’s gonna be a big part of that. But at the end of the day, it’s really seeing and checking your gut. And a lot of this business is a gut check, and it’s tough. I know I’m gonna pass on some of these businesses again in the future and that may be one of the hardest things to wake up to every morning if I passed on a billion dollar business that ended up being Snapchat, I mean, who in their right might thought Snapchat would’ve done as well as it has done? I mean it’s—it’s one of those things “Yeah, my message disappears…okay…” but thing are gonna do well, you’re just gonna pass on. So you have to be comfortable with that in this industry.
Nick: Yeah, Chris Yeh on episode two mentioned the same exact business, Snapchat. And how could you predict that, I don’t know. But I think it’s challenging not to second guess your focus and your strategy when those things happen.
Imran: Yes, definitely. And…maybe it’s worth second guessing it if you keep passing on all of these big deals. Thankfully, that hasn’t happened yet for me, but you never know.