Should you even be an investor?
Startup founders become investors all the time. After courting and closing investors themselves for years and understanding what it takes to build a company, they take a natural next step to try to help others. The feedback loop of older founders helping the next generation is part of what makes Silicon Valley so awesome.
However, even with all that experience, they still might make lousy investors. I know a few angel investors that told me they were basically horrible at it at the start. They picked companies they thought they could help, meaning they biased towards those that needed help. They weren’t sure how to balance a portfolio. One angel told me to assume you’ll lose all your money on your first ten investments.
I have the ambition to become an investor, and as is common with entrepreneurs, I have the dubious confidence of believing I’m going to beat the odds. Having done consulting and advising to multiple startups, I’ve found working with early stage companies fun and rewarding. Learning from many other startups also makes me a better entrepreneur. So while I’m told I might lose money, I am still eager to be an angel.
Still, I don’t want to jump into things blindly. So I’ve come up with a simple test: simulated investing. Call it a startup bracket, to mirror March Madness that coincides with YC winter demo days. It’s simple: at demo day, pick which startups you would fund, and track how well you would do.
The first bracket I ran was YC W12 and I picked my top 10 companies.
Some caveats:
- I didn’t talk to these companies about this bracket.
- This was based only on the 2-minute demo day presentation. In some cases, I already knew the founders.
- I had no insight into how competitive the environment was, so there would be a solid chance I would be squeezed out of the round. An investor needs to build a reputation to get deal flow and be allowed into crowded rounds, making it more difficult to get into companies perceived to be the hottest each round.
- Many have found my insights about growth and strategy useful. Still, the founders and I may not be a good match.
- I’m sure I missed some hits. I asked some friends to make picks too, and we weren’t fully aligned at all.
It’s been a year, so let’s revisit. One appears to still be stealth. This list is ordered alphabetically:
- 42Floors. Commercial real estate search. Series B 1/13
- Amiato. Big data analysis (was Nou Data). Series A 3/13
- CircuitHub. Circuit board fabrication. Seed 1/13
- Exec. Uber for work. Series A 5/12
- Farmlogs. Farm software. Seed 1/13
- LendUp. Payday loans. Seed? 4/12
- MatterPort. 3D scanning. Series A 3/13
- Rescale. Simulation as a service. Seed 6/12?
- Socialcam. Video sharing. Acquired 7/12
I’ve included a link to the latest update I could find about their fundraising. Reaching later rounds or profitability is a proxy for value. An acquisition or IPO is a direct measure of value. Some angels sell some stock at later rounds. For example, if I put in at the seed stage of 42floors, would I have been able to hedge at the Series B? This kind of thing really matters operationally because you can partially divest and put the money back at an earlier stage of another company, but you might lose some upside on the hits. This is not an aspect of investing I have much experience with yet.
My conclusion: it is probably too early to tell, but it looks as if I did pretty well.
About half wouldn’t have raised additional money beyond the round I would have participated in. This means there isn’t much signal about my gain to date. Socialcam is the only exit, which is good because exits within a year are considered somewhat early, depending on traction. All appeared to have raised some money after YC, which is good news. All appear to be active, which is really good news.
It might look like I’m doing research to train my investing filter. While this helps, I think my innate intuition and biases will be hard to change. What I’m actually doing here is scoring my biases to see whether they make me a good investor. I’m clearly biased towards B2B services. I like things that have a clear path to growth and revenue. I generally like advanced technology. I’m biased towards things I’d like to see exist. I’m especially biased towards ideas similar to ones I’ve had myself (Rescale & MatterPort).
How did the rest of the batch do? After a bit of research, it turns out to be remarkably hard to get an exact answer, and YC doesn’t publicly report aggregate stats. Companies doing well are easy to spot. Clearly failed or exited startups are easy too. Verifiably finding that something is shut down is hard because two states look very similar. A startup might be heads down in stealth mode with very little digital exhaust. Or it could be a zombie web site with founders that moved on but haven’t updated their employer on LinkedIn or Facebook.
I was very generous in assuming the startup was active with no evidence of shutting down. It appears around 15% shut down. 65% appear to have gotten follow on funding, but the number might be higher because many startups don’t announce funding. Again, 0% of my bracket shut down and 100% received follow on funding. There is a power law distribution in startup returns, and these results mean at the very least I managed to avoid the tail. The big question still left to be answered is whether I picked the top. There are a few companies in the batch on a great track that aren’t in my bracket: ZenPayroll, YourMechanic, CrowdTilt, and others look really good.
I unfortunately missed YC Summer 2012 demo day, but I did recently attend the W13 demo day. Like many others, I was very impressed. I picked 10 startups for my W13 bracket, but 3 are off the record. Again, in alphabetical order:
I can see myself using all but 2 of my top 10, whether personally or for my new startup. I’m not sure this bias is positive. Who watched the Thalmic Labs MYO video and didn’t want to immediately use it? Are they in a position to create a whole new user interface method? Who knows, but here I’m saying, quite literally, I’d bet on it.
I think overall YC is going to do really well with this batch, especially considering how hard it is to pick the best. When so many are so good, you know the batch will do well. In 6 to 12 months, I’ll revisit both brackets and hopefully have enough evidence to take the plunge and start investing. I’d have to wait years to find out the exact return here, but I’ll consider investing once I know I’m well into the black.
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