The New ABCs of Startup Investing: Part 3

We’ve made it — the last installment of our primer on startup investing for the non-startup-investor. We’ve covered the [b]asic plumbing, and we’ve covered [c]onstrained focus. That means we’ve earned the right to press our advantage with the most powerful force in private-market investing, [a]lignment.

It ain’t Over till it’s Over
First, we meet. Then we invest. And then … we do what exactly? Keep tabs? Buy lunch? Ask for updates constantly? Try to be helpful?

The most common and well-intentioned lie in startup investing is that a particular VC shop is “the most helpful to [their] founders.” The reason this is such a trope in the community is that it’s an obvious stalking horse. Of course, it inures to the VC’s benefit to help a portfolio company. But the ability of 99% of investors to positively affect the outcome of their founders is questionable at best. Why is that?

First of all, investors, as we know, are not omniscient aliens. Without focus in a portfolio, there’s no consistent base of knowledge or contacts to draw upon. Simply put — most portfolios are organized broadly for absolute returns, and as such the investors lack the relevant expertise and connections to repeatedly create unfair advantage for their portfolios.

But you’re smarter than that, and that’s very good; there is no such thing as insider trading in startup investment. You have the ability, and arguably the duty, to advocate on behalf of your portfolio with every tool in the toolbox. And your toolbox is vast indeed because you are investing in the waters where your experience is deepest. You are investing in waters constrained to your center of power, and there is seldom a scenario where you can’t intervene to produce real value for your founders.

Five Portfolio Therapy Techniques
Here are some suggestions to get your brain in the mode of actual helpfulness, instead of falling back on platitudes.

1. Hiring. This is a common talking point within the professional VC community in the Bay Area. The idea is that, due to the high profile of the investor, top talent looking to work at a startup might more easily be recruited by the VC than the company itself. This is certainly true for the top 10 VCs that software engineers frequent when looking for roles. For the rest of us, it can still be helpful to open up our networks and pull for our portfolio companies, as long as founders don’t feel pressured into overvaluing our contributions to their pipeline. After all, we invested in their judgment. But let’s move on to some more concrete PT.

2. Guidance. You followed the constraint principle, right? So you’re investing in a field in which you have absolute mastery. You have hard-won knowledge and pattern recognition, which your portfolio companies can now wield if you find effective ways to transmit these learnings to them.

3. Capitalization. The best introductions to follow-on capital don’t come from other founders or random investor friends. They come from investors who already have skin in the game; i.e. you. This topic deserves its own post and will get one in due time. For now: think 12 months ahead of your portfolio companies. Socialize your most promising subjects with investor friends several quarters ahead of funding, when money isn’t on the table. Consider alignment in these second-order transactions as well. Most importantly, never ask another investor to come into a subsequent round if you’re not going to be using your pro-rata — unless you’re somehow excluded by the nature of the terms and your bylaws.

4. Partnership introductions. If funding is gasoline for startups, strategic partnerships are jet fuel (fun fact, did you know that’s just unleaded kerosene?). Sit down with your founders on a regular basis to find out what they need, then go and hunt it for them. Don’t act like a salty house cat, bringing unrequested dead birds and mice to the doorstep. Sure, they’re presents, but they’re often a distraction from the antelopes you could be hunting together.

5. Partnership, period. Introductions are great. But the real unfair advantage is the ability to make partnerships happen for your portfolio companies, full stop. You should know ahead of investing where you’ll be pressing your advantage. Remember the example from last month of the AI doorman company and the family office who owns the high-density housing? It should hit you in the head like that. If you can’t think of similarly blinding alignment, what are you doing investing in the first place?

Reprinted by permission.