STARTUP ENTREPRENEURS AS INVESTORS
This blog, unlike other J&M blogs, is written in reaction to a piece of news that circulated in Europe last week among the startup investment community. Three technology entrepreneurs, Taavet Hinrikus, co-founder of Wise, Sten Tamkivi, co-founder of Teleport, Ian Hogarth, co-founder of Songkick and a tech CEO, Khaled Heliouih, ex-CEO of BigPoint who started his career in the investment banking world and then in venture capital, before moving to the operational side, have cemented the foundation of Plural, a €250 million fund -an investment platform-, from which they already executed some investments in the past twelve months.
The reason put forward for the launch of the platform is the acknowledgment that very few investors in European startups have either founded or operated a technology startup, therefore most startups in Europe do not receive the guidance from someone who “has been there before”. This is very true, especially compared to the US, where more than half the venture capital funds have at least one general partner with such experience. Entrepreneurs in residence and venture partners have been around in the US for more than 50 years, with, however a different role, as they do not participate in the decision making in the fund investment committee. An entrepreneur in residence incubates a project within the group, and a venture partner gets involved in some investment sourcing, may sit on investee boards, but both are not full partners. They generally spend a limited time with the investment entity. Conversely, ex-entrepreneurs who are General Partners are instrumental in investment committees and are permanent members.
When communicating this news to a member of a board where I sit, I mentioned that it was a long-awaited fresh air brought to early-stage technology funding as I hope their example will be followed by other entrepreneurs attracted to cut their teeth at investing. Yet, I would caution anyone who predicts an outstanding success to Plural. They may be successful, but they may also not live up to the expectations.
Entrepreneurs-turned-investors have been there before
This is the major argument in favor of ex-entrepreneurs. They can help new entrepreneurs navigate through the maze of building a fast-paced technology business better than most startup investors. They have the scars to prove it. With them on your side you avoid familiar pitfalls and waste no time. In principle, it works well. In practice, it may be different. A real startup is not a cookie cutter. It is like an art piece, unique in its vision, its design and its team. Will some savvy ex-entrepreneur provide guidance equally to any other technology startup? Probably not, but we could certainly trust other investors would not fare better.
The truth about unemployable talents
The partners at Plural aptly called startup entrepreneurs “unemployable”.
- Entrepreneurs cannot work for a boss. It is true, though tech startups generally raise significant funding from investors that play a major supervisory role in corporate boards. Some entrepreneurs understand their reporting duty to their board. Great entrepreneurs “manage” their board.
- The most unemployable are executives who have worked in teams of outstanding entrepreneurs. Each time they attempt to join another entrepreneur, the latter cannot bear the comparison with the stellar entrepreneur they helped build a highly successful business. It is impossible for them to stay around an “average” entrepreneur. It is like a spaceship navigator jumping on a scooter.
- Because they are unemployable, they all resort to working for themselves, more often building another startup.
Beware ex-entrepreneurs who trade entrepreneurship for investment.
Many entrepreneurs who experienced a successful exit enjoy dabbling in early-stage startup investments as angels, sometimes overreaching to involve themselves deeper than they ought to. Creating a fund and managing money with a fiduciary duty toward investors that entrust them a significant share of their wealth is completely different. Even if the investors are their peers in a joint investment platform.
Why would a successful entrepreneur become a startup investor at the venture capital tier? How long can they commit to remain in this role? Entreprise founders will be stung again by the bug of entrepreneurship. If one scans historic data on thirty years of startup acquisitions where leaders were asked to remain on board after the acquisition, one finds that the most apparently patient entrepreneur leaves within three years, often to optimize their cashing in according to the deal structure. Most of them, almost immediately after their departure, start another venture. It is in their DNA.
Startup entrepreneurs excel at laser focusing to execute on a vision. It is like an obsession. Great startup investors improve their expertise by monitoring their investments, communicating with diverse founders and executive teams and using broad information sources that make their contribution to board meetings sharp and authoritative. These skills are hardly compatible with entrepreneurs’ proficiencies.
On the pure financial return, no star investor will match a good entrepreneur building value with its own business.
Domain knowledge vs. process knowledge
Ex-startup operators with a decade experience or more undoubtedly bring loads of potential advice to early-stage startup founders. Rarely will the expertise prove to be in the startup domain knowledge. I insist on “rarely”, as startups address specific markets that have unlikely been addressed before. Showing competences as a new battery technology company for instance may not be of interest to another battery technology startup. Hopefully the domain of the new company is best known by the founder. On the other hand, a savvy operator sharing its startup process experience is contributing an incredible value. The main aspects of the process cover value proposition to potential customers, market validation, team building, scaling, fund-raising, opportunity grabbing, pivoting etc. In this respect, more operators are welcome in the VC European arena.
The enterprise is yours, not investors’
Entrepreneurs have a vision. This vision must not be robbed or altered by investors who believe and make others believe that they’ve been there. Each startup writes its own book. A great operator-turned-investor understands it must embrace the vision and adapt its experience to make it available to the new project.
Beware the forced business model. A business model that worked wonders in startup A may have no relevance in startup B. Unfortunately, I watched this flaw repetitively. I know it too well: I confess I did it once, before quickly realizing my mistake.
Always make your due diligence: there are founders and founders
It goes without saying that taking investors on board, ex-startup founders or not, requires a thorough due diligence. Some founders will make outstanding investors, some will be a burden to carry along. Know what you look for in an investor at a certain time in the life of your venture. The label of ex-founder and/or ex-operator is no guarantee for success. What kind of business did they create and/or operate, in what kind of environment, with what burn rate, for how long before becoming cashflow positive etc.? In short, is there a real fit between the investor and you?
Diversity is healthy for startups.
Entrepreneurs assisting their peers in early-stage startups are welcome. They must listen as much as they bring their process expertise. It is true that the profile of the European technology startup investor is rather uniform. More diversity has been called for years. Clearly, a hands-on experience leading a startup from the ground up beats many.
What to Watch For
- Investors with diversity among its partners: diversity in education, experience, origin, etc. Benchmark capital is a good example of diverse talent that can be leveraged to enhance portfolio companies value.
- Listeners. Good investors spend a long time listening to understand better the evolution and situations of their investment in order to contribute more than money.
- Strength: investors who never oppose an entrepreneur with a good debate is not helpful. Entrepreneurs need the debate, as long as it does not turn contentious.
- Investors that have managed money with success through the whole cycle. Advantage here is given to experienced investors.
Conclusion: the right balance of investors to bring in
In the very early stage, or seed stage, founders are in the mode of discovery of what a startup is and liken themselves to explorers in the middle of a thick jungle with the wrong tool to move forward as fast as they wish. That is when ex-operators-turned investors help them most. Money is only a minor part of the package. Growing to later stages, Series A and B, more traditional VCs, with a background in fast-growing companies, will complement the expertise of the initial investor. Further down the road, financiers with a cunning knowledge of transactions will successfully complete the group of investors and help lead a company to a new level.