David Weisburd here.

Earlier this week we talked about value-add and how investors can benefit the companies they invest in.

Today, I want to cover the opposite topic: the things investors do that detract value from startups.

If you think this is not an important topic to understand, think again. In fact, two very prominent Silicon Valley investors are on the record talking about this very thing.

Vinod Khosla, venture capitalist and self-made billionaire, famously said that 70-80% of Venture Capitalists actually detract value from startups. Michael Siebel, the President of Y Combinator, the top performing startup accelerator in the history of Silicon Valley, claims that simply writing a check and not communicating with the founder until a liquidity event makes you an A-minus investor, with not much room to improve upon this and a lot of room to damage the relationship.

Liquidity event:

A merger, acquisition, IPO, or other event that allows startup founders and their investors to cash out some or all of their shares.
Why does this topic matter? Outside of the sad fact that the entrepreneurial journey is already difficult enough without having investors detract value, this affects you a lot as an investor, too.

After all, the entire lifeblood of an investor is his or her personal deal flow… and acting in a way that annoys entrepreneurs can kill your deal flow overnight.

With that in mind, let’s dive into the top 3 ways that investors detract value – and exactly how you can avoid them.

Avoid These 3 Mistakes at All Costs

#3) Unsolicited Advice, Intros, and “Help”

As we discussed in the previous article on value-add, the most effective way to provide value-add to an entrepreneur is by asking him or her what they need help with.

Nothing is more annoying to an entrepreneur than unsolicited advice, unsolicited introductions, or any other “help,” regardless of how good the intentions are.

#2) Keeping the Founders from Pursuing Great Businesses

In his book, “Good to Great” Jim Collins states that “good is the enemy of great.” The founders and executives that could be building great businesses are not failing but rather limiting themselves by making businesses that are simply good.

First principles:

A bottoms-up thinking process that starts with known facts and builds an intuition based on facts vs. mainstream opinion.
This is not surprising when we examine it from first principles, as founders who have the capacity to build $10 billion or $100 billion companies are highly capable founders that can easily build a $100 million company.

As angel investors, our entire success is based on power-law returns… not singles and doubles. The difference between a $100MM exit and a $100B exit can mean the difference between making $1 million and $1 billion. The result is literally 1,000X or 100,000%.

Power-law returns:

A system in which the lion’s share of returns come from a very small proportion of the total investments made.
If that is the case, then why doesn’t everyone focus on creating great businesses?

The reason for this is that many entrepreneurs get a lot of pressure from investors and other stakeholders and this causes them to settle for good when they could be reaching for great.

Unfortunately, this often happens even if the payoff for being great would be 1,000X that of being good, and even when there is a 10 or 20% chance of achieving that great result (making it 100 to 200X more rational of a strategy). The reason for this is typically investors that lack the patience to back great businesses – which, of course, take longer to build.

If you want to be both a good and a value-added investor, it’s important to invest responsibility (diversify, diversify, diversify) and let your founders swing for the fences.

Don’t bother your entrepreneurs about when you will get your return back or pressure them to provide a 2X-3X return. Not only is that kind of behavior annoying to entrepreneurs… But it can also kill your deal flow and limit your success.

#1) Making the Entrepreneur Work for You

For whatever reason, some angels believe that entrepreneurs work for their investors. While this may be fundamentally true from a corporate governance angle, this is not how it works in the real world.

Adverse selection:

A situation in which buyers and sellers have different information, resulting in one participant benefiting at the expense of the other.
The top 1% of startups (the startups you want to exclusively focus on) do not need your money, and in fact have investors competing for the privilege of making an investment. If you are not constantly competing to get into your opportunities, you are most likely subjecting yourself to adverse selection.

The most surefire way to kill off your future deal flow is to constantly ping your entrepreneur asking for updates and information.

To put it simply, the entrepreneur’s job is hard enough already.

Our lifeblood as investors is our deal flow, so if you’d like to maintain a great reputation and get access to the next Google or Uber, at the very minimum, avoid making those three common (and dangerous) mistakes…

Entrepreneurship is a brotherhood, so you can be 100% sure that entrepreneurs will speak with each other and with your co-investors. Within a year, you will have a reputation (whether good, neutral, or bad). Cultivating that reputation is the absolute best way to ensure you’re always at the front of the line when the next Uber comes along.

I’ll be back soon, so don’t go anywhere… And let me know your thoughts in the comments below.

Very best,



David

P.S. – Today, we’re so excited to celebrate the one-year anniversary of the Angels & Entrepreneurs Network. That means that today is the final day to become a Founding Member. Our subscribers receive fully researched startup deal recommendations, special reports, training videos, and much more. Just click here to learn more.

Comments

37 responses to “The 3 Worst Things that Investors Do that Kill their Deal Flow”

  1. This was very interesting. I sure don’t know much about investing. I am really trying to learn. I would love for you to send me emails where I can be informed and get involved. Thank you

  2. Great info, David! That couldn’t be more true even outside of entrepreneurial endeavors. The more someone hounds you, the less you want them around.
    /r
    RobA

  3. Great article. Something I try to live by, moving from good to great. I hope more angel investors will apply this helpful information. Thanks for writing this.

  4. Thank you for the great advice that you gave us on “The 3 Worst Things that Investors Do that Kill their Deal Flow” I have been investing in Startups for the last Eighteen Months and I’ve invested in Twenty Three different Startups. We as Investor’s, either novice or experienced, need to be educated or reminded on all that goes along with investing in Startups and the opportunities that can go along with it. You do a great job of providing this type of information for all of us to become better at what we do. So once again I thank you for all of your time and effort you put into educating us.

  5. Great insights David! Kind of reminds of coaching kids in softball and basketball. Sure we all want to score a lot of points but you have to let the game come to you. Each game is different; each has its own ebb and flow because of the style of the team you’re playing; some have great defense some great offense; occasionally a team has both. I always preached, play hard but relax and let the game come to you; otherwise you’ll likely force shots and get in your own way. Angel investing reminds me of this.

  6. Appreciate the simplistic language and tips. Taking it in slowly and trying to be open & not skeptic about opportunities and returns. Also, remember there are other angels besides ” guys” and the brotherhood. Not being sensitive, but making you aware. Thanks for all your efforts here. I’m excited!

  7. Everyday I tell my Fiance’ I couldn’t pay less than a few grand for an education like this, let alone the $80 I spent. It would take years to accumulate this knowledge. Look forward to learning more. Thanks!

  8. Everything I have read and watched has been eye opening and very educational. I am 100% new at this and I am 100% invested in this. Thank you for all the information.

  9. Thank you, David, for providing these informative and actionable insights. This is a whole different world for me and it is exciting to think I am, in a small way, helping create a better future and hopefully compensated at the same time by investing in startups. I don’t have any particular ninja business skills to offer a startup but I am capable of doing a lot of different administrative activities. Is it helpful, or at least not harmful, to send a message to a startup saying something to the effect of, “lemme know if you folks need any help…”? without adding some specifics of the assistance I could lend remotely? Isn’t that too vague to be beneficial? Please let me know your thoughts as I am eager to adopt an effective communication style. Thank you again for providing this great post. I look forward to learning more from you moving forward.

  10. Thanks for this informations. You know I have to admit… I did this mistake, but reading this, will make me not to, anymore

  11. My thought and feeling when starting this journey of angel investing was/is to invest only what I could afford to lose. I have made several investments with companies that sparked an interest in me and were solving a problem. And then, I just sit back and watch for updates. If they are moderately successful in achieving what they set out to do(or what they modify their plan, over the course of time, to do), and made me a little money, that’s a win for everybody. If they made me a little more money while achieving their goal, it’s an added benefit. If they fail to achieve what they set out to do(and don’t adapt or modify their plan with changing circumstances), and I lose the money I invested, no big deal. I just move on to the next investment…

  12. You’ve got to remember, these investments take time- it’s not going to happen overnight, and it may not happen months or even years down the road. You have to be PATIENT!… If it’s a good idea, it will happen…eventually.

  13. Thank you for the information. I want to learn. I am new to investing. Articles like this is a great help.

  14. I joined on June 4 and I have not received my welcome package.

    You give great insightful infomation for the novice investor.

    Thank you very much.

  15. I joined on June 4 and I have not received my welcome package.

    You give great insightful information for the novice investor.

    Thank you very much.

    • Hi Linda,

      Thanks for your comment. Welcome to A&E! Your welcome package should be on the way, but luckily, you don’t need your welcome package to get started with all your subscription has to offer. Head over to your Deal page to start checking out the due diligence packages available to you here: https://angelsandentrepreneurs.com/deals/.

      Cheers!

      Sarah

Leave a Reply

Your email address will not be published.