The Breeze: How I Make Investment Decisions
Market, product, founders, and fit
One of my favorite Mike Maples-isms is that investing in a startup is picking who you want to get into trouble with. Semil Shah has said that when you invest in a startup, whether it turns out good or bad, it sticks with you. One must pick wisely.
When I’m considering investing in a new company, I’m deciding if I want to start what could become a 10-year or longer business partnership with the founders. I try to initiate the relationship with clarity and conviction.
Here’s what I think about when investing in a pre-seed startup:
Market: what is the potential for the market’s size and growth?
Product: how is the product unique and defensible?
Founders: how are the founders exceptional?
Fit: is it a good fit for me?
For market, I’m looking for a market that’s relatively new but growing fast, or I have reason to believe that it will grow. In board meetings, Maples used to ask, “Is our market growing? Is our position in the market growing?” If the answer to both questions is yes, good things will happen.
Making the early bet that a market will or won’t show up is the hardest part of pre-seed investing for me. It’s particularly hard because the markets start small. Back in 2019, few people were talking about carbon accounting and carbon offsets. I invested in Pachama and SINAI on the belief that businesses would have to address their carbon emissions in the future. Now those markets are maturing, dozens of players have emerged, and fortunately Pachama and SINAI are thriving. On the flip side, there are other markets, like carbon removal, that I’ve avoided, which might turn out to be a big miss. We’ll see.
For product, I’m focused on uniqueness as the defining characteristic. Uniqueness provides differentiation to the market and serves a proxy for future defensibility. Pre-seed stage products go through a lot of iteration in the first year. By definition they have to if they want to find product-market fit. Usually the uniqueness isn’t features, as features can be copied. It could be an insight or experience the founders have from years of working in an industry. It could be an unusual complementary skill set a team brings to the table that would be hard to replicate. It could be a clever business model. Or it could simply be a way of operating that outperforms.
AtoB initially raised money as “Google bus for everyone working in the Bay Area”. I was skeptical because I didn’t like the leasing of physical buses. I prefer digital solutions. But the founders had done an almost unreasonable amount of market research – including dozens of hours on the street handing out flyers and speaking to commuters – that it felt like they’d inevitably figure something out. When covid hit, and no one was taking buses or going to the office, they had to pivot. They brought the same tenacity to discovering a new direction, and they settled on digital financial services for the trucking industry. It took off. My reflection (in hindsight, granted) is that they had a masterful capability to understand a problem space, which was transferable to a new market opportunity.
For founders, I’m looking for a sense of exceptional accomplishments that demonstrate intrinsic motivation and excellence. Some founders are good at broadcasting these things, but more often it takes getting to know them socially or casually over time. Lately I’m focusing on exceptionalism in each founder in a company – if it’s one, two, or more – not just the CEO. Maples said in a recent podcast that it often takes at least a couple exceptional founders to go the distance with a company. That resonated with me and has entered my filter.
When I think of some of the best founders I’ve known or worked with, like Sanjit, Hans, and John at Meraki, or Kevin and Mikey at Instagram, or Paul and Rohan at Clubhouse, they are individual powerhouses who formed legendary founding partnerships. It’s a high bar. And many startups fail due to cofounder issues. But I think there’s something special in the way that 1+1 can be more than 2, which is what I’m looking for.
For fit, I’m assessing if the company is a good match for me personally, and if I’m a good match for the company. I want to be uniquely useful to the companies I work with. Given that I like to help founders with connections, narrative, and strategy at the early stage, pre-seed is a great fit for me. Next I consider the startup’s focus, the founders’ style, and my emotional feeling for it. Admittedly it’s subjective, and there’s risk of bias. There’s also a risk that I miss a good investment, only to find out later that they raised a round from a top-tier fund, all because it didn’t feel right to me. To close the feedback loop and learn, and build those enduring 10-year relationships, checking the boxes isn’t enough. I have to be fired up about it.
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