Investment

Last updated by at .

Stay away from the mediocre middle. Cognitive dissonance is painful.

Stay away from the mediocre middle. Cognitive dissonance is painful.

We aren’t losing deals to other VCs, we are losing deals to startups that continue to bootstrap.

-anonymous venture capitalist lamenting the state of affairs to me

We’re now long into a new startup reality. One that will be characterized by constant change. The rules of the game are changing, the disruptors themselves are being disrupted, and tactics that worked a few years ago are now nothing but useless cruft.

By now, it isn’t news that the new startup reality is more global (eg Estonia, Israel, New York), more social/crowd-y (eg Twitter, Meetup, Kickstarter)  more inexpensive (eg RoR, AWS, AppFog, Google Apps), more distribution/platform-based (eg App Store, Google App marketplace, App Exchange, Pinterest), more metrics-driven (eg Lean Startups, KissMetrics, Unbounce) and savvier (keep reading) than ever before.

In future posts I will get into what I think is really happening in terms of startups and innovation from a 1 million foot-level, but for now, I am interested in expounding upon is how the confluence of the factors listed above is shifting the balance of power between entrepreneurs and investors, while still favoring the moneymen and money-women, to more and more to the side of the entrepreneurs.

The great investors already grok this — the not so-great are about to be a whole helluva lot pain as they attempt to remain relevant in order to get a seat at the Good Deals table.

Simply put, in the new startup reality, today’s savvier entrepreneurs, with more flexibility in financing (Kickstarter anyone?), are no longer assuming investors’ value-add (sans money) – but are actively verifying that a value-add exists and making sure that they get investors who add considerable non-monetary value or pressing investors who don’t, to provide better financing terms. And in some cases, intentionally pursuing “dumb money”.

To recap, a non-exhaustive, and non-mutually exclusive, list of how an investor can add value (ostensibly) to your startup:

Their Network

You want this investor to invest in you because their network is relevant to your startup. Not only is it high-quality and far-reaching, it goes beyond simple introductions because they possess a singular ability to make people in that network actually do their bidding…for you.  <—- Read this again. And again. This is rare.

While many investors claim this – very, very few actually can deliver on this promise. Today’s entrepreneurs, unfunded and funded alike, are comparing notes on these claims. Does Jane McVentureCapitalist get her calls or emails returned? Can she force, cajole or beseech people to do her bidding on your behalf?

(Inversely, such investors see a natural fit to leverage and hedge their investment in you and your startup vis-à-vis their network.)

The Signaling Effects

This investor is a high-quality brand-name. You should trade on their name for the high-value signaling effects it provides. Broadcasting that you are funded by such an investor makes it radically easier to hire top talent, to create a perception of stability and fait accompli success, to make deals with potential partners, to get the attention of the press easily, and to sell your startup, amongst other things. It should be readily apparent to you who these investors are and who they aren’t.

Note: these brand names used to be the name of the actual VC firm, but now the brand value appears to be accruing to the actual partner.  This is not trivial.  See if you can suss out what that implies for your startup and for the other partners (perhaps those who don’t have a brand name) in the firm.

Pattern-Matching & Specific Domain/Phase

A particular investor has both deep and broad experience in the same space you are attempting to disrupt. Similarly, you are in or will be in a specific phase of company building that an investor has an unusual talent for – be it starting out or scaling hyper-growth or the sale of your startup.

(Recent) Startup operational experience

This investor has been around the block once or twice in a startup, they know your pain, your dreams and your reality better than you know it yourself. They’ve shed copious amounts of blood, sweat and tears to get across the finish line.

This is tricky — while many investors will claim both a) relevant operational experience and b) willingness to fight in the trenches with you — not many actually possess both. Also, this may swing the other way, you don’t actually want their hand on your steering wheel.

On the other hand, this is one that is relatively easy to verify via your entrepreneur back-channels.

Everything to Everyone

Watch out for this category. What is their value-add? Warning sign: they have discomfort verbalizing it and aren’t used to being asked about it. They’ll say it’s a little bit of everything. I don’t buy it, and neither do today’s savvy entrepreneurs.

Savvy entrepreneurs would rather take money from so-called “dumb money” that, at least: Stays the f*ck out of your way.

My sense is that great investors know precisely where and when they actually add value and also know how to stay out of your way, and not impede you with wind-bag advice and onerous ceremony and status re-enforcing ritual. “Dumb money” that knows it is dumb money isn’t so dumb in my book.

Summa summarum, based on my conversations with entrepreneurs and early employees, who have exited, whose startups are still in play, some funded and some not-funded —- they firmly believe that, in some cases, it is advisable to take “dumb money”, on good terms, that provides more value-add by staying out of their way and not pretending to be everything to everyone than it is to take money from the middle-tier folks who destroy value and waste your time by not delivering on their value-add promises.

It is the middle-tier investor class that may prove most dangerous, fickle and least valuable to your startup. They like to pretend they bring to the table an exploitable network, strong signaling, domain expertise, and operational experience – but rarely do – and by fooling you, they actually destroy value by wasting your time and sapping your creativity.

Head’s up. You’ve been warned.

PS Pre-order a copy of The Lean Entrepreneur.

Follow @Pv