Why Angels and Venture Capitalists Don’t Think for Themselves
I see a lot of times on Angel List where “the usual suspects” get together and do another deal. You know who they are, and I have even at times enviously said “I wish I was more plugged in with those guys.
But that herding of the cool kids isn’t just a Silicon Valley principle. In fact I see it happen locally all the time. Of course it happens with the venture capitalists too, and I can think of a few VC deals that the local angels wouldn’t touch, but the same VCs were in all of them.
There are a number of factors at work with this mentality that I think need to be embraced as opposed to fought. Think about the following checklist.
1. I’m going in cause Joe is going in.
2. Joe and I work well together so I’m in.
3. Joe made me a bunch of dough on our last deal, so even if he is investing in a country doll-making operation I owe him.
4. Joe has a pile of capital, so he can support this thing when it needs more money.
These factors become, in a lot of cases, more important than what is in your pitch deck. And we have all seen this one time or another where a deal gets buy-in from one of “the family members” and thus creates a ton of momentum.
Then suddenly from this single investor buy-in, there is a fight among the rest of that investor’s peer group to get in as well. Then, one of my favourite bugbears happens: angels and VCs get on stage at events and complain there are too many investors in a deal.
MORE ANONYMOUS ANGEL: Dissecting the Conflicted World of a Startup’s Investor Value Chain
Sure, there is some safety in numbers. Most angels, including I, believe most VCs (if they are being honest) look at some deals with the fallback of saying “well everybody else was in it” if it doesn’t work out. I know a few investors that have gone into deals to meet and work with “the cool kids,” and being part of the cool kids deal is a way of buying a seat at the table. The reality is that there are enough independent thinkers in the equity investing industry that there is always someone willing to take a risk on going it alone—more so in the superangel community.
What’s all this pointing too? The obvious one is to figure out who “Joe” is and pitch him or her. However, seeing as not everyone knows Dave Mclure, Andreessen, Hoffman, Feld and Suster personally, that might not work out for you. In fact most entrepreneurs don’t have direct access to a superangel.
And worse, if you don’t have a herd member within your reach, you are, in a majority of cases, going to get left out. Here is the corollary list.
1. Why am I the only one talking to this deal?
2. Why has everyone else passed on this deal?
3. My investment isn’t enough to get remotely close to a closing, we need more investors.
So what’s your strategy?
First, what entrepreneur hasn’t used the line “Well X is in so you may want to get in too!” Truthfully, that’s not a bad start and sometimes it probably feels like a scene out of The Player or Get Shorty where you are always ratcheting the relationship you have to get to the next rung up the ladder.
But taking the movie analogy a step further, does anyone other than “the family member” ever get to pitch the Godfather? Seriously think about getting your lead investor to start gathering the family, the herd, the cool kids, whatever you want to call them, together. Also note, you’ll probably have to compensate them for being the lead.
Second, copy models. If a group of investors made money in your particular industry using a particular structure, go after them and copy that structure. They have an existing comfort with it help them embrace what they know.
Third, try to stay in tune with who has done well on recent exits (ones within the last 36 months). Buy the founders lunch, ask who was in the deal, ask who was worth working with, and most importantly ask who else does this group like working with?
Finally, sometimes the most successful approach is to call me or one of my peers out on our own crap. The key is to get your lead investor interested and vested in your organization a year or so before you hit them up for money.
I end up being the lead angel on quite a few of my deals because I am stupid enough to begin mentoring and working with you long before you need the money. Then, when you do need the money, it’s hard not to pony up. You think I’d stop falling for this one!
In the end, just like the old saying goes, “if you can’t beat ’em, join ’em.” As humans we have generally always collected in groups. As far back as middle and high school we’ve done this in our own lives, and at the same time during these years we have enviously looked at groups we weren’t apart of.
Take some time and think about the strategies you used to get into those “cool kid” groups all those years ago—they are probably strategies you might want to use to get into the investor mafia.