entrepreneurship investors startup advice

Great explanation of “disruption” – and why investors dislike startups that meet expectations

“Disruption” used to be mentioned frequently as the thing that every company wanted to be (urged on by investors).

But what is it, really? I’ve met lots of people who believe it’s “a fancy word for ‘innovation'” – but if that’s all, it would be pretty pointless and vapid.

This post from 2011 gives a great explanation based on simple concrete ideas. It explains why disruption is interesting to companies and managers.

What about investors?

It’s a great explanation, although it’s mostly from the perspective of business owners / management. Why do investors – especially startup / VC investors – care about disruption?

The key here is Des’s paragraph about share price:

“Microsoft’s share price hasn’t moved. This is because they are precisely predictable. Their shareholders have gotten exactly what they paid for, and not a penny more.”

A share price that doesn’t move *still provides profit to shareholders* (in the form of annual dividend). In fact, it often provides rather a nice sum of money – just like the rental income from owning property).

…but: Angel/VC investors make the bulk of their profit from changes in the share-price, not from dividends. Two reasons:

  1. Startups usually choose NOT to pay dividends – the money is reinvested into the company instead, to try and grow even bigger, even faster (pour gasoline on the fire of your success, make it burn faster!)
  2. The returns from dividends are – like rent on property – a small fraction of the investment. The returns from the share-price changing are – like betting on a horse-race – a substantial multiple of the investment

If you run your startup perfectly …

If you do everything you said you would do …

If nothing goes wrong …

… your investors may class you a failure. And they’d be right to do so. They didn’t invest for the dividends, they invested for the “surprise me” factor.

(which should, perhaps, give you pause for thought: if they’re “right” to pan you for achieving your aims … are/were you “right” to take their investment?)

entrepreneurship investors startup advice

“seasoned startup investors absolutely hate patents and the entire patent system. They compare it to a cancer in the economy. “

Yes! Yes, yes, YES!

Next time anyone in the UK hears an investor ask about patents (hint: they probably are ex-3i staff – and no, that isn’t a good thing), send them this:

10 Myths about patents

“Myth 3: Nobody would invest in startups that don’t have patents.

Fact: The seasoned startup investors absolutely hate patents and the entire patent system. They compare it to a cancer in the economy. ”

entrepreneurship games industry investors startup advice

Notes of interest from NESTA games-funding event

This (“NESTA: Investing in Video Games”) was last month, but I’ve been too busy to write it up till now.

The most interesting things that I noticed at the event:

  • Index is interested in spending SEED money on games companies [Ben Holmes]
  • Index can now “write cheques” up to $1m in the UK “in 1.5 weeks”; typically they’re writing them for $200k-$500k – they’ve done 20 of those in past 18 months [Ben Holmes]
  • Tony Pearce won-over Turner as an investor by saying he’d be bringing them detailed analytics on the social gaming industry [Tony Pearce]
  • None of the panel mentioned VentureHacks, even when it was the obvious answer to some of the questions from the audience. I had to grab the microphone and do it myself.

I felt a bit mean, hijacking their Q&A session. But, really … startups *need to know* about VH. It’s wrong for investment/government events to ignore it, or pretend it doesn’t exist; in the long run, everyone benefits from the existence and spread of VentureHacks.

entrepreneurship investors startup advice

Angel investor admits mistake; world doesn’t end

I don’t normally call-out individual investors, but this tweet from Max Niederhofer underlines something I’ve been thinking about for a while: I’d like to see a culture of equity investors admitting (publically) their missed investments as often as they big-up the ones they made.

Biggest angel investing screwup of mine of the last 18 months: not accepting @begemann’s offer of getting into @wooga. 18M monthly players!

And of course – aside from the investor issue – it’s interesting just how big Wooga is right now.

Anyway, I’d like to celebrate Max (and others) for publically admitting he misjudged that investment. I wish more investors would do this, on a regular basis.

Why should an investor keep quiet?

I make no claim to know the mind of investors. The nearest I can come is that – for a while – I sat on an investment team that made recommendations on investments from $0.5m up to $10m. I loved the experience of being on “the other side” of the table. But I only did it for a year or so – I’m in unfamiliar territory here.

Some guesses / intuitions from that experience (and from conversations I’ve had with investors over the years):

  1. The suspicion that you might scare-off new startups when they hear you rejected other startups that they consider similar to themselves. Fair enough – although I think this does a disservice to entrepreneurs; we’re not stupid – we know that investors make mistakes, and we expect them to learn from them, I think many of us would be more eager rather than less (“they’re probably smarting from that mistake, and more likely to jump on a similar opportunity like US!”)
  2. Funds, especially, sell themselves on their reputation for making “the right” decisions. Every few years, they have to persuade a bunch of very rich individuals to part with tens of millions of dollars, on nothing more than the faith that the fund will invest it more intelligently than the investor would have themself. They don’t want to tarnish their reputation by admitting the profits they “failed” to secure for their own investors.
  3. Angels have a similar reputation issue, but with Funds, rather than with investors. My impression is that this relationship is a lot less fragile / critical – but if an Angel is respected by a Fund as a canny selector of good startups, it could make it much easier for said Angel to cash-out when they need to. Although… that exit may itself make the Angel look bad (why are they getting out? What gives?) so I’m not sure this is so important
  4. Pride. Both personal and professional.
  5. Fear of revealing their personal “investment strategy” to their rival investors. I’ve heard Angels talk about how they have a secret sauce in their choice of investments – one they guard as vigorously as Coca Cola’s – but I’m not sure how important this really is. “Security by obscurity”, and all that…
  6. Um. Others?

Why should an investor confess?

As an entrepreneur, when I’m sifting through potential investors, I’d like to know:

  1. Does this guy track their failures as well as success – do they live by the same rules they expect us to, i.e. “test and prove and IMprove”, or are they stewing in a soup of arrogance and ignorance?
    1. An investor that gets better each year is one I want on my board – chances are, their advice and input will be better year on year. Not stagnant.
  2. Market opinion: what other entrepreneurs came to you with serious investment offers? Social proof works both ways, guys…
    1. Every investor will boast about the good investments they made, but that tends to be a small pot. Sure, they see 20 (or 200) pitches a year – but how many of those pitches are from smart entrepreneurs? Do the smart guys avoid this investor, or do they swarm to them?
  3. Market exposure: what has motivated them in the past to make yes/no decisions? Not theoretical (fakeable) ideals – but actual deals they’ve rejected. (again, finding out the deals they accepted is relatively easy / common)
    1. Does this investor get enough exposure to the “real” spectrum of startup opportunities? Or do they only deal with – say – Financial Services tech startups? Will I end up having to (re-)educate them on the realities of (say) Social Media startups, because although they’ve funded one … that’s the only one they’ve ever seen (and they judge everything else by that one)?
  4. Honesty. With personal recognition of past mistakes, and the dose of humility that required.
    1. Yeah. Most people don’t care about this one. I do. If I’m holding myself and my colleagues to these standards (and I do) … why should investors get a bye?