Having been the CEO of an angel and venture investor backed startup for 9 years before its acquisition in 2018, I am now experiencing the other side. I am involved with advising startups through my EIR role at Seedcamp but have also started actively investing myself.
The funding round for my third angel investment has just closed, so I have been thinking about what makes a good investor in early stage startups. This post is inspired by the classic Good Product Manager / Bad Product Manager essay by Ben Horowitz. It applies to angel investors in early stage (pre-seed and seed) rounds. Some things may apply to institutional and VC investors, but some may not.
Good investor / bad investor
Good investors know their area of expertise and have a long history which allows them to know what has worked in the past, what hasn’t, and when the time is right to try again. Good investors operate within that area of expertise, giving them their unfair advantage in picking startups. Good investors stay within that area of expertise and are therefore able to make investment decisions quickly. A good investor ignores what other investors are doing, makes a commitment independently and shows confidence in the idea before bringing in other investors they have worked with before.
Bad investors have a shotgun approach and try to invest in as much as possible. Bad investors don’t know what their unfair advantage is and have no investment thesis. Bad investors take a long time to make a decision, ask who else is already investing and are influenced by what those other investors are doing. Bad investors don’t know other angel investors and have not worked with many angel investors in the past.
Good investors are there to work for the founders. Good investors make minimal demands of the team they are backing and always act in the interests of the founders, sometimes to their detriment. Good investors take up as little founder time as possible, but offer their own time without limits. Good investors are responsive and flexible to take meetings, calls and emails from potential and existing investments.
Bad investors work for themselves. Bad investors take up too much founder time with questions, requests for meetings and long calls. On the opposite extreme, bad investors are difficult to contact, have limited availability and are restrictive with their time.
Good investors are hands-off but are willing to get into detail when asked. Good investors realise their advice is just one opinion, ask a lot of questions and offer viewpoint so the founders can make their own decisions. Good investors back the founders regardless of whether they agree with the decision. Good investors give founders the benefit of the doubt but still challenge assumptions and ask the difficult questions.
Bad investors want to be involved on an operational basis and question day to day decisions without prompting. Bad investors tell founders what to do and get upset when decisions are made against their advice. Bad investors question everything in excessive detail, not realising they don’t have the right context to get involved with most things.
Good investors realise startups are a long game. Good investors act as if they are going to work with the founders for the rest of their life on many projects. This means good investors accept that they may lose money on one investment but will have an opportunity to back them again in the future. Good investors realise that founders talk, and successful founders later become investors who will only want to work with other good investors.
Bad investors become Mr Market even with illiquid startup assets. Bad investors consider startup investments at a point in time, rather than as a part of an overall strategy to help founders. Bad investors consider startup investments as a financial instrument rather than to stay involved with the cutting edge of technology and benefit from a vicarious founder experience.