The attractiveness of different investment stages

When I first started investing, I thought that the best investment opportunities were at the seed stage. In other words, I thought that the best opportunities were in being the first investor in companies. My reasoning was that, if you know what you’re doing, this is the stage when there is the greatest return potential.

However, in addition to the greater return potential, seed stage investments also feature the greatest risk, and the greatest competition. If you know what you’re doing, you can minimize the risk. However, you can’t change the competition.

The number of people who can lead a $500K seed round, or contribute $50K towards it, are numerous. And this number will only grow as technology in general, and software in particular, changes the way that things are done in more and more sectors. The result is that seed valuations are often pushed higher than what can be justified by seed companies’ underlying business prospects.

As the round size and the resulting check size increase, in other words in Series A and B rounds, the number of people who are competing for a deal declines. And my intuition suggests that the reward to risk ratio does not decline as much. In other words, series A and B investors occupy a more attractive part of the value chain than seed investors.

I’ve participated in a few later stage rounds, beyond the series B. However, I haven’t done so a sufficient number of times to have a feel for whether later stage rounds are even more attractive than series A and B investments. With time, perhaps I’ll find out.

What’s missing from this reasoning is your personal fit for different stages. For example, earlier stage investment decisions are more qualitative in nature whereas later stage decisions are more quantitative in nature. As a result, even if series A and B investments represent a more attractive part of the value chain, they might not be the right fit for a highly qualitative investor.

Kindness

Every action you take, no matter how positive the intent, can be taken out of context, spun, and presented in a negative light. All you need for this to happen is people who don’t like you.

Similarly, every action you take, no matter how negative the intent, can be presented in a positive light if the people doing so like you, or fear you.

I’m not advocating for the latter.

For the former, enough people will take this approach based on what you do that you shouldn’t give them another reason to do so by not being kind.

When to raise money from a strategic investor

As a startup, there are two benefits of raising money from a strategic investor.

First, the strategic support provided by the investor can provide value beyond what a financial investor can provide. For example, this may come in the form of new customers, new suppliers, a distribution channel, technology, or a reduced cost base.

Second, a strategic investor can turn into a strategic buyer at the time of exit.

There are also two downsides to raising money from a strategic investor.

The first is that the strategic investor can, either through their investment rights or through persuasion, pull your startup in a direction that makes sense for the interests of the strategic but not necessarily for your startup. This goes beyond the different perspectives that founders and all investors, including financial investors, can have about the best direction for the company to achieve its goal of maximizing long-term shareholder value.

The second is that the presence of the strategic investor and the fact that it is often a likely buyer of the company has the potential to limit other exit options for the company. As a result of the restricted exit options, financial investors are often less willing to invest in the company.

When you’re an early stage company, you have yet to exhaust the many ways in which you can create value. You’re also far removed from an exit. As a result, the costs of raising money from a strategic investor outweigh the benefits. If you have other options, you should avoid raising money from a strategic investor.

When you’re a late stage company, a strategic investor can provide new value in an environment where you’ve exhausted many of the easy ways to create value. You also start to think about an eventual exit. The benefits of raising money from a strategic investor might begin to outweigh the costs, so you will want to think about doing so.

Hard at first, easy later

Doing something consumes energy. As a result, you have less energy to do the thing again in the short term, which makes it harder to do.

However, doing something also builds that thing into a habit. This means that it takes less energy to do the thing in the long term, which makes it easier to do.

So you need to do things that are hard at first in order for them to become easy later.

Startup investments as call options

Although an investment in a startup gives the investor equity ownership in the company, the return of the investment is actually better thought of in terms of having bought a call option on the company. Here’s why.

The main drivers of the value of a call option are its underlying stock price, strike price, time to expiration, and volatility.

At the time of purchase, a call option has an underlying stock price that is below the strike price. If the underlying price rises above the strike price, you exercise the option at the strike price and make the money between the higher stock price and the lower strike price at which you exercised. This means that, at the time of purchase, a call option is out of the money. Similarly, at the time of the investment, a startup is valued at a higher figure than its fundamentals suggest. You invest with the hope that the company’s fundamentals grow, and pay a premium for this optionality. If they don’t, you very often lose money on the investment.

The longer a call option’s time to expiration, the greater its value. Similarly, an investment in a startup is a long journey that, excluding an acquihire which might take place earlier, takes upwards of 7 years and often much longer to produce a return.

Finally, the greater the volatility of a call option, the greater its value. Similarly, startups are highly volatile investments, both at the startup level as the company tries to build a product, achieve product market fit, and scale, and at the portfolio level, with many more startups failing than succeeding.

As a result of these reasons, if you view startup investments as traditional equity investments, you’re less likely to make the types of investments that succeed than if you view them as call options.

Startup: A Silicon Valley Adventure

I recently read the book Startup: A Silicon Valley Adventure by Jerry Kaplan. Jerry was the founder of hand-held pen computing pioneer GO Corporation in 1987, and the book tells the story of the challenges, pains, and joys on the road to building and eventually achieving a modest exit with GO.

It’s a story which highlights the importance of product market fit (it turns out that a hand-held pen computer’s close cousin, a touch-based hand-held or in other words a smartphone, is the right solution), timing (GO was a few years too early), and competition (large markets attract the attention of large tech companies with greater resources than startups, and the startups that succeed achieve distribution before incumbents achieve innovation).

I strongly recommend reading the book, which you can check out here.

Wind sculptures

A wind sculpture is a sculpture that changes shape based on the strength and direction of the wind.

I first encountered a wind sculpture when my wife and I visited Buenos Aires about a year and a half ago. The Floralis Generica at the United Nations Plaza in Buenos Aires not only has petals that close in times of high wind, but also changes shape based on the rising and setting of the Sun.

Here’s a video with more examples of wind sculptures.

Besiktas in the UEFA Champions League

Turkey’s sole contender in this year’s UEFA Champions League, the top European football club competition, is Besiktas.

The group stages just ended this week and Besiktas achieved something that no other Turkish football club has done in the competition so far. They completed their group stage matches undefeated with 14 points, after winning 4 and drawing 2 of their games. This represents the highest number of group stage points ever collected by a Turkish football club in the UEFA Champions League.

I congratulate Besiktas and the club’s fans on this excellent performance, and look forward to seeing what’s next in store. It could be quite surprising.

Doing less rather than rushing

When you’re giving a presentation in a predetermined time slot and you realize that, if you continue at your current pace, your presentation isn’t going to end on time, you have two options. You can either speed up your pace by talking faster or cover less content by focusing only on the most important remaining content.

The former approach creates stress, and that stress impacts not only your ability to communicate your thoughts but also your audience’s ability to understand your message due to simultaneously thinking about your frenetic body language.

The latter approach means that you don’t cover some content. However, by skipping the content that isn’t a priority, you can get the key elements of your message across, thereby retaining your calm and increasing the likelihood that your audience understands your message.

The reasoning outlined above regarding what to do when you’re pressed for time when presenting can be generalized to other contexts. Specifically, when you’re pressed for time, it’s better to do less by prioritizing the important things than to do the same amount by rushing through it all.