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):
- 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!”)
- 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.
- 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
- Pride. Both personal and professional.
- 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…
- Um. Others?
Why should an investor confess?
As an entrepreneur, when I’m sifting through potential investors, I’d like to know:
- 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?
- 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.
- Market opinion: what other entrepreneurs came to you with serious investment offers? Social proof works both ways, guys…
- 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?
- 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)
- 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)?
- Honesty. With personal recognition of past mistakes, and the dose of humility that required.
- 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?