One of my favorite startup investors, Jason Lemkin, tweeted something very insightful the other day.
My top mistakes investing:
- Investing when not 90%+ sure within 20 mins
- Not doing pro-rata 100% time if great
- Investing in any founder don’t 100% trust
- Not investing just b/c don’t 100% understand it
- Investing in founder not 100% honest
- Not investing after 1st meeting
Jason is probably one of the world’s top 10 software-as-a-service investors. So I always pay close attention when he drops wisdom like this.
I haven’t been investing nearly as long as Jason has. But from what I’ve seen, his advice is spot-on. I especially like the first investing mistake on the list.
Angels and venture capitalists like to talk about doing extensive due diligence. But I think Jason is correct that you can get a very good feel for a deal within the first 20 minutes of reading the pitch deck or hearing it from a founder.
I’ve certainly made the mistake of digging too deep into a deal and convincing myself there’s a major problem. One of my biggest lessons is that with early-stage companies, there are always going to be issues that may seem insurmountable at first glance. After all, if it was a sure thing, everyone would be fighting to get into the deal and we’d probably never see it. This is simply the nature of early-stage investing.
I have also learned that pro-rata (your right to invest in subsequent rounds after your first investment) is something I misjudged at first. I’m now a big believer in doubling down on the (most) likely big winners. In a few cases — like FabFitFun — I exercised my pro rata rights. And it made a tremendous difference in my (mostly paper) returns.
But for many other deals, like Density.io, I passed on my pro rata rights. And I’ll regret that forever. When you have an amazing founding team with a great idea that’s catching on, just invest in the next round! It may seem expensive compared to what you paid in the first round, but it’s almost always a good decision. It won’t always work out, but that’s just the nature of startup investing.
As I mentioned last week, I’m scaling back my startup investing due to overheated conditions. But I can always absorb wisdom from the great investors. And the ones who talk about their investing mistakes are especially worth listening to.