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10 Investment lessons learned over 10 years

Over the last 10 years I’ve also been closely involved with early stage technology funding (advising VC firms and Angels) and have invested personal time and money in early stage ventures. That has given me a unique perspective of the challenges between entrepreneurs and investors.

I’ve written about my Top 10 fund raising lessons for entrepreneurs, and dare to follow up with my Top 10 investment strategies that may be useful to investors and entrepreneurs, here:

1 ) Invest in the founders, but be wary if the company consists of technologists only. The ones that come in without an operating plan clearly do not understand what you as an investor are looking for. Get a real operator in early.

2 ) Invest in the business, don’t invest in technology. The statistics prove it: ninety-nine out of a hundred of the most innovative technologies never turn into successful businesses. Especially investors (both VC and Angels) that made their money in the hay-days of technology have a tendency to underfund the business side, providing a weak foundation for any technology to succeed.

3 ) Don’t invest in an early stage company with more than one product or service. Let the company become the King-of-One, rather than the King-of-None. Multiple products or services require more money to support successfully and dramatically dilutes the focus of the company. Multiple products or services also “invite” a larger group of competitors, making it hard for customers to perceive true differentiation and unknowingly, slows down adoption.

4 ) Don’t invest in an early stage company with more than one business model. Keep it simple. Multiple revenue models sound good, but usually don’t yield the projected outcome. The company should make all of its money in advertising or in subscriptions, not in both. Dilution of focus is costly and provides yet another reason for failure.

5 ) Don’t invest in companies that rely heavily on partner support early on. This is the typical David and Goliath phenomenon. Partners sell once the company does in overwhelming numbers. The company should always have direct control of its own business model first, before they allow any partner to reduce its margins.

6 ) Invest money or time, don’t do both. I very much relate to Carl Icahn in an interview with Dan Primack (on PEhub) with regards to CEOs responsibility to make the numbers work, and not to rely on investors to “add value”. The CEO is in the driver seat, take him out if he doesn’t produce.

7 ) Look for fundamental changes in customer experience. The Ultimate Driving Experience is what sets BMW apart, not just the timing in their engines. Customer experience is much more than a pretty user interface, it is an overall experience that spawns disruptive purchasing.

8 ) Watch how professional the team operates pre-funding as an indication of their interaction post-funding and with customers. Real professionals do everything with a purpose and I have mastered the art of detecting them. So well that I can tell from a visit to a trade-show floor whether a company is going places.

9 ) Don’t categorize investment allocations based on past investments or trends. Every company is unique and requires an amount of money unique to their assets: people, timing, market and ecosystem. If you don’t think you have a unique scenario, you probably don’t have a valuable investment opportunity.

10 ) Invest with passion but don’t fall in love with the company. Investing is the ultimate flirting game, but it is usually a bad idea to get really involved. Your asset value is the selection and performance of all the companies in your fund. Stick with what you do best.

From an investment perspective I see many “sub-optimizations” but not a lot of real great innovations these days. I do blame the current investment model for that sometimes. We, in Silicon Valley, have too many technology investors using the same rear view-mirror investment criteria. Although I have a lot of admiration for Apple, it is a bad sign when we need to leave real innovation in the hands of large companies like theirs.

The landscape for investors is about to change dramatically, no longer can they just continue to invest in proprietary technology silos at single digit valuations. They’ll soon need to broaden their experience (“in search of the Economist VC”) to understand the macro-economic impact of marketplaces, platforms and the impact of technology to other industries.

A wonderful long road for technology innovation and investing still lies ahead.

The Delicacy of European Investments

Originally posted by Georges van Hoegaerden, Managing Director – The Venture Company.

I just came back from a trip to Europe and let me tell you: Belgian chocolate, raw herring from Holland and ficelle from France – nothing is more authentic and delicious.

But few of these travel well or find a large deserving audience in the United States. Much like technology.

The state of the technology industry and the accompanying investment ecosystem in the US are quite a bit more developed than in Europe, 15 years at least.

In the US, roughly $30B per year is poured into early stage companies by some 300 investors in my backyard in Palo Alto, not including Private Equity deals. In contrast, only a handful European early stage VCs exist and the majority of all european investments are late stage investments done by Private Equity firms.

In Europe, early stage VC valuations hover around $1M, compared to $4-7M in the US. As a result desperate european entrepreneurs often default to Angels that show some flexibility, but those investors are often very inexperienced with the technology sector and early stage investing or the combination. They made their money somewhere else. Because of the young history of technology success in Europe, very few european investors (either VC or Angel) have actually had the personal experience of building an early stage technology company from scratch.

To sum it up, european investors (with a few exceptions) take large early equity stakes, provide limited relevant business insight and push those companies to early profitability (even at 250K euro investment levels). Selling a product or a service too hastily, before it is ready to enter a global marketplace delivers NO validation of the business, good or bad. But it is a sure way to slow down its innovation and differentiation.

So, underdeveloped access to quality early stage money makes life of entrepreneurs in Europe quite difficult.

But, let’s assume you passed the bar on all the above and your company is on its way to the United States. No one can stop you in the pursuit of the great early exit opportunities only Silicon Valley can offer.

So here are some things to be aware of:

1/ A cherry, picked by an investor in Europe is not always a cherry in the US. Be sure you understand – or seek advice about the timing differences between continents that attract follow-on investors in the US. Some of that timing has to do with technology, but market timing is even more crucial.

2/ Plan ahead. Allocate a larger fundraising runway than you would in Europe. To US investors foreign companies are yet another risk they need to mitigate. By default you are less attractive than a US company.

3/ Modify your operating plan. Change it from a plan to profitability to a plan to market dominance (which could include profitability but can also have other primary denominations as drivers, such as owning a majority of eye-balls in the consumer space).

4/ Move your headquarters to the US. Without it you’ll find very few US investors interested.

5/ Assuming you get this far, be open to a recap. US investors understand the equilibrium of shareholdings will provide the best business value, not exorbitant ownership of the initial investor achieved through a low initial valuation. But since the US valuation should increase significantly, the initial investors should not lose too much net value, if at all.

6/ Hire a local management team that understands how to perform in a petri-dish that is quite different from Europe.

My final recommendation is to be prepared before you come over and not put your head in the sand, I can give you a long (and still growing) list of foreign companies that were forced to move back.

For larger US VC firms there is a fantastic opportunity to scout for technologists in Europe and fold them into their US investment model before they’ve taken in too much local money. I see technologists in Europe building innovation that is at least as good as the in the US. Remember the most delicious chocolates from Belgium?

But, the worlds largest chocolate factory is Hershey’s located in the US. The name of the game remains matching sufficient technological capability to a fast growing market, in the same way Hershey’s reaches a much larger audience than Belgian chocolates – with a quality that is good enough for most. Market timing, not technology, is key.