Two years ago, I had (yet another) “brilliant” idea. (I am one of those people that can’t stop themselves from having ideas – it is both a blessing, as it provides endless free mental entertainment, and a curse, as I have been constantly chasing apparently great ideas that took me nowhere. But I digress…).
To put things in the timeline context, I was just finalizing my collaboration with Moven, where I was coming after many years of working with fintech startups, in my roles of the executive in charge of internal innovation, and as a fintech venture capitalist at SBT Venture Capital. So it made sense (at the time) to start another fintech-focused VC. After all, I have been doing it successfully for years, my friends were doing it, what’s the big deal anyway…
Two years later, the reality check – on money, process, resources, and results timeline.
I was just at the end of six months of doing the roadshow for a large investment round, and have just talked with maybe 200 VCs. So the thought of doing it again for external investors for my own fund was not very appealing, and I decided to invest only my own money. From this decision, consequences.
First, not enough money. I decided to focus on seed level startups, in the $25,000 to $50,000 investment, spread on many investments. I knew both the theory and the practice of seed investing, after working closely for years with Startup Bootcamp accelerators.
Second, too much money. It is well known that would-be investors that learn to trade using a training account with fake money get usually good results. All this smart behavior goes up in smoke the moment they start trading with their own, real money. The behavioral biases that influence this apparently strange result are well documented. When it’s YOM (“your own money”) and not OPM (“other people money”), you can’t think straight.. you are always too cautious. Of course, I knew about this problem (I used to teach others how to avoid this trap), and I created a system that would say “invest” (or not) and at what valuation (pretty easy at seed level). And still, a lot more often than the system was telling me, I said “no”. I was too cautious with my own money and made a very small number of investments. Which, statistically, guarantees failure.
Third, too many startups. When I started on this path in 2012, we had to go around the world to find good startups. We invested in Hong Kong, Silicon Valley, Montreal, and London. Five years later, thousands of flowers have bloomed. I was literally bombarded with requests, close to 1,000 startups. At the level of money I was looking to invest, and the resources I had to analyze the opportunities (me, myself, and I), it became clear pretty soon that it was not possible to do a good job, and give enough good startups an honest assessment.
Fourth, startup success and survival statistics. It is well documented that the VC business model is to invest in dozens of companies and expect 1 out of 10 to be hugely successful. The earlier you invest in the company life, the longer you have to wait. Just a quick example, I made a significant investment in Tufin in 2013. Tufin was founded in 2004 to develop on-premise software that manages various network level security policies. The company filed for IPO in 2019, 15 years after its start. So yes, from 2013 to 2019 the initial investment gain was “only” nX, while the seed level investment gain was significantly larger. But you had to wait 15 years… 15 years is a long time to wait to see if your $50,000 will generate an (any) ROI.
As of now, I am shutting down my seed fund. It was a lot of fun to talk with hundreds of fantastic entrepreneurs, and it was an exciting mental journey to see so many great ideas being brought to market.
I will keep watching them from a distance and wishing all of them to succeed while pondering the next step in my personal adventure.