Why I Passed on Investing in (a real but unnamed) Hot Startup

Just say no

Yesterday I video-skyped with the CEO of an intriguing Startup.  They were recommended to me by one of their investors on AngelList.  They had going for them a) a big addressable market; b) an area which clearly will break out, but with no clear leader; c) two vocal and well-known angel backers, both of who screen more potential deals than anyone else I know, but both only investing in maybe 10 a year; d) other influential investors; e) an advisory board featuring a world-expert (who advises the Obama administration on a closely-related topic and is also investing in the company); and a seed round which already has $300k of commitments for a $500k round.­­­  And a ton of excellent press coverage for a company that just started selling in November. You can’t get much more social proof than this.

Then add the fact that the deal was a convertible with a 25% discount on a $2mm cap, the company had launched a few experiments and booked real, albeit small, revenues, had worked out its e-commerce platform, was focusing in on sales metrics, and was running on a burn rate of only 8k a month, as the founders evidently were drawing no salary. And the cherry on top was that this very much for-profit company was also raising awareness and doing some good for an important social purpose. What’s not to love about this situation?  But I’m going to pass on this deal with so many things going for it. Am I nuts?

Half the reason is me, and half of the reason was my talk with the founder. While to date I’ve had great luck with AngelList (investing in CardMunch—see my blogposts here and here, ScriptPad and UpNext via this source), I think increasingly going forward I’m going to invest in teams I get to know a lot more closely from mentorship involvement via TechStars Boston and MassChallenge.  So that makes me much more picky about investing via AngelList or the traditional angel-group presentations where there is less interaction on the due diligence.

But the bigger reason was my interview with the CEO.  I come armed to these encounters looking to disqualify a company, as I’ve often already discovered what’s to love about the company from the first round.  So I generally am testing for weaknesses, as opposed to looking for a reason to justify buying.  And the CEO couldn’t give me a simple, clear elevator pitch.  Adding to my confusion was that I came in a little confused about his distribution model—his paper presentation had shown several different routes.  It took me at least 5 minutes to figure out what he was doing, and I was prepped for the talk.  Now, for a company that is all about execution—this isn’t a patentable idea—if the CEO isn’t the top sales person/advocate, it faces a big challenge, whether in attracting good people, customers, or future investors.  Maybe I just got him on a bad day, or he got me on one.

Lastly, I don’t know how I can help this company in any meaningful way.  The others investing are smarter, better connected, and more in touch with the company.  I haven’t used their product (though I’ll check it out), but there’s just not a connection for me.

I considered calling up one of the investors, who is the head of a large and prestigious EastCoast angel group, and seeing what that angel knew that I had missed.  But in the end I just said no, deciding to go with my gut and just close the book,  to mix metaphors.

I wish the company the best, and made some recommendations as to who might be good investors to close out the round.  But I still passed.  What would you have done?  Would you have given the CEO another chance to pitch you? Checked in with the other angels investing?


17 thoughts on “Why I Passed on Investing in (a real but unnamed) Hot Startup

  1. This is a very interesting post and thank you for sharing your story. To answer your question, I think the answer is very simple. You made the “right” decision because you went with your “gut”. I am not sure I agree with an “off day” or “bad day”, I believe there was a reason why yourself and the CEO didn’t automatically click. Just think if you did invest, you would probably be worrying about his next “pitch” to both future customers and getting future employees on board. Again, thanks for sharing.

    -Kim Walsh

  2. Hi Ty,

    What’s puzzling about this whole story is how he got all those other top class people on board – surely he had to have some kind of sales skills / passion / charisma to line up all that social proof? That would certainly tend toward the “off day” theory.

    If you spoke to him again though and still aren’t feeling it, maybe he’s just less convincing to you personally than the others. If you did invest, you might both struggle to overcome that.

    On a more general note, I really appreciate your candour in discussing your investment criteria and evaluation process. The more these things are demystified, the better – for investors and founders (I’m in the latter group to be clear) alike.

  3. Great post Ty. It always comes down to the jockey. I’d have done the same thing. Every time I have overlooked a shortcoming of this sort in a CEO (or a key employee hire) I have lived to regret it deeply. Onward and upward.

  4. Ty,

    I also like to see outfits where the top brass can light a fire in my belly from the get-go… I think you’ll make winners and losers, but your notion of investing where you can also provide some good sweat equity are always going to make for better marriages… When I’ve gone hunting for money in any campaign, I’m also looking for talents I can put to the task as well. oftentimes I’ve got more than an investor’s cash for my campaigns and it’s paid off big dividends. Mark Sheehan, Author of “The Scent of a Dollar”. I’m in Australia now, rolling-out ZUMA Oz downunder…

  5. We’ve been to a lot of angel investors trying to raise the latest round. At the end of the day, what worked was establishing a real personal connection. I agree with your reasoning, since at this stage, the common wisdom is that you “invest in people”. If you were not impressed with the CEO that is the biggest reason not to invest. Now… The real question is whether you will do the logical equivalent which is: Given that you don’t like the model, don’t understand the business, but you’re in love with the team, would you invest?

  6. Hey Ty,
    I think you did the right thing. Not to be cliche, but you only get one chance to make a good first impression. The CEO should have had his act together, and if he didn’t then, he likely never does or won’t in the future. I do like Geoffrey’s comment #3 – but as something to ask in the first meeting, though, not the second. Also being a founder, I will certainly prepare for that question when the day comes.
    Best, Laura

  7. Great blog Ty! In my opinion, it’s hard to figure out what went wrong in the first meeting, could be a bad day for him, or could be that this was the earlier dates, people always learn from their mistakes, so when he goes home and figuring out what went wrong, on his next date with a diff investor, I am sure he will improve. So my suggestion is that if it’s truly a great start-up with high potential and high impact, it maybe worth to give him another chance after a while, after he gains more experiences dating with diff investors, and see how much he changed from his first date with you. A good CEO should definitely learn fast from his past screw ups and mistakes, and come right back in the game!

  8. Ty, you did “The Right Thing”!

    A founding CEO who should be passionate about his startup and how it will change the world should be able to explain the problem and the solution in very simple terms in his/her sleep. That really isn’t that hard, you know?!?!!? Seriously… he messed up.

    You made the right choice. It’s your money. Don’t be an Ant Drone. Be an Ant Queen. (not that you are a Queen… I looked up Queen or King … there is no King. But if there was a King you’d be it!!) chuckle chuckle… you smiled didn’t you?!?!?!

    Cheers to the Boston startup community!!

    – Marsh

  9. Overall, in the end, it’s your money – so walking away if your gut says walk away is the only responsible thing to do – but, for arguments sake….

    (remember, I’m coming from the founder side here, full disclosure).

    Given all the social proof, I’d give the CEO another chance. Let him know you didn’t get it, the pitch was not good, and you left with more questions than answers. This will do three things:

    1. You get to see how the CEO reacts to pressure with all the positives, that might be the first bad news he/she has gotten – how do they react? If they come out strong, you may have just caught an off day. If they fall flat, you just exposed a fair-weather leader. Good to know early!

    2. You said “I don’t know how I can help this company in any meaningful way” – forcing them to refine their pitch (if you can spare another few hours, and I admit, time is money and may not be worth it). If you give another shot, especially under pressure, you’re helping. More than you know!

    3. I would ask them directly “Why me and how can I help you”. A CEO has to know who the good deals are and when to say no, and that goes for investors. If he/she looks at you and only sees dollar signs, well, that’s also a problem. But it would be good to know, and something they should have said in the pitch – why they want to work with you, and vice versa.

    Anyway, that’s my take. I think one more round is worth it – eliminate the bad day scenario, put a high-flyer under some stress, and see, diamond or coal?

    Good luck with it!

    1. I did speak (before reading your response) this morning to the CEO, and he read this post. To his credit, he was gracious, but he was persistant–perhaps the most important trait in a startup CEO. And I’m sure he’ll be crisper and clearer in his next meeting with the angel. So he successfully passed the first two parts of your test, perhaps increasing my idiocy factor.

      But I’ll still go with the guy that there wasn’t something that really got me excited–numbers can look good, but there was no sense of mission there, like in another company which I am wooing hard, where there is an incredible opportunity and a great personal fit for me (guys, you know who you are!)

      My two take-aways are that there are always more deals around the corner, and I’ll always make bigger mistakes. Or so I hope in both cases! Thanks for leaving your good comment.

      1. Not idiocy at all – you said the most important thing -> about being excited, about sense of mission, about personal passion. The it’s not a good marriage if you can’t find that passion for it – so I totally agree with your decision. Best of all it sounds like the CEO learned a lot of good lessons from it – so win-win.

        I was in a similar situation; It can be hard as a founder to hear someone you really want to work with and admire is not interested in your idea. For me, that’s the hardest part, because of the desire to work with smart people.

        Best of luck on the one you have the passion for – and as a Massachusetts native, glad to hear you’re investing in that area, some great minds and startups there!

  10. Great post. Intriguing. I like your thinking. Products matter but so does leadership. Yours in this space illustrates a differentiated approach to investing : following the herd if your gut says no will probably turn out to be a good thing.

    1. Thanks for your comments, Stacie. Hard to buck an influential herd, especially when that herd has a bigger and longer track record. But that’s what makes markets. Anecdotally, I’ve had people email me both ways on this question.

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