Entrepreneur Office Hours - Issue #128
Don't be fooled by the things you don't fully understand
Humans have a funny habit of underestimating the things we don’t understand. For example, consider a sport like NASCAR. A lot of people will ask, “How is that a sport? It’s just driving in circles.” What those people don’t appreciate is that driving a car near the peak of its physical limits is very different than the kind of driving we all do in our own cars. For example, when you’re driving a car at 200 mph, understanding the weight of the remaining fuel in your fuel tank or the temperature of the asphalt you’re driving on can literally be the difference between life and death. In contrast, how often do you worry that the weight distribution in your car or the angle of the sun could send you careening into a wall?
In the entrepreneurial world, something similar happens with venture capitalists. Maybe not the “life and death” part, but professional VCs are much more sophisticated than most entrepreneurs tend to realize. They’re not just arbitrarily making investment decisions, that’s for sure. And, in this issue of EOH, I share a story that (hopefully) demonstrates why.
In other words, when you’re fundraising, you’d do well to remember that the investors you’re talking with probably understand what you’re trying to do better than you realize. That’s something I didn’t understand when I was a young entrepreneur, and it’s a big reason why I struggled.
When you’re fundraising, even the simplest questions from investors can have surprising implications.
The Real Estate Investor Who Took Niche Dating Mainstream
When Alon Carmel launched JDate in 1997, the Web already contained over a hundred Jewish themed dating websites. But rather than seeing all that competition and thinking the market was saturated, Alon saw the competition and figured: "It must be a good business." And he was right!
Listen to the full story of Jdate now on:
…or search “Web Masters” wherever you listen to your favorite podcasts.
FROM THE ARCHIVES…
I consider any article about entrepreneurship where I can incorporate a reference to Shakespeare a giant “win” in my book. That’s exactly what I managed to do in this article about how to choose a startup’s name.
Office Hours Q&A
My co-founders and I are considering taking a large seed investment from someone who is a friend but not a professional or experienced tech investor. Ours will actually be the first startup he’s invested in.
Do you have any thoughts on something like this and what we should watch out for? I guess I’m mostly wondering that you always hear there are risks taking money from bad investors, so I’m curious what those risks are and how we can avoid them.
New investors can be difficult to work with. But, like everything else in life, everyone has to start somewhere, so the fact that someone is new to investing doesn’t inherently make that person a bad investor. It does, however, make the person a less experienced investor, which means you need to consider how the lack of experience might impact you.
One of the biggest ways an inexperienced investor is going to impact you (and possibly be a “bad” investor) is if that person isn’t clear on the expectations for his/her role. This can manifest itself when inexperienced investors expect to have lots of day-to-day involvement in your company decisions. Usually (though not always) investors don’t help operate the companies they invest in, nor do they expect to have involvement in those operations. But some inexperienced investors thinkin buying a stake in a company means they should always have a say in how it’s run. That’s almost never the case. (The exception being, of course, if the investor technically owns a majority, in which case that investor can do anything.)
Beyond having uninformed expectations about being involved with a company’s decision making, inexperienced investors might have errant expectations about how often they should be updated, what their responsibilities are to the company, and even if/when they should expect to attend meetings.
Because of this, your job is to help set those expectations and guide them. This can be a problem if you’re also an inexperienced entrepreneur, so don’t be afraid to ask for help from fellow entrepreneurs who are a bit further in the process and understand how to manage investor relationships.
Another way inexperienced investors can create problems is by not bringing value beyond money. While money is, indeed, important, it’s not the only type of value you should expect to get from investors. Savvy entrepreneurs want investors they can leverage to help their businesses in other ways beyond money including partnerships, connections, introductions, hiring, and, of course, mentorship.
Again, new investors might not be aware of this. Before taking money, help make them aware of these expectations. If they’re going to be good investors, they’re going to want to figure out how they can help succeed aside from just giving you cash. If they balk at the possibility of helping provide value beyond money, that’s when you should worry about whether or not they’ll be good investors. At the very least, you’ll know what kind of investor relationship you’re getting into before having over a piece of your company.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!