Is there too much hyperbole in startup investing?
Several months ago, I met a brilliant Russian developer at Serge Milman’s Starta Accelerator, located in a sleek coworking facility under The High Line in Manhattan’s Meatpacking District. The young developer was perplexed by the intense nature of the tech meetup scene in New York City. He noted that most all the angel investors and early-stage entrepreneurs spoke in a hyperbolic tone, where every opportunity was either “massive,” “intensely disruptive,” “tectonic by nature,” “immensely viral” or “positioned for exponential growth.” It was encouraging to see an aspiring immigrant entrepreneur come to terms with a new cultural norm. And, although I understood what he was saying, I couldn’t disagree with him more. While these phrases all seem like hyperbole, they are clearly not – given that the group leading the discussions are all angel investors.
For you readers attempting to be angel investors, or for those of you trying to raise startup money from angel investors, you’ll find angels to be an eclectic bunch. They may come off as speed daters; one moment listening to your most intimate entrepreneurial hypothesis and the next they ghost you like a Tinder date. At that moment, when they are seemingly tearing your dream apart and enjoying your minion-like attempts to pose a rebuttal, they are judging you in another capacity – the angels are observing how well you deal with pressure and how quickly you think on your feet. Then, like Ariana Grande, they “thank you” kindly and are off to the “next” date. Some entrepreneurs take this type of rejection too personally, when, in fact, the dismissal may have been the result of a disciplined investment process. In most cases, these angles are looking for startups that have the potential to be outliers. They are looking for massive market opportunity, pure unadulterated disruption, or a unique offering that fits well into some sort of significant long-term trend change.
Angels speak with what seems to be hyperbole and look for outlier opportunities because the failure rate for their portfolio of early-stage startups is around 90% on average. For the veteran angel investor who builds an investment portfolio of 20 early stage startups, she anticipates 18 companies may fail, perhaps one breaks even, and she needs one to grow at an “exponential rate.” The angel’s mindset is to invest in many different moonshot ideas, knowing that almost all of them will fail, or at least some will do okay, but she’s banking on that one startup team to “kill it.” If we are talking about a portfolio of 20 startups, that one winning team may bring the entire portfolio return to a 4X multiple over a 5 year period. The typical angel may evaluate hundreds or thousands of companies over 3 to 5 years, or longer, to build a portfolio of 20+ companies. It’s hard work, but real angels do it for the love of the game.
Many top early stage investors are so focused on finding the right moonshot investment ideas that they unwittingly walk away from amazing opportunities. The hurdle to receive investment capital is high. David Cowan from Bessemer Ventures walked away from Google, eBay, and Paypal. While he’s all about moonshots, he thought those three ideas were a little too out of the box; look at BVP’s complete Anti-Portfolio here. And for public humiliation, you would have thought the team on Shark Tank had ASAP Rocky as a member when they chastised two black women for running bold color lipstick brand, The Lip Bar, which is now sold nationwide in Target. The same Shark Tank team ridiculed an offer to invest in Doorbot, which is now Ring Inc. and was acquired by Amazon. Angel’s know that most of their investments will fail, so they set a high bar. In some cases the bar is so high that amazing opportunities are overlooked.
So, the next time you hear veteran early stage investors and entrepreneurs speak with what’s perceived as hyperbole know that it’s all part of a well-disciplined investment approach to create an outlier type of event. The angel investment math doesn’t work with profitable startups that don’t have massive upside. Emerging angel investors should increase their ability to find awesome investment targets by creating a deal flow and high standard filtering process. Entrepreneurs should enhance their chances of raising funds by dreaming up massive opportunities.
If you’re an exceptional entrepreneur with a moonshot idea or an emerging angel investor looking for a disruptive approach to early-stage investing, then sign up for our waitlist below. At Fundr, we believe that startup funding is broken and world-changing ideas are going unfunded. We are launching a platform that connects investors with the best founders and companies out there. Our disruptive approach will mitigate risk, increase access, reduce bias, and speed up the investment process. Sign up for our waitlist (here) and disrupt with us.