Why I Invest In Early Stage Companies

I have been investing in start-ups for almost 20 years. These investments have not changed my life financially but they have given me the opportunity to see the world differently and that in itself has changed my life. Here is my perspective on early stage investing as a non-professional investor.

It is important to note that my tech investing is not my primary business. My investments in Real Estate and distressed assets, which is my primary business, follow a very different strategy, risk level and business model.

My macro investment thesis:

1.  Disruption - One of the companies we invest in hopefully will disrupt an industry, maybe even my industry. I can either be part of the disruption or watch from a distance.

2.  Playing the odds - Early stage companies have a very high failure rate but also high payouts to winners (10x - 100x). Therefore, you need to make lots of micro bets to see what happens. 

3.  Diversification play - Industries are changing fast and the lines are blurred between them. Making investments in numerous areas provides coverage for when a company pivots into another industry.

4.  Consumer demand – It’s impossible to predict. Only way to create luck is to be invested in various areas. I have a 12-year-old daughter and I have no idea what she is going to like next month let alone 5 years from now.  

5.  Timing - I invest for the future and not for today. In an exponentially changing world we need to focus on what the world will be like 5-10 years from now, and exponential change creates chaos that we cannot always comprehend. Industries move linearly while tech/early stage companies move and think in exponential terms. 

6.  Teams – important, yes, but never under estimate the power of a passionate leader. They can find smart, experienced and skilled followers to get them to a successful place.

7. Cool tech - I don't invest as a profession, so I am not solely focused on short term IRR or return on investment. I want to be cool and have something to talk about. The Uber of this or that or another subscription service is not great conversation, being ahead of the curve is.

8. Future deals and rounds - When you invest in a team and a product, many times both don't succeed but one probably will. I have invested in companies that completely pivoted into different areas and then made money and I have invested in teams that originally failed but made it on the second or third try. Think long term.

9. Scale - Always look for an opportunity that can be big.

For my micro view, I focus my fund on:

1. Industry Knowledge - I only invest in groups of 20 members or more that are in varied industries and can provide a qualified assessment of the investment.

2. Network - It is important to use the combined network effect of the partners to grow our investments.

3. Competitive – As a group we hate losing and will do what it takes to make these investments work.

4. Funds - We are connected to money and will make sure that if portfolio companies deserve it they will get their next round.

5. Multiplier effect – We invest with the understanding that our investment is an entry to further funding.

7. Existing businesses - One of the companies we see will be a disruptor to our businesses and we hopefully will pay attention and learn from them. This is probably more profitable for us then any investment.

8. Increasing luck - The more our funds invest the more opportunities we see. I currently see almost 100 deals per month and only invest in about 1 per month. 

Again, financially, these investments are not life changing but since many of the things we do, create a mindset, early stage investing for me has created opportunities to accept change, focus on growth and think about the future. That is why I invest early stage.