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December 20, 2012

Finding "Investor-Entrepreneur" Fit (aka Avoiding the Series A Crunch)

A question I often get asked by entrepreneurs is what is Flybridge’s investment philosophy – do we make our investment decisions based on people or on themes?  The glib answer is both, but as I’ve thought more about this question I wanted to expand the answer a bit to help entrepreneurs understand how investors approach this issue in more detail.  I think this question has become more acute as the much-discussed shortage of Series A capital (the so-called "Series A Crunch") means that, going forward, too many entrepreneurs are going to be chasing too little capital.

People-based investing is an age-old investment strategy.  Bet on the jockey, not the horse, as the saying goes.  Exceptional entrepreneurs will always find a way to make money, so the job of the investor is to spot the exceptional entrepreneur and convince them to take your money as opposed to worrying about strategic trends and dynamics.  People-based investors focus their due diligence process on spending both structured and unstructured time with the entrepreneur, as opposed to analyzing the product, business model or interviewing customers.  People-based investors can be quite analytical, although often times it is more insinctual.  When they are analytical, people-based investors conduct deep management team due diligence, psychological profiles and a broad set of team interviews.  When they are not, they simply listen to their intuition as to whether the entrepreneur is a “money maker” and trustworthy.

Personally, I think this is a flawed investment strategy.  Building a successful startup requires more than exceptional people, because even exceptional people can find themselves the victims of market forces, competitive pressures and faulty business models.  I have seen many exceptional people execute beautifully, hire well, achieve operational excellence, but still fail to build a massive business.  These entrepreneurs are like the well-trained surfers who sit, frustrated, on their surfboards on a calm day because they can’t catch the right wave to propel them to shore.

A theme-based investment strategy requires the investor to have market knowledge and a strategic point of view.  Theme-based investors go deep in a particular sector, develop a hypothesis, and then meet entrepreneurs to test this hypothesis.  They build market maps, attend conferences, hire EIRs and cluster their investments and networking around a particular sector.  By building expertise in a sector, theme-based investors develop insights about where the markets are moving and where the opportunities are for disruption.  They like to “see everything” in a space before investing in something so that they are assured that they have picked the absolute best way to play the theme they have identified.

And here’s where the magic happens – referring back to my glib answer regarding Flybridge’s “both” investment strategy – when a theme-based investor collides with an exception entrepreneur who shares the investor’s vision for a particular disruptive opportunity.  I have heard many entrepreneurs gush when describing these meetings.  “It was like he was giving my pitch for me!” effused one entrepreneur after a VC she was pitching took over the meeting with their own passionate observations about the market opportunity.

We experienced just such an opportunity as part of a new deal we are leading in New York City that my partner, David Aronoff, recently alluded to.  We have a thematic focus on cloud computing and the consumerization of the enterprise.  It is an extension of our developer-driven investment theme, that led to portfolio companies such as 10gen and Crashlytics.  When we intersected with an entrepreneur who had a similar theme and had developed an emerging leader in a space we liked, we jumped at the chance to lead the Series A, following on with some great angel investors.

As an entrepreneur, those are the situations you want to find.  Seek out “Investor-Entrepreneur” Fit.  Find that investor who believes in you as well as the market opportunity and has already been thinking proactively about it.  Watch what they blog about, what their investment history looks like, and what conferences they are attending.  If you can find this intersection of compelling themes and people, you won’t sweat the coming Series A crunch.

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