Being informed doesn’t always prepare you for the worst or the best
To make a good investment you have to filter out the noise and look at the core value proposition. Understand what the market opportunity is, how hard it’s going to be to build the product, reach a critical mass and be successful.
One of the secrets to good investing is getting to know the entrepreneur - don’t make a split second decision based on one meeting. First impressions are important, but it's only after you make the investment that you really work out the calibre of the people that you’ve backed. It’s one of the reasons raising venture capital can take up to 12 months - it allows us to get to know the entrepreneur and for them to get to know the investors as well - it's a two-way relationship.
It's hard to appreciate the impact that one person can have on a business until you've actually seen it - both on the upside and the downside. For example, The Preston Group was struggling to get critical mass, so we recruited a new CEO who was experienced and had good judgment. He brought the team, the company and the stakeholders along on the journey and did a fantastic job - it was inspiring.
Peter Farrell at ResMed is another example. He’s an outgoing and charismatic guy who built a fantastic team of people who stayed loyal to him. That's one of the reasons that ResMed has been such a fantastic success and continues to be 20 years later.
Another thing to look at is the founding team's dynamics. This can kill a business but it can be really hard to understand until you’re right in the middle of it all. One investment we had went bad pretty quickly because the relationship between the two founders was poisonous. It embarrasses me that we hadn't worked out that these two people hated each other before we invested. When things got tough their relationship literally fell apart and eventually one of them had to leave.
Investors are biased towards the upside - if you focus too much on the downside you'd never make an investment. But when it comes to early stage angel investing there's no such thing as the perfect deal. You have to make an informed leap of faith - understand the upside and appreciate the downside and prepare to find plenty of surprises along the way.
John Dyson is Investment Principal at Starfish Ventures
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