Published in UT San Diego, December 4, 2012
“Very interesting technology, good idea, strong team but you are just a little too early for me to invest.”
Hearing this, the young entrepreneur contemplates two possibilities. Should he strangle the angel investor to death right on the spot or simply bludgeon him into submission with his pitch deck and then make him read a year’s worth of blog posts from TechCrunch?
I have come to an epiphany on this dilemma. This thing called startup investing — angel or venture capital — has an interesting component. The central issue is timing. The above investor is probably right. It is too soon, but at the same time, the risk he runs is that if he is too careful, it may soon be too late.
Imagine a very steep mountain with a very narrow ledge at the top (Everest is a good example), and the distance available to travel from the time you are going up to the time you are going down is very small. There is not a lot of flat land up there. This is the angel investor dilemma.
The optimal time to invest is about 30 steps before the entrepreneur gets to the top. That is the moment when you can see the summit but you are not quite there. There is still some climbing to do, and strong legs and an oxygen tank should carry the day. The entrepreneur is tired, and if you offer him a Clif bar and some Gatorade, you may be invited to walk the last 30 steps with him. At that point, he does not need a five-course dinner from Fleming’s.
Now, let’s take a look at the venture investor. His problem is much different. Imagine the same mountain, and also imagine a mile of flat land up at the top before you can start the descent. The venture investor has seen you make the summit; he is the one who can offer the all-you-can-eat buffet, enough to feed your army of developers and sales people, but he also has a timing problem. He wants to do lots of due diligence. He needs time to take advantage of the flat land. You are physically exhausted, a bit confused, there are no clear signs pointing to the proper descent path. After all, your sole goal was to summit. Getting down was not really at the top of your list of problems. And now you need supplies to make the trip down. More people die on the descent from Everest than on the ascent.
This is the venture investor moment. But again, if he waits too long, he will miss out. Entrepreneurs get stronger on the flat land. They can catch their breath. And there are other investors waiting at the top. They have already built Swiss chalets with hot tubs and a gourmet kitchen, just waiting for you to knock on the door.
The investor/startup dance is always about time and timing. In January 2012, one of my companies was down to $8,000 in the bank. Today it has more than $100 million of orders for our technology. The investor in that one hit it just about right.