Fred Says Invest in The Mess…I say Invest in the Grind

I have blogged before about my approach that I have developed to investing.

On illiquid angel investments I want/need to be as cheap as possible.  It means despite my improving flow of deals, I say NO more than ever.  I have learned to embrace the NO and am getting better at it.  When I knew I had to say no more often (Stocktwits time commitments) I invested in Betaworks back in 2008 and also started investing in Techstars so that my early angel money could be surrounded by a very experienced group of eyes and execution mentors.  I am STILL finding amazing opportunities at the $2 million pre money valuation.  Many more than I could possibly say yes to, even though I would pull the trigger if I had an endless supply of capital right now.

On liquid investments, I don’t care about P/E or balance sheets or what’s in the past.  I want to pay up for the best stocks because I can get out!

Fred uses the term ‘Invest in the Mess’, but I don’t think he means the type of mess that I would call a mess.  To me, a mess is what certain private equity people do. They come in, change management teams, grind all parties to the ground to reduce their cost basis and risk and than roll up their sleeves and go to work rebuilding sales channels, products and operations.  I have seen partners do this and I don’t know much, but I know that investing in the mess is NOT FOR ME.

You need a different stomach.

I believe the next stage of the web will be about grinding it out.  Building sales teams, doing the dreaded ‘off web’ marketing.  Has anyone in the web 2.0 world of Silicon Valley bought local televeision time or national radio plans.  I believe in the mathematics of Revenue Per User (RPU), but now that everyone is using that term, I doubt that the strategy will continue to work long term for building a business.  I believe you will have to recruit talent that knows how to acquire customers in more old fashioned ways.  Face to face…travel, phone, shmoozing etc….That will take time and patience and that’s what the next phase of investing is about more than the mess.

It’s the GRIND.  Your leaders should be prepared for it.

9 comments

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  2. Peter Cranstone says:

    Howard,

    Remember the three snake rule.
    1) Snakes are dangerous
    2) Snakes should be avoided
    3) Snakes look like opportunities at a $2m pre

    Very, very few people have figured out measurable, sustainable, profitable revenue from volume for a $2m pre. It’s an idea, a few moving parts and a few moving people. There’s no sustainability, there’s no paying customers “and if” it’s a middleware play (that’s where your software goes in someone else’s environment (as opposed to a web 2.0 play)) then indeed there’s going to be a long grind.

    After 20+ years at this game (entrepreneur) I’ve learned about the grind and really what it comes down to. Solve a real problem, solve it in the simplest way, punt on the rest.

    Problem is – it’s darn hard to do that, especially if you’re ahead of the curve. So warning Will Robinsion – $2m pre ahead. Is it a snake or an opportunity? And the only correct answer is “insufficient data”?

  3. Anonymous says:

    I have only invested in three private placements in my life. In all three cases, I did the due diligence on projections, sales and marketing, technology, and management staff, and even then made LESS than the expected investment. People wonder why I only invest in small chunks, but the proof is in the pudding. The ones that work will outweigh the profits of those that do not. I admine Fred Wilson because he uses the same skills a corporate raider or a pure venture capitalist would do. He grabs the bull by “the jewels” after reviewing what he likes and dislikes about the company and reshapes the firm into something in which HE can comfortably invest. That is not what I do best (particularly when it comes to management issues) and since I do not have the kind of capital you folks have to swing into those investments, I couldn’t even dream of something like that. Even if I did, I would not. I would go “redneck” on most of those operations anyway if I did. I am not skilled enough or patient enough to make those kinds of pivotal changes.

    Stocks I can do because I can break most of them down (at least within the USA), value them, figure out the trend, make projections, figure targets, get in and get out. Because it requires no more than cash and a direct access broker, I need no intermediary and the only mess I have to deal with is a chart and my own research.

    Perhaps that resigns me to being a back-bencher for those who invest in grander schemes, but at least I understand the risks before during and after the investment with stocks (and most real estate that I deal with). Because I am experienced and comfortable in that pond, I will just keep swimming in that one. At least I understand when it is about to be drained so I can get out of it lol.

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