Just because you’re a great entrepreneur doesn’t mean you’ll make a great investor. Gallup research (2,500 entrepreneurs studied) shows that certain behavioral traits are shared among top entrepreneurs – but the skill set that makes an individual a powerhouse when it comes to building a company isn’t the same as what makes a profitable investor. But why do entrepreneurs turn investors?
“For successful entrepreneurs that have made some money, angel investment is a great way to live the early-stage life vicariously through entrepreneurs. It’s a lot of fun.” – Dharmesh Shah, the co-founder of HubSpot. These entrepreneurs can find themselves simply in different stages of life. Entrepreneurs make huge “life-balance” sacrifices since almost all of their time and energy is focused on growing the business, talking to customers, dealing with employees and the myriad of other elements that are important to the startup. It can be difficult to successfully balance a wife/husband and a kid or two. Of course, there are many examples of this successfully being done, but it does add another layer of time management and stress that can be too much of a burden for some entrepreneurs (or their significant others). On average, it takes around seven years for a startup to exit. So when entrepreneurs finally reach the “exit” sign, a lot of them are ready to focus more on other aspects of their life. That being said, entrepreneurship is an addiction. They still want to be involved in the entrepreneurial scene and startup process.
The drive to stay within the startup life while balancing own life can lead to the question – why not to try to invest? This position offers the opportunity to get involved with multiple startups while having a bit more time and energy for other things. They are happy and enjoying their work without having the concerns of payroll and profits. Most already have come to terms with losing their at-risk capital and enjoy sharing in the startup adventure. Some of these entrepreneurs-turned-investors can invest in startups while working on their own next startup.
Ultimately, most successful entrepreneurs want to take a little time to figure out what they want to do next, and becoming an investor is a great way to pass the time and stay current. Becoming a product-focused entrepreneur requires a tremendous amount of passion for that market, customers, and the product. Often a successful entrepreneur doesn’t find something that he/she can totally dedicate to with so much passion that he/she did in the previous venture – so they become investors or advisors.
Being an entrepreneur is essential for adding value as an investor. Investing is more than finding cool companies and figuring out a price to pay. There are a few entrepreneurs turned investors that have parlayed their business-building skills into become successful angel investors and venture capitals. Thankfully for us, many of these entrepreneurs-turned-investors write extensively about their experience:
Tim Ferriss – Investment Philosophy: “So I look for consumer-facing products addressing a problem I have that are already demonstrating traction of some type — like user adoption — that I can help dramatically. They need to be simple enough to understand, yet unique enough to pitch a trend piece to say, Fortune or the New York Times. Which means by default, I could pitch it not just to New York and San Francisco but the rest of the country. And ideally, but not a prerequisite, a product-focused studio and at least one person who’s been with the startup from early inception to exit on the exec team.“ (Fortune)
Reid Hoffman – Investment Philosophy: “Even if you have a mass audience and unique value prop, a business fails without cash flow. An initial round of financing is important, but how reliable is later financing? Will investors see the right elements in the next stage? Your product must scale intelligently – this is why I like software. A well-coded site can adapt to mass demand without its capital expenditures scaling out of control. A product like TypePad can grow to 10 million users without half the growing pains of a service like WebVan, the Web 1.0 startup that attempted to deliver groceries to users’ doorsteps. Try reaching Facebook scale with a service like that.” (TechCrunch)
Jason Calacanis – On Angel Investing: “A couple of years ago my level of angel investing would be significant on a number-of-deals basis (two or three per month), but not very important or significant on a dollar basis. Today? Well, I’m able to lead a round of funding, set the price with the founder, and perhaps even take a board seat. (In most cases we get the option of a board seat, even though I really don’t have the time to sit on that many boards.)” (Source)