Does Investor Coaching Help Entrepreneurs?
Early stage investing has 4 parts. Well, 5 really if it is institutional, and 4 for an individual investor.
First is the discovery. As an investor, you need the ability to spot deals. This is easier said than done since it involves various complexities. The foremost is timing – to time the market readiness and the company readiness and to ride that. This puts to test several things like macro-market awareness, ability to assess teams, product market fit and so on. An investor who gets this right more often than not will likely outperform.
Second is pricing. An investor has to understand from a portfolio perspective what price they are getting in at. It has to sync with their portfolio approach. I am an early stage investor and several of my investments don’t make it. Hence, I need the ones that do make it to provide significant returns so that my portfolio can return capital. Even if I love a deal, and it provides safe but moderate returns, it may not sit in my portfolio.
Third is monitoring. Monitoring now has taken several meanings depending on whom you talk to. In my experience of talking to funds, some take it very seriously. They spend significant amounts of time with the investee companies, go deep, make connects, conduct workshops and generally take a very active role. One has to note that this is all in their mind and intent though. The benefit an entrepreneur derives from this may not be proportionate to the effort put in by the investor. In some ways it is very difficult to quantify results of this activity. If the same investors were to then take a more hands-off approach, it’s not clear if it would impact the performance- for better or for worse- of the company. It is also emotional. Investors have a greater sense of fulfillment if they feel – ‘we were not just moneybags!’ I want to tell investors that even discovery and pricing are fairly complex activities and they should feel proud if they got that right.
Fourth, it is exiting. Exiting has as much decision making involved as entering. Great early equity investors are really defined by ‘what’ they are able to exit. Very few companies reach public markets, so mostly it involves exiting to other investors or to strategic buyers. Pricing that again, making the decision and making it happen is a key activity.
If you are an institutional investor, the 5th activity is consensus building. Most funds have multiple partners and teams full of smart people. More Voices, More Opinions. Then what our committee will agree to becomes a key factor. I have done a lot of individual investing and have done some in groups. The group dynamic makes the investments, completely different from the ones you make individually.
Just like companies need to decide where to play, investors too need focus areas that they can develop. Knowing an investors’ preference can help entrepreneurs make better decisions too.