Instagram’s First Investor Explains What He Looks For In Companies

Steve Anderson's first Instagram photo
This was the very first Instagram photo Steve Anderson posted, back when he was testing the service. Kevin Systrom took it.

[credit provider=”Steve Anderson”]

Steve Anderson of Baseline Ventures has had an amazing run lately.He was the first seed investor in Instagram, which sold to Facebook yesterday for about $1 billion. He was also a seed investor in OMGPOP, which sold to Zynga for close to $200 million last month, and Heroku, which Salesforce picked up for about $200 million in 2012.

He’s also got early investments in Twitter and Path, which are sure to be two of the biggest success stories of the next couple years.

So how does he pick them?

In the case of Instagram, he met founder Kevin Systrom in January 2010 when Systrom was still at Google. They met at a bar, introduced through another entrepreneur the two of them knew.

Anderson told us, “He had his iPhone and bunch of HTML code he’d hacked together called Burbn. It was a bunch of hypotheses and no real clear answer what to do — photos, check-in, comments, gamification. Instagram emerged out of that, a paring down of features that were really working.”

Through trial and error they quickly decided “that HTML5 wasn’t really ready for prime time, that native apps were totally superior.” They also decided to “make a sole bet on the iPhone, which was risky at the time.”

It paid off — Instagram got 25,000 users on the first day, showing obvious product market fit. A little more than year later, it was up to 30 million.

The rest is history.

Anderson honed his investing skills working at Kleiner Perkins earlier this decade, and also did stints at eBay in the early days, and on Microsoft’s Windows Server team.

We caught up with Anderson this morning. He shared some of his wisdom with us:

  • He wants founders who are thoughtful, but then make forceful decisions. This is important because few people get their idea exactly right on the first try. “As Instagram has proven with Burbn to Instagram, I find it really hard to believe that any one person will have the perfect maniacal vision right from the start …. So that’s part of my assessment, hey, does this person have an opinion, based on a worldview that they’ve developed through listening, paying attention, and pondering. Kevin is the best at that. He’s very thoughtful, he ponders, but he’s very deliberate once he makes a decision.”
  • Founders must be able to code, but he doesn’t have strong opinions about languages. “All the scripting languages — Ruby, Python, NoJS — those have all very important places as do people who know Objective C for iOS development. Even C++. You don’t use it to develop a really cool app like Instagram, but you need C++ if you want to do anything fast tied to hardware, or anything operating-system based.”
  • Don’t raise more money until you’re sure you have product market fit. “What are the goals for [follow-on rounds] of financing? In Kevin’s case…the goal was to take all these features [in Burbn] and narrow them to a product that has a great product market fit. Generally speaking, most of my investments are pre product launch, they’re just an idea. So getting product market fit is the most important goal of the round. My goal as an investor is to make sure there’s enough financing to give companies time to do that, a year to 18 months. The worst scenario is to try to raise more money when you haven’t achieved that goal.”
  • To be a great seed investor, you need a great network of connections. “As a seed investor, I don’t what exists until I find it. With series A, B, C, or growth investments, you already know what you want to invest in. You have to fight for it, convince the team that it’s the right investment at the right time and right price. But for me, it’s all about networks … I spend time with entrepreneurs, I meet them mostly through other entrepreneurs.”
  • On Y Combinator and other accelerators and incubators. “They did this for people who don’t have their own networks or can’t grow their networks. How often do you show up to one place and see 80 companies? Of course with that scenario you’ll pay a higher price because more people are looking. That’s fine. Entrepreneurs have more transparency today than ever before, they can choose the types of investors they want to work with.”
  • Anderson is fine with all the other seed and angel investors who have sprung up since he started. “When I went out at Baseline to raise capital, all I heard was crickets. I had to stay the course, adjust, and scrape together what I could. Six years later, there are a lot of investors … I don’t worry, I’m very confident in my ability to add value to young entrepreneurs and young companies. I like working with other investors. It’s a big market, it’s less about seeing everything and more about seeing your fair amount so you can be able to pick.”
  • When to shut down a failing company. “Your goal is product market fit. If you don’t have it, eventually you’ll run out of cash, say the experiment is wrong, and fold up your tent … A lot comes down to the entrepreneur. Do you keep doing this against all the feedback, or not? That’s why when I invest I want to leave enough room for pivoting or reexamining your goals. After that, most of the time entrepreneurs are realistic near the end and say this isn’t working. Those decisions aren’t that difficult. It gets more difficult in later stages when you’ve got millions of dollars in. Usually there, you try to sell the company.”