What It Takes To Be A Great Investor: Part V (The Grand Finale)

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This is the fifth & final (I promise!) article in a series on what it takes to be a great angel investor (and why this should matter to entrepreneurs).  Part 1 – Access to Great Deal Flow – is here.  After that it’s domain experience, access to VCs and deep pockets.5. Access to buyers – I saved the least obvious for last.  Most people think that being a successful investor is about finding the right deals and nurturing the teams through the difficult times to come out with a great company.  That’s certainly the most important part of the success.

But I’ve come to the view (only after being in the industry for a few years) that the best investors influence their end-games through well cultivated relationships with eventual buyers of their portfolio companies.

Imagine that you funded Larry & Sergey, Chad Hurley & Steve Chen, Mark Zuckerberg, Mark Pincus or Evan Williams.  Or eBay / PayPal, Salesforce.com, Skype, etc.  Imagine the kind of relationship you’d have with these folks and your ability to discuss their needs as well as your portfolio successes at which they should be looking.  Or imagine that you were colleagues with any of these individuals before becoming an investor.

To me it’s no wonder why Ron Conway will likely always continue to perform well.  He’s backed so many of the Silicon Valley’s young elite tech professionals.  He knew them when there were young and accessible. He gave them early breaks.  People don’t forget.  Plus he’s been around the senior captains of industry his entire career.  He’s bound to be able to help a company or two at the time of a sale.  And he’s been involved in so many that he knows the way the end-game works.  For most entrepreneurs it will be the first time and also will have such a profound impact on their future financial situation that it’s hard to objectively handle the exit process in the way a seasoned pro can.

The is even more so the case with big-name VCs.  Imagine the positions of Sequoia (Google, YouTube), Kleiner Perkins (Zynga, Google), Accel (Facebook), Union Square Ventures (Zynga, Twitter) and so on.

I’m obviously only naming a small fraction of their investments since I don’t feel inclined to research them all and many other great venture firms have this kind of access.  But let me put it this way – investors who have buyers’ ears are less likely to have zeros (they can bury good technology and still try to recover their investments) and are far more likely to architect winning M&A deals.  In a world with less IPOs this skill matters greatly.

It’s no wonder only the top VCc have great returns and the industry overall has very average (often not beating the S&P 500) ones.  It’s hard for me to imagine that angel investing outcomes judged 10 years from now will have a drastically different profile.  The best angels or angel funds will do tremendously well.  I suspect many will match the S&P 500 or worse.  And key driver of success will be the ability to help companies exit to the right buyer and importantly at the right time.

My own firm was involved with the sale of our portfolio company BillMeLater (an online credit company – think PayPal but for credit) to eBay for $1 billion in October 2008.  Not exactly the easiest time to be selling a credit business as the finance world around them was melting and the company was negotiating its credit facilities if it were to stay independent with the likes of Citibank.  I wonder what this company would look like in 2010 as an independent?

But to understand how super-angels and not just VCs get in on this act check out Aydin Senkut’s record.  60 deals, 16 already acquired (by Google, Twitter, eTrade, Intuit, Microsoft).  I don’t know which ones Aydin played a more assertive role in brokering relationships but I can imagine.  I guess what I’m saying is that startup investing (whatever the stage) is not a stock picking job.  It’s an active job throughout the entire life of the portfolio company.

I remember 3 years ago when I lived in still lived in Silicon Valley and I was on the board of advisors of an early-stage, super-angel / early-stage VC backed startup.  It was my neighbour so we talked about the company almost nightly after we put our little kids to bed (such is life in Palo Alto!).  We talked about her desire to sell the company for personal reasons rather than raise a large round of VC.  I agreed to help.

One of her early-stage investors, Jeff Clavier, played a very active role.  He was meeting with Yahoo! on a regular basis for a variety of reasons and Jeff was able to make sure it was a conversation point.  Ultimately Yahoo! didn’t buy the company but having them on board as serious potential buyer helped our ultimate sale.  I remember feeling grateful that Jeff had that access.

Look at the corporate roles / boards occupied by Jim Breyer (Wal-Mart, Marvel, Dell), Marc Andreessen (Facebook, eBay, HP) or Reid Hoffman (Mozilla, Zynga & obviously LinkedIn).  Think about their ability to drive business development, c0-investment or M&A decisions.  If not directly through firms on which they’re on the board – indirectly through the relationships they form operating at this level.

I watch some of the firms that I have personally respected for years create close corporate relationships and I know why their successful.  I’m typing this from SFO right now after just attending an executive offsite set up by Motorola and some of their largest retail customers.  As busy as I feel looking at new deals and working with portfolio companies I can tell you that this activity is one of the most valuable.  I got the chance to speak to several customers about their business issues and also a chance to position some of our investments with them.

And as with VCs the same goes with angels.  Are you able to drop your portfolio companies directly into the SVP of product management at the right buyer?  Or the CEO?  The angels who will drive the best returns will.  Think of investing as lifecycle management: sourcing, coaching, funding (through others) and exiting). I think the top decile excels in all of these.  And if you’re an entrepreneur you should look for investors that play across the entire spectrum.

As I’ve said many times, investing shares many of the same characteristics as gambling.  People don’t often win by accident.  The best players control their outcomes and play at tables stacked in their favour.  Have fun with your angel investments.  If it’s a casual hobby no big deal like dropping some cash on a fun Vegas weekend.  But if you’re going to play with real dollars, make sure you have the skills for the big leagues.

And if you’re an entrepreneur taking money from angels, super-angels, micro VCs, VCs or whatever we want to call early-stage investors make sure you push beyond their brand names and try to understand from other entrepreneurs how these investors fare in helping companies across these important stages of the startup lifecycle.

This article originally appreared at Both Sides of the Table and is republished here with permission.

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