Should You Invest in A Hot Deal?

There are lots of opportunities to write a check when you are a seed investor.  If you become a known seed investor, you will get some deal flow if you are open to it and most importantly accessible.  For me, I find I get deal flow from my blog, from email, from networking, from doing office hours, from LinkedIn, from Twitter, from, from Facebook, and from friends.

Deal flow isn’t a problem.  Getting good deal flow is a problem.

Inevitably, when you start investing you will run into a deal that is called a “hot deal”.  I have invested in a couple of these.  Both companies failed.  Deals become hot for a variety of reasons.  The founders, the space, or the cadre of investors that are in the deal contribute to the deal being hot.

To be clear, this is more of a Silicon Valley phenomena than it is in other places.  There is more competition and money there, so the level of fear is higher among general partners of firms of missing a deal.

Yesterday, Sam Altman wrote a post about his angel/seed investing experience.   It has a lot of great thoughts in it and you should read it.  The hot seed rounds that everyone wants to get into wind up being companies that fall into the dustbin of history.

If you are an investor and get a hot deal, be careful. The hot deals have the same probability of success as any other deal.

VC Fred Wilson says that the more people ridicule his early investments the better.  If they get it right away, he’s suspicious.  Investments that are crazy and outlandish work out better, and because they have more beta in them provide awesome returns.

In both trading and in seed investing, being a little contrarian can bring outsize returns.  But being disciplined helps make you successful.  Following rules keeps you focused and on a path.   There is a lot of talk about a “bubble” in both the stock market and in VC investing.  If there is a bubble, it would be the most highly predicted bubble in the history of investing.  If you believe in bubbles, the nature of a bubble is that no one can see it until it pops.

Peter Thiel said that this is the perfect VC investment.

Usually in VC investing, there is something about the deal that no one else sees that brings you in.  Andy Kessler calls it “investing in the fog”.  Investing in the fog invites derision from friends and peers.  You have to be able to take that.

When people ask me what I have invested in I preface my response with, “You are going to think this company is nuts but….”

As a seed investor, it’s best not to invest in everything.  Pick stuff you like or know.  For me, there are things that I am really interested in and I like to put my money there-and there are things that I really understand and know (like markets).  I also like to invest in themes that are transcendent.  For example, I like to invest in companies that put the power of the individual over the power of hierarchy.  Enabling companies.

One of the worst investment strategies of all time is throwing things up on the wall and seeing what sticks. It also sucks for marketing strategy too.

The best traders and VC’s press their bets.  That is, when the trade/company starts out they aren’t “all in”.  Capital is held back and kept in their pocket for use later.  As the trade/company starts to become more successful, they add to the position.  At each stage, there is still a chance that they will go bust.  I have had great trades on that turn around and are in my face with the blink of an eye.

The most successful trades/seed investments always look better in the rear view mirror than they did when you first invest.  When everyone starts to get the business or see the trade, it’s because the fog has lifted.

Very occasionally, there will be a hot deal that everyone sees and is a no brainer. There is only one way to get into deals like that.  Integrity and transparency.  If you play nice in the sandbox and bring value to the companies you invest in, you will find that entrepreneurs will invite you into deals because of reputation.



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