One of the hardest decisions to make when you are investing is whether to do the next round or not. The first seed round is relatively easy compared to the next rounds. The seed round is based on some data, some diligence and hope. The next rounds have actual data that you’ve experienced. Hope is less of a factor. You also have experience interfacing with the entrepreneur and team they have built. The probability math becomes very conditional.
Companies are certainly different. The analysis is similar as long as the business model is similar. They attack problems using different methods. Software as a service type companies cannot be looked at the same as two-sided market companies. If you are doing a social network, the metrics are different again.
Stage is also a factor. If you are a seed investor, should you be sinking money in a C round? If you are an early stage fund, how do you plan on taking advantage of C rounds? I have figured this out both for my angel investments. My partner Kenny and I talked at length about this for our fund.
For me, it comes down to math and gut. One advantage I have over a lot of investors was trading my own money. I know how to take a loss, know when to press, and when the time to get out happens, pull the trigger. Reminds me of the Kenny Rogers song. The discipline which comes from doing that over and over again for a long time carries over into what I am doing today.
One important thing to remember, every single dollar you put in prior to the round at hand is sunk. You can’t get it back. There is no “dollar cost averaging” in venture investing. The decision is only whether to put more money at risk to earn a return, or not. This isn’t stock market investing, nor is it Warren Buffett value investing where you hold for years and years and see a return from both appreciation and dividends. In venture, growth has to be exponential. If it’s not, the seeds for exponential growth have to be present.
For angels, everyone has a different risk and return metric that they are comfortable with. For funds, the math really guides the decision. It’s almost easier as a fund than an angel! If you put $1 in, what do you need to come back for you to write that next check? Because of the total fund metrics, it’s generally 10x or more. Angels can live with a lot smaller returns and be happy. The fact that angels can capture deal by deal returns versus the fund model drives that decision as well.
Some deals work, and some don’t. That’s just a cold hard fact of the business. The winners take a lot longer to play out than the losers.