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How I Invest

Last Reviewed: January 2023

Here is a brief overview of my investing principles. It’s taken me years to reach the point where I can actually articulate how I approach investing. I expect this set of principles to forever be a work-in-progress.

A few more things before we dive in:

Creating this written statement and publishing it publicly has forced me to be clear and intentional; I can’t overstate how helpful writing this down has been to identifying what’s important to me and what isn’t.

This set of criteria works for me but I don’t expect it to work for others.

Having this statement helps me sleep comfortably at night, and that’s my first principle of investing: feeling comfortable that I have a reasonable set of guidelines to help my decision-making process.

I realize that it takes discipline to follow any strategy like this and I have surprised myself by maintaining my discipline and for becoming more disciplined as time has gone by, which hasn’t gotten any easier, especially as my deal-flow has improved.

I’m going to make more than my share of mistakes, though I’d much rather they be missing good opportunities rather than investing in bad ones or, worst of all, in the wrong people.

For clarity, and until I can convert this set of thoughts into an essay of some kind, it will remain a bulleted list grouped by category.

⁠

People

I can’t over-emphasize this point enough: I want to be convinced that you’re a rock-star and that I’d be lucky to work with you. This is, unfortunately, the highest hurdle anyone will have to overcome and it’s hard to do. I don’t have a great way of describing what I mean by “rock star,” but it starts with someone having some combination of great humility, trustworthiness, character, integrity, smarts, being

formidable⁠

, and the general sense that there is some inevitability to your plan working … again, this is a work-in-progress.

I prefer Founders to have some level of “technical chops” that compliments their natural ability to get people to say “yes” to them.

Maybe you’ve heard this before: I only work with people who I wouldn’t mind being stuck with in an airport during an extended flight delay. If I invest with you, we’ll likely be partners for a long time — 10+ years, or even longer — so I want to believe we won’t drive each other crazy or get sick of each other. I want to enthusiastically answer the phone when you call instead of either dreading it or sending it to voicemail.

Re: the last bullet point: you should feel the same way about me.

One of the traits I value the most in a Founder is a natural desire to get to the “right” answer: in other words, intellectual honesty. You’d be amazed how obvious this is to spot (or to determine it’s missing) and what it reveals about how a Founder will behave across a wide variety of situations.

You’ll need to be someone who doesn’t shy away from vigorous debate and, as Brad Feld would say, “brutal honesty delivered kindly” to get to the right answer.

I want to work with people that want to work with me. If you don’t want me to be your lead investor and consiglieri, I’m going to sense that; it means that I’m the wrong investor for you.

⁠

Sector / Industry

I have a limited circle of competence: Enterprise SaaS generally, cloud services, certain parts of FinTech, and crypto. I’m very reluctant to invest elsewhere though it happens occasionally.

As of Q4 2021, most of my new investments are now focused on crypto. Yes, even after all the negative events of the past year or so, I view this as the biggest long-term opportunity I’ve seen since the early days of the internet itself in the mid/late 1990’s.

I avoid all Consumer markets. Period, full stop. There may be good opportunities led by great teams but I’m fine missing them. I can’t add any value to these businesses.

I just haven’t gotten comfortable with Real Estate either and I’m not sure when/if that’ll ever happen. Having said that, I’m very comfortable with PropTech which is my proxy for investing in this space.

Businesses with deflationary COGS are always interesting: that is to say, businesses where the primary non-employee expenses are falling faster than price reductions to customers.

“Mission-critical context” —something I learned from Geoffrey Moore, those things that businesses have to do whether they want to or not, like paying bills or running servers or testing products — are great long-term categories that will probably never go out of style. (PS … more people should go back and read or re-read Geoffrey Moore.)

I like networks. Who doesn’t? I’m still convinced there are still plenty of big ones left to capture (or create) if you look hard enough.

⁠

Structure and Terms

I prefer to be the lead investor and set the deal terms. It’s not that I won’t participate if I’m not the Lead, but it’s unlikely. In a few cases I’ll be “just the money” but it’s not something that excites me or that I look for or enjoy saying “yes” to (so it’s almost always a “no”).

I’m going to make up my own mind and am not particularly interested by what others think or who else is investing. You get differentiated performance by being different, not by being the same.

For an early-stage company, I will invest in debt instruments but not in a convertible note or a SAFE. I want to know with certainty all the terms of the security I’m purchasing. A convertible note or SAFE is not priced equity, and whether it converts as agreed to is a decision made between the Company and the Lead investor in the next round; interests can and often do diverge. It’s gone sideways on me before so I just don’t take that risk anymore.

I look to invest in companies and markets that I can support over multiple rounds of funding. I fully expect (and hope) that my first check is only going to be ~5% of the total financial commitment I make to the company. I know, that seems really low, but that’s the only way the math works for me.

Along those same lines, it’s hard for me to invest in rounds that are raising less than $1,000,000. The math just doesn’t work. (A comment about math: this is a much broader topic that I will eventually address in another post).

I also like to invest in emerging VC’s — those VC’s who are raising their first or second fund without much of a track-record but who are well connected to the markets of their potential investees — especially when I can be somewhat of a sounding board.

I’m not likely to pay the highest price but I will pay a fair price. Having said that, the best companies never seem fairly valued so I’m ok not feeling great about price if I feel great about everything else.

I’ll serve on a Board but happy to transition off the Board sometime after the first institutional investors arrive (by institutional investor, I mean a fund with LP’s writing a $5+ million check; I don’t consider myself an institutional investor even if I write/syndicate checks that size). I’d actually rather be an Observer-with-Influence than a Board-Member-with-a-Vote if given a choice; there are more degrees of freedom for me in that role.

⁠

General Considerations

I prefer to make big bets in a small group of companies instead of smaller bets in a larger group of companies. This is the

Warren Buffet’s Punch Card Rule⁠

and I like how the selectivity it requires forces more considered decisions. I realize this doesn’t square with portfolio theory but it works for me.

Following on the point immediately above, I generally have the bandwidth to work on only 3–5 companies at a time, depending on the general mix of stage. And since I go “all in” and have all these other constraints that help me narrow my list of potential investments, I’m only making an investment every 18-months or so. (By the way, NOT investing is still investing even if it doesn’t feel like it. And I can tell you that it isn’t any less work.)

I say “no” a lot. Almost always. Don’t take it personally. It’s just that very few opportunities meet enough of my criteria.

Since I would want to know myself, I’ll tell you why I said no when I say “no.” You may not agree with me, but I’ll explain my reasoning to you.

I generally make fast decisions — usually after about an hour or so and will always let you know where you stand. I will not lead you on or intentionally waste your time if I’m not interested. You will probably know what I’m thinking before I tell you.

I’m not going to tell you what I think of your idea/product so don’t ask me to. I’m not likely one of your customers and the only feedback on your product you should care about comes from actual customers and not from investors.

In a liquidity crisis, I’m likely “to lend freely at a high rate against good collateral.” (See

Bagehot⁠

)

I don’t sign NDA’s before first/intro meetings — I just see too many things to be able to keep it all straight — but I will at the appropriate point in time. I keep my mouth shut, but if that isn’t enough for you, then don’t tell me something you don’t want me to know.

You should ask for my references and go talk to them. There aren’t that many of them.

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