After yesterday’s post Investing in 100 Startups, several people asked me about the lessons learned from the 26 startup investments I’ve already made. Generally, startup investing is much harder and less glamorous than it sounds, but I really enjoy it — entrepreneurs have such great energy and enthusiasm.
Here are 26 lessons learned from investing in 26 startups:
- Entrepreneurs are always overly optimistic
- If anything seems fishy or out of the ordinary, immediately pass
- Any signs that the entrepreneur isn’t self-starting and resourceful, immediately pass
- Everything takes twice as long and costs twice as much
- Look for a pattern where the entrepreneur had already started a prior business, failed, and is at it again
- Lean startups are better than heavy startups
- Expect regular investor updates
- More traction reduces risk
- Lack of liquidity is one the biggest challenges
- Exits are few and far between
- Plan for 7-10 years before seeing a return on investment
- Exit value is more important than entry value (e.g. a small piece of a big pie is usually better than a big piece of a small pie)
- Reserve twice as much as the original investment for follow-on investments (e.g. exercising the pro-rata rights)
- Personality fit is more important than entrepreneurs realize
- $300k is the ideal amount for a seed round
- Build a portfolio for diversification
- Investor jargon is more prevalent than expected
- Know that winning a pitch competition isn’t the same thing as a successful startup
- Fewer seed-funded startups as a percentage raise a Series A round
- Developing rapport well in advance of investing is important
- Evaluate the Investment Readiness Level
- Seed capital is different from venture capital
- Bet on the horse, course, or jockey
- Understand the difference between friendly customers and unaffiliated customers
- Milestones met pre-investment help improve confidence
- Investing is an incredibly hard way to make money
Even after investing in 26 startups I still feel I have a ton more to learn. Every investment is different and every entrepreneur is different. When I eventually make investment number 100, I’m sure I’ll feel the same way.
What else? What are some more lessons learned from investing in startups?
David Cummings on Startups 
Maybe a startup coming out of the Startup Pirates program will be your #27! http://atlanta.startuppirates.org/
#20 developing rapport well in advance. Important on both sides of the table.
Very insightful. Did you invest in any specific industry or sector, e.g was your learning biased to one sector?
Tell a founder you’re a venture capitalist but only invest at growth equity risk levels.
David – thanks for sharing. Can you do a post classifying the types of entrepreneurs you’ve invested in and how you first connected with them? Something visual would be nice.