Seed stage investing can feel eerily similar to Instagram-posting: even unwittingly, my instinct is to post the photo that captures me in the best light, on my best day, and in the most picturesque of backdrops. At least for the people who know me the least, chances are they see me as a little bit cooler than I really am. And though I don’t try to come off inauthentic, I have no interest in posting images of me first thing in the morning, after I’ve yelled at the driver in front of me on I-15, or that time when someone snapped a candid photo of me on the beach with my shirt off before I was warned to suck in my belly, cock back my shoulders, and arrange my chest hair. That really happened. And the photo was deleted from existence.
So, too, if you ask me about which companies I’ve invested in my instinct is to point you to the companies that have had time to bake, figured things out, and for whom lady luck has smiled upon. After all, the euphoria I feel from all those likes on that Great Wall photo from China (had time to suck in the tummy) is the same euphoria I feel when someone says, “Didn’t you invest early in [insert our hottest investment]?”
In that spirit I thought I’d share about a recent investment of ours that uniquely captures a more authentic reality when the startups and founders are unproven and largely unknown. First a little context…
My Kids Remind Me of How Little I Know
I’m convinced that I’m only as smart as my ability to explain things to my kids. When I started full-time venture investing, they weren’t sure how to tell their class or friends what I did. “He invests in startups” doesn’t mean much to kids under the age of ten. My son, six years old at the time, started telling his buddies that I was an “adventure capitalist.” I dig that. And it sounds cool.
Understanding how we invest dollars into a business and take an ownership stake is simple enough. “Dad, we watch Shark Tank, we know how it works. And we like Mark Cuban the best.” Check and check (we’re a family of basketball fans).
Far more difficult to explain is what determines why we invest in a given startup. First of all, as early stage investors our investments sometimes don’t turn out the way we expected. We can’t pretend like we have a perfect formula. In my own startups, only two of the four worked out. And if I were to start a fifth, my guess is that I’d have 50/50 odds at best, based on past performance, that that venture would work out.
The way then I explain to my kids what I do is to distill it down to one thing: founder secrets.
Investing in [local] Secrets
The best description I’ve found for what we look for in an investable idea comes from Mike Maples, Jr and is shared in a few places including here. Here’s how I summarize Mike’s explanation of founder secrets to my kids: I meet someone with an idea: their idea seems crazy, because they want to change how the world does something. But that founder thinks everyone else is crazy, as the rest of the world has not yet adopted the best way to do that thing. The founders whisper to us their secret for a different and better way—the way things should be.
What I find most interesting is that after this explanation my kids start to lose interest. To be clear, they generally understand what these startups are doing. The rub comes because I rarely invest in a startup offering something my kids care about right now. I’m a seed investor based in Utah. If you turn the pages back a decade in Utah tech, you’ll see the emergence of some trailblazing founders for our state and for the future state of B2B SaaS companies. From the anticipated IPOs to the deals I looked at last week, there is an awesome wave of innovation—most of it software for businesses.
Occasionally, local founder secrets are broadcast early and openly. Unlike SaaS companies that typically follow a path from product to sales to marketing to then branding and PR, these businesses go about their pursuit of building great products and establishing known brands through a different process. They put secrets into the hands of the average Joe and the average iPhone-wielding kid early in their startup’s life.
An example of founder secrets: Cake
A year ago I received a call from a longtime friend, an early investor in my last startup and someone in whom I too have invested early-stage capital. He gave me one of those calls that investors find hard to resist. A call coming from someone you trust. Someone who rarely makes a phone call for something like this, much less an in-person introduction. “I’ve got a friend you need to meet, he’s building something cool.” Suffice it to say, I made room in the calendar. Later one night after we hovered over some sushi rolls and ended the conversation by shaking hands over the table with me saying, “I’m in. And even if our venture fund decides this isn’t a fit, which is a likely scenario, personally, I’ll invest.”
What I gained conviction in then is what the Cake founding team member and CEO Kendall shares in his Mobile Browser Manifesto. Cake is smart because it makes browsing the mobile web simple. If you care to experience what founders feel in their belly, it’s worth a read. What I knew in that first meeting with the Cake founders wasn’t that this would be the next big innovation for users of the mobile web, what I know is that the way we search, especially on our mobile devices, has lost some of the magic that search once had.
Cake’s secret went on public display yesterday. Here’s to making the web fun again.
Liked what you read? Please support by leaving your comments and/or sharing with others! You can also follow me on Medium and Twitter via @krommenhoek.