My first investment miss

“I don’t want to belong to any club that would accept me as one of its members” (G. Marx)

I want to do a post mortem of the first opportunity I had, and missed, of angel investment. To put things in proportions: I have limited investing capacity and have had any capacity for a very short time. I haven’t had the chance to make an independent angel investment, but a few months ago I came across an opportunity that I thought could be good. I missed it and I want to write an analysis of how and why.

“Having an opportunity” means I found a team that:

1. Working on a solution to a problem I believe is big enough
2. Is in the top 5% of teams I believe are working on a solution to this problem

If those two things exist then I ask myself if I can contribute to the team. This usually will be by putting my network to their use, my knowledge, and also obviously some money. The reason this phase is important is that this is where the investment becomes attractive. Investing in a startup is incredibly risky, and in normal years it has negative expectancy. The recent decade created an illusion that startups overall make good returns, but the recent years were an anomaly. So investing in startups flat out is not attractive. But if you believe you have the ability to alter the chances of the investment to return money you can create a different set of opportunities for yourself.

If all three first tests come out positive, the last question is “is the team willing to take my money”. In the story I am going to lay out here below, the answer was no and that’s how I missed the opportunity.

I met one of the three founders shortly after he finished 10 years of military service in a top technological setting, and was considering a few ideas for an entrepreneurial journey. We’ll call him Alpha. We met by chance but connected well right away. I saw potential in the guy and knew his experience puts him in a very good spot in terms of network and reputation.

At that time Alpha was determined on working with Beta and on a specific problem, which we will call X, in the space of big data management. I knew problem X is big but it was also a busy space to operate in. Alpha and I spoke regularly for 3 or 4 months, during which he decided to shift to problem Y and to have guy Gamma join them. I didn’t see that clearly in real-time but this was the turning point when this opportunity became attractive. Before Gamma joined, it was a pretty good opportunity, but Alpha and Beta together lacked the required business experience and possibly also some killer instinct. Gamma turned out to be a valuable addition, bringing both experience and a rich network to the mix.

The entire team and I met and they expressed doubts towards problem Y, in the employee experience management space. I felt my confidence is shaking because, as mentioned, I strongly believe in solving problem Y. Looking back I think that if I would have made an investment offer at that point it would have been excepted. I didn’t.

Time passed and I left Israel. The team and I kept in (less intense) touch and they shifted again, trying to solve problem Z, in the no-code dev. aids space. Problem Z is a problem I know exists but do not find exciting. Tackling problem Z seemed to me like “more of the same” and I thought the specific solution required more validation. At this point, 7–8 months after first meeting Alpha, the team shared with me their intention to start looking for funding. I knew my ability to contribute to the journey, considering (1) Gamma was part of the team and (2) problem Z was chosen, is now limited at best.

I had no special knowledge of problem Z and now special skills in this space. Nonetheless, I thought (and still do) this team is a top 1% team and expressed my desire to put money as part of a pre-seed round if they will have one. A couple of weeks later I was surprised to find out the team is already in the midst of a seed round and has received competing offers from good VCs. They decided to allocate a part of the round to angel investors and asked if I will be interested in participating. I was surprised, agreed, and shortly after was declined allocation. The team managed to close a funding round with a top tear VC and a small group of great angel investors, all having more to contribute than what I can offer.

I felt some relief because I wasn’t sure this is the best thing to do with my money and the burden of decision was removed from my shoulders. At the same time, I felt disappointed because, to be honest, I was the first to discover this team, and I had access to this investment opportunity before anyone else. You never know if a team is going to succeed but once a significant sum was raised and top tear investors are involved, the chances improve dramatically. Investing in this team 3 months ago would have meant my investment doubled its current value by 5 or 6 times.

For my benefit and my benefit alone, I want to identify the reasons I lost this opportunity:

1. When the team contemplated dropping problem Y, I made the case for keeping it. The team (most likely) didn’t see that as valuable or thought I would not have the same level of interest if they change course. At that point, our communications became less frequent and I lost my position as a “trusted advisor”.
2. Objectively, I am less valuable in solving problem Z. Particularly, my network is less effective in this space. The team identified it just as I did.
3. This particular team, solving problem Z, was more attractive to investors and the competition grew. I couldn’t beat the competition.

I do not know if making the investment before the shift from Y to Z would have been smart. It could have made the team stick to Y, something they obviously didn’t want. Ideally, investing just as the shift to Z happened, would have been both smart and practical. But when judging an investment in retrospect one must take into consideration the information one had at the point of decision. At that point, I had no information on validation the team did and no indication the team will be looking for a full-on funding round so soon. I probably couldn’t have predicted the urgency but I now understand I could try next time.

Lessons for next time:

1. Be more clear with the team regarding your intentions. If I want to put money before VCs do I have to make that clear.
2. Notice changes in communications. It is possible the team thought I was less available in France (which is exactly the other way around) and contacted me less frequently. However, it is also possible other, more valuable contributors, joined their rotation.
3. Once the situation gets competitive, it’s harder to win by an order of magnitude. I need to make my value more visible earlier in the process.

I still strongly believe in the team and don’t see why this space is interesting. I really wish this team succeeds and I also wish to find equally good opportunities in the future.

I’ll finish by saying Sapir and I ate at the Tour d’Argent yesterday, and it was absolutely exquisite. The dinner was a wedding gift from my brother and sister, which I will not forget for a very long while. It costs like you think it does.