Secrets of the Most Successful Early Investor I Know

Editor’s Note: This is the first of an occasional series of how the most successful early investors build their portfolios. And, of course, our take.

The VC company True Ventures is truly remarkable.

Every time I check their portfolio, I wonder how they do it.

They have more big winners in their portfolio than any other VC firm I know.
And they did it by investing in the earliest stages, mostly seed and A rounds, with some Bs and Cs thrown in.

They also invest in later rounds, almost always as a follow-on to stakes originating in earlier ones.

Investing this early isn’t easy.

And yet True Ventures has drawn back their arrow and hit a bull’s-eye multiple times. Consider…

  • Automattic developed WordPress.com. It now has a valuation of $1.2 billion.
  • Stratasys bought 3-D printing company MakerBot for $604 million.
  • Yahoo picked up video ad company BrightRoll for $640 million.
  • Splunk scooped up cybersecurity company Caspida for $190 million.
  • Wearable device maker Fitbit has already IPO’d. It’s worth $6.8 billion.
  • 3D Robotics is the largest drone company in the U.S. It raised $64 million this past April.
  • Madison Reed of the consumer hair coloring business raised $12 million last year.
  • Goodreads has a website for readers who find and share books they like. This simple idea has generated 19 million members. Amazon bought it for $150 million in March 2013.

What do all of these companies have in common?

They all got their first check from True Ventures.

That’s pretty impressive.

The VC company was founded in 2006. They have made 312 investments in 171 companies and have raised $900 million.  They do many things well, including portfolio management.

For example, they have enough dry powder to invest in round after round of those companies they really like.

PayNearMe is a case in point. Founded in March 2009, they give consumers the ability to buy things that would be hard to pay for in cash. Think rent, healthcare and online goods.

True Ventures made their first investment in the company that May. PayNearMe’s business is growing 5% to 10% month over month. True Ventures really likes this company.

How do I know?

They have invested in every one of their rounds. Take a look…

0915_funding-rounds

Can you do this?

Well, some startup portals, like OurCrowd, give investors the option of following up their investments in the later rounds – which avoids dilution.

Unfortunately, most portals don’t give you this option.

The good news? Seed and Series A investors participate so early, their shares look incredibly cheap by the time these companies IPO or are bought out.

In other words, your profits are big even with dilution.

The Secrets to Their Success

True Ventures favors founders with multiple successful exits. “It’s all about the people” is a favorite saying of theirs. The company especially likes founders they have worked with before.

They like to take at least a 20% ownership stake with the first check they write (from $1 million to $3 million).

They also treat their founders as customers, staying attuned to their evolving needs and giving them help on typical startup challenges (like hiring and tweaking products) and tougher ones (like removing obstacles standing in the way of progress).

Their startups can also get help and guidance from their in-house “True” ecosystem made up of more than 250 founders.

Their startups are clustered around six big and fast-growing markets: sensors and devices, media, infrastructure, software, mobile and e-commerce.

Recent investments have targeted the Internet of Things, education, healthcare, synthetic biology and neuroscience.

Peering Into the Future

None of this sounds out of the ordinary or visionary. But it is.

You see, True Ventures made most of these early investments into markets that “really didn’t exist yet.”

That’s extraordinarily hard to do.

For example, says co-founder Jon Callaghan, 3-D printing was considered confusing and expensive. True Ventures invested in MakerBot anyway.

When True Ventures invested in Fitbit, digital healthcare was more theory than reality. The closest thing was the pedometer market.

And until recently, drones were considered a pure military play. That didn’t deter True Ventures from investing in 3D Robotics.

Callaghan says they want to be in “markets that are going to be great in five, six, seven years or eight years. Our job is to look into the future.”

That means investing with a certain amount of uncertainty. Nobody quite knows how the technology in question will develop… or meet customer needs… or create new consumer behaviors.

Not everybody can do this. But if you want to follow True Ventures, you don’t copy what they invest in, but how they invest.

Drones, digital healthcare, 3-D printing, etc. – these markets are well on their way. You can be sure that True Ventures has moved on. And they’re now looking at newer and, in terms of perception, stranger technologies.

If you really want to adopt their investing philosophy, you also need to look into the future… into what seems strange and fantastical.

I’ll give you one example. Metamaterials. Now, let me be clear, I have no idea whether True Ventures is looking at this technology.
But it is the sort of technology that would interest them.

Scientists talk about Harry Potter-like invisibility cloaks or the reverse -supermicroscopes that let you view vanishingly small objects such as individual strands of DNA.

Crazy? Unbelievable? Flat-out impossible? Yep.

Now you’re in True Venture’s territory.

Good luck.

Good investing,

Andrew Gordon
Founder, Early Investing