For early investors, the more startups you invest in, the better. With every investment you make, you diversify your portfolio and gain valuable experience.
We have about 40 companies in our First Stage Investor startup portfolio.
I don’t expect you to invest in all of them. But we encourage members to invest in at least 10 to 15 startups. Here’s why…
Because you’re investing so early in companies that haven’t figured everything out, at least half of the companies you invest in might not reach the promised land – a liquidity event (IPO or buyout).
That’s a lot of failure. For some investors, it’s too much to handle. But the most successful venture capitalists and startup investors know and readily accept this reality. Why? Because the upside of those startups that succeed is remarkably large.
Right now, we have fewer than a half-dozen dropouts in our portfolio. That’s a remarkably low 15% failure rate.
But, frankly, that’s unsustainable.
With every new raise, these companies must meet increasingly difficult milestones. Some won’t be up to the challenge.
I focus on investing in companies that have gone through – or are capable of going through – the gamut of challenges startups face and have met higher and higher expectations with every raise. They’re the ones that live to prosper another day.
With those successes, your initial investments usually produce big profits.
I found out a couple of days ago that one of our holdings, Magic Instruments, didn’t have the immense skill, talent and luck it takes to keep a startup moving forward and appears to have folded.
I checked the Magic Instruments website, LinkedIn, Facebook page and Twitter account. But my investigation didn’t yield much information. It last issued an update in May 2018 (we recommended the company in November 2016). The message essentially said that times are tough, but it’s moving ahead, including “the resumption of [its] fundraising with angel investors.” I suspect those funds never came through.
That’s unfortunate. But what was much worse was that the company stopped communicating with its investors suddenly and without warning.
Every now and then, a founder’s behavior will deeply disappoint you like this. Failure I can accept. But failing to tell your investors that the company is in danger of going under is inexcusable and, frankly, gutless.
Much to my dismay, I came across a Better Business Bureau report of 25 people – investors and customers – complaining that the company went silent on them without warning and/or never sent them the product they paid for.
But as disappointing as the final chapter of Magic Instruments was, I doubt it was (as a member called it in an email to us) an exit scam.
That would mean the founders never had any intention of seriously pursuing a liquidity event and had every intention of exiting with investors’ money in their pockets. I don’t think that was the case.
Regardless of what happened with Magic Instruments, I’m not overly stressed about this. I’ve just written our 43rd recommendation… on a medtech company that is filling a huge need with proven technology in a $50 billion market. It doesn’t get better than that.
I’m moving on from Magic Instruments. I suggest those who invested do the same.
Co-Founder, First Stage Investor