I recently met up with an investor who I'm not totally sure is a fit for my second fund, so it was important to me that I was upfront about all the reasons why he shouldn't come in. The last thing you want as either a founder or even a VC is to have an investor get stuck with you when you're not on the same page about expectations.
So here's all the reasons I told him he shouldn't be in:
1) Fund investing is boring. Let's be clear. You trust me with your money and I get to do the fun part--working with founders. For most funds, you get a quarterly statement that isn't fun at all, and then you get to go to a once a year meeting. The meeting is nicely done, but it's just that one meeting.
Now, granted I've tried hard to change that. More updates, more casual events, more exposure to portfolio companies, co-investing, etc., but you're still not pulling the trigger yourself. Being in a fund is not the same thing as angel investing.
Of course, angel investing for most people isn't very fun past the first year. Writing checks is plenty fun, but when you realize that you probably aren't very good at it, these companies need lots of help, and you realize you missed out on the best ones because no one knew who you are, I guess fun is relative.
2) The payback time is forever. It takes a really long time for a company to go from zero to being worth hundreds of millions, if not billions of dollars, and to *exit*. These are six, seven, eight year runs or sometimes even longer. Imagine that's the case in the deals you do out of the fund in year one. Now, in year two, the same thing happens, and year three and year four, etc, etc. You could wind up getting distribution checks from a fund you invested in a dozen years ago. Hopefully, the fund gets some nice wins early and you start to get your money back, but when you're in a venture fund, you're in for a really long haul. Think kids college tuition money.
3) You don't really know what you've got until the money is in the bank. On paper valuations are kind of meaningless. Just because the next biggest fool pays X for preferred shares, creating an implicit valuation for all the shares, doesn't mean you can either get out of it at that price or that you can be sure of the exit price. Just put your money in and hope for the best. Check your bank account in 10 years.
4) Money is a commodity. You've invested in a product company where the product is money--and largely the person who wins the deal is the first person to show up and pay the highest price. That doesn't sound like a really defensible business does it? Now, in the early stage, not a lot of people are willing to show up for two people and a roll of duct tape, so when you're first, you're really first, and there are good deals to be had--but other than that, you're really not getting any great deals.
If your fund is in Uber, than it doesn't matter. It doesn't matter if you grossly overpay. You'll still make a ton of money--but if you're not in a few select deals, or in them super early before other people knew your thing was a thing, it's hard to win.
5) There's very little salvage value if things don't work out. When you buy a building, if you overpay for it, it's still a building. Maybe the neighborhood doesn't improve as fast as you think, but at least you've still got something, and there's some rent coming in.
When you back a founding team and their first product hits a wall, there's not usually any IP that is worth anything to anyone. It's basically going to be a zero--and half of these early stage deals are going to wind up being a pile of flaming worthless paper.
Granted, it's the other half--or more realistically the other 10% that really drives all the value, but you could realistically lose half your money in a fund. Generally, it doesn't happen that you lose *all* of your money in a fund. I've only even heard of that happening twice. You have to be pretty bad at this to bet on 30 early stage companies at single digit valuations and going zero for thirty. As an angel doing a deal a year, you're much more likely to go oh-for, but in a diversified pool, at worst you'll probably only lose half your shirt.
6) VCs are along for the ride. There's little control in these deals that an investor can exercise. It's very difficult to force an exit, to affect strategy, and if you have to replace a team early, things have really hit the fan.
Yeah, so you really don't want in this. Trust me.