5 Reflections on Investing
Sitting here in December, we’re reflecting on the year and on the lessons that we’ve learned through the process of investing our second fund over the past two years. Inspired by these conversations, we wanted to share five lessons gained from building our portfolio of early-stage consumer technology companies. As we look ahead to 2021, we hope these points of focus demonstrate what’s important to us and may be helpful for others.
1. Ownership matters—maximize on the first check
The only way to generate meaningful returns for our investors is to own enough of the companies that win.
It’s important for us to strike the balance of sufficient ownership with having enough “shots on goal.” This Institutional Investor piece was very telling on distributions of returns in venture capital.
In our current portfolio, we have both core positions and discovery positions, which we track with the hope they can graduate to core and drive further returns to our investors. In order to process annual deal flow of thousands of companies, we narrow our filter by focusing on outlier opportunities. To do that, we ask ourselves: Can each core position return at least half our current fund size? The greatest returns are made with high ownership in true outliers, but greater ownership also alleviates some pressure on the magnitude of the required outcome.
Our primary goal is to generate returns for our investors. Ownership is the most important component of success for us, because if we don't achieve significant ownership in our companies, the other lessons are less relevant or moot.
2. Focus on making good decisions
Over the long run, we believe good decision-making compounds to drive successful results. Good timing and luck factor into success, and sometimes bad decisions can still lead to good outcomes. We often remind ourselves that investment decisions are a one-way door—once the decision is made, it’s done. For us, good decision-making is predicated on remembering:
- Multiple partners prevent tunnel vision. We believe diversity of thought contributes to better decision-making. While a deal originates typically from one partner, we’ve found that having multiple partners sponsoring a deal means bringing more perspectives, greater expertise, and broader experience to the table. This helps both with decision-making and for understanding who can best help that company if we make the investment.
- Companies should be evaluated on their own merits. As any investor likely remembers from the fine print of their quarterly fund reports, “Past performance is not a promise of future results.” Pattern recognition is important but is also a lens that shows our biases. Can we map success to psychographics? It’s challenging. We instead look at each founder and company on their own merits.
- Intellectual honesty matters. Everyone is human, but we try to make objective decisions and not to allow emotions to impede making the right decision. We challenge and push each other’s thinking and test the strength of our conviction with rigorous debate. Building and growing an open and welcoming culture that truly allows for intellectual honesty is crucial.
3. Speed counts
While we focus on best decision-making, we recognize that we’re almost always making decisions based on imperfect information (that’s part of what keeps early-stage investing so interesting), particularly in fast-moving, highly competitive situations.
We’ve seen cases where even a few days has made the difference between getting into a great company or not, so we designed M13 to be both process-oriented and nimble—not an easy feat.
We have 10 full-time partners (five investing and five Propulsion operating partners) who sit on both coasts and across three cities. We made it an imperative to have an operating cadence of daily standups and constant communication (IRL, voice, text, email, Zoom, Slack) and weekly, monthly, quarterly, and annual meetings. This ultimately allows us to stay in constant communication, enabling us to triage new opportunities and support portfolio companies much faster. We collaborate better and share more information quickly and can make decisions without waiting for the next formal discussion forum.
It’s also worth noting that time is our scarcest asset and 99% of the job is saying no. A “quick no” helps both internal time allocation and is appreciated by founders and their investors.
4. Be differentiated
Capital is a commodity. While we believe we’re good investors, our edge is really our Propulsion Platform and unique set of limited partners that help founders build great companies. Propulsion is our team of full-time executives who bring extensive knowledge across a range of key growth functions (brand and communications, data strategy, people and talent, and marketing and operations), a technology platform that helps in those key areas, and a proprietary data system that helps leverage and activate our ecosystem.
Part of what we believe has given us our edge over the past two years has been:
- Our full-time focus: Our Propulsion partners would be the envy of any growth company, and they’re actively involved in the diligence process. Once we make an investment, they’re solely focused on helping companies reach their KPIs and objectives, which we believe ultimately helps drive the probability and magnitude of our companies’ success. These partners are full-time and fully up to speed on each company, so we’ve eliminated the issues of onboarding, chasing people down, or negotiating advisor agreements.
- Our M13 LP base: We've been lucky to have many successful founders and entrepreneurs invest in our fund who help us with deal sourcing, diligence, and as mentors to our existing portfolio CEOs.
- Scaling our edge: At the outset of planning M13, we understood that if we wanted to create a durable platform, our efforts—and people—needed to be able to scale. We created our NICO data and tech platforms to allow our firm to flex and grow. It also allows our team to maximize their scarcest resource: time.
5. Brand matters
Brand is more critical in venture than in any other asset class. With abundant capital and returns concentrating in the biggest winners, we focus our differentiation as a firm on a single target customer: the founder. If we serve our founders well, then the rest of our constituents will be well-served, including our LPs, co-investors, and our own team.
Human connection is at the heart of our brand, and our founding teams benefit from access to our community, from our Propulsion partners to our LP base. We’re committed to helping our founders by alleviating the isolation, stress, and anxiety that comes with demanding responsibilities in a couple of ways:
- Offering real feedback: In cases where a company is not right for our portfolio right now, we take the time to give honest, clear feedback to entrepreneurs. This takes up a significant amount of time, but it’s a key pillar of the firm. Ultimately, we know that in many cases, first-time founders become repeat founders and bring new ideas to the table. It’s crucial they hold us in high regard—our latest NPS* of 85 shows that our approach is working. We understand that this is a long game.
- Showing empathy: We seek to be an approachable and empathetic partner because we understand the founder journey—this applies both with our portfolio company founders and founders in the market. We live in a data-rich, transparent world where founders can easily and quickly spread the word as either advocates or critics. Network effects are real, and we want to build on our reputation as good and thoughtful partners.
As we take stock of where we are today, we’re grateful for the support of all of our stakeholders whose input helps us understand what, where, and how we can be most impactful as investors. We encourage feedback loops from our team, founders, investors, and other sponsors. As we look ahead to 2021, we'll keep building on the key components for success and keep sharing what we learn along the way.
*Net Promoter Score (NPS) is a methodology used by companies, including many of the Fortune 500, to assess their customers’ happiness, loyalty, and willingness to recommend M13 to other founders.