When Experience Is Worth More Than Cash: The Rise Of The Entrepreneur-Investor

Mark Zuckerberg

By Hollie Slade, Entrepreneurs , 17-04-2014

For tech startups, a check from an angel investor or venture capital firm doesn’t quite cut it anymore. Founders are increasingly looking for hands on operational help and industry expertise as well, according to a survey of Wharton alumni working in Silicon Valley, released this week.

A value on market know-how and connections tops snagging a high valuation or a venture capitalist with a marquee name, their survey of 126 mostly senior tech executives or managers who work at young companies found.

“VCs have been pushed towards doing more Series A type deals,” says Jude Gomila President and cofounder of Heyzap, a personalized app discovery network, which he grew to $12 million in annual recurring revenue. He’s recently invested in three startups – Zenpayroll, Transcriptic and Benchling, usually at around $20,000 per investment. He says his own experience helps him pick the best teams. “You can learn how serious or hard working a team is by comparing it to the early days of founding Heyzap. You can compare relative growth rates, product execution capabilities and how they are going about their own raise.”

Access to early-stage capital is easier to get than ever, says Gomila, listing platforms like Angel List and the explosion of vertical incubators like Y Combinator.

The advice he gives entrepreneurs? “Make a product that is specifically useful to a group of customers in a big market. Go with your gut feeling and try to have zero fear. Do the biggest idea you think you can pull off. Focus on product quality and positioning – sales will come if you get the quality and positioning correct,” he says. 

Gomila’s investment strategy is based on various hypotheses he’s been considering. “Once I formulate a hypothesis for how the future should be, I keep my eyes open or sometimes actively search for a great team working on the problem. On the other side of the spectrum, I find it fun to exhaustively search through all startups I can find on various platforms like Angel List. The companies I invest in are either dead cert wins or companies that are taking on risky projects that have huge implications for technology if they succeed,” he says.

He’s got high hopes for crowdfunding democratizing financing still further. “I think in the future we will see consumers and private individuals directly invest in companies before they start in quasi-IPO-like crowd equity financing,” he says. “With the prevalence of data about companies and communities, we may even see the rise of an extended JOBS Act – that allows for non accredited investors to get involved in investing in companies. After all, why should the average smart person be barred from investing in a ground breaking startup?”

Hamid Shojaee, CEO of Axosoft, a software company located in Scottsdale, Arizona also personally invests in startups. This week Axosoft announced they’re starting Software Startup Grant program giving $10,000 to promising local tech businesses. It’s a straight grant rather with Shojaee not taking any equity.

“I feel that having a thriving software company, it’s now my turn to help the next generation of software startups – especially those who are starting in the more challenging environment of Arizona vs. Silicon Valley,” he says.

Tech hubs outside California are definitely underserved in terms of access to capital, says Shojaee. “As a result, the type of software companies that we see in Arizona are generally organically grown and tend to have revenues from their early start,” he says. “The most effective way to help boost tech startups in Arizona is to address the access to capital gap. It’s already getting much better as some of the software veterans of Arizona are starting to invest back.”

What he tells every entrepreneur he invests in? “Take risks. Make decisions quickly, it’s your only advantage as a small company. Remember that most of your decisions are wrong. Wrong or bad decisions are better than no decisions. Correct the wrong ones. Build on the good decisions. You don’t need a lot of good decisions to make a great company,” he says.

Starting a business is still a big risk – most fail, says David Rose, serial entrepreneur and CEO of angel network, Gust. “I’m a third generation entrepreneur and a third generation angel investor,” he says.

“Coming from that world I have extraordinary empathy for entrepreneurs who are doing something that an investor is not – entrepreneurs are the ones taking the risk and creating new things.”

He says he looks for real traction and entrepreneurs with skin in the game.”These days angels don’t fund ideas. If you haven’t put in real hard cold cash into your project then we’re certainly not going to fund it because if you don’t have confidence how are we going to?”

But, a word of caution from Laura Dawson, Assistant Professor of Management at The Wharton School.
“There are the typical things like access to potential partners, suppliers, and customers, but I’ve found that there is also a negative side to having investors who are too close, or too intimately connected, to the target industry,” she says. “By being so closely embedded to the industry, there is less testing that goes on and more assumption-driven conclusions, which is not always a good thing.”

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