Startup Warts and Investing

I was speaking recently with a seed investor I respect a great deal about some of the companies I invested in while I was at betaworks. A couple years since I first started, I’m now getting visibility into which companies might be very big. One thing I’ve noticed is that a couple of the companies that are growing quickly now had noticeable issues when I was first introduced. I’ll call these issues “startup warts.” Of course, all startups have warts, but these ones in particular were larger and more transparent than most.

What exactly is a startup wart?

A startup wart is when the founders can’t get visas to build the company here in the U.S. It’s when the founder is building a hardware company with no previous hardware manufacturing experience. It’s when [Sarah] doesn’t have great references from previous jobs or companies. It’s when a big competitor is expected to get to market before the startup does. It’s when the founders won’t be able to raise enough capital to get to the next milestone. Startup warts can be a million different little blemishes or a couple massive glaring cysts.

Estimote is an example of a company that had a couple big warts when I first invested. Although the company came out of YC and the engineering team was strong, the founders struggled to get visas and the company had no real operations or business / sales presence in the US, their largest market. Many angels and seed investors quickly passed because of these issues. But if they had dug in, what they would have learned is that no one was more keenly aware of these warts (and transparently pushing to solve them) than the founder, Jakub. Since then, they’ve quickly secured pole position to create the API for the physical world, have hired incredible people here in the US like Steve Cheney to run the business, and are selling a boatload of beacons every day. If the company isn’t already, I’m confident they’ll soon be in the anti-portfolio of all the investors that passed.

What I’ve found is that many investors really hate big warts like the ones once seen on Estimote because they’re really easy to spot. When other investors, LPs, or founders inevitably ask why you made the investment even though there’s that glaring wart, it can be disheartening to justify the thesis. But it’s the small warts, too small to spot, and often found in large numbers, that are the real startup killers - death by a million little paper cuts.

Now, a couple years after I first started investing at betaworks, I think the companies with a glaring wart or two may actually be the biggest opportunities for early-stage investors, especially because lower valuations reflect these blemishes. If you can dig in and address these issues head on, the founders and investors emerge stronger than ever. So bring me a solid team and idea and maybe even a wart or two, and we’ll work on removing the blemishes together.

 
112
Kudos
 
112
Kudos

Now read this

My Time at Lehman

I started at Lehman Brothers on June 1st, 2007 as a first year analyst. It was my first job out of college. Dick Fuld, the CEO at the time, publicly discussed “the road to two-hundred,” in which he would not retire until the stock... Continue →