You are the average of the five people you spend the most time with. You are what you eat. About a year ago, I tracked down a VC who gave a talk I heard about where he referenced the phrase “Your portfolio is your path,” it stuck out in my mind because amid all the noise, it was simple, brief, and yet still open to interpretation. We hung out and I asked him about the entire talk he gives (a subject for another post, if he agrees to it), but this one a small portion of it and I think OK to share.
“Your portfolio is your path.”
At least in the Bay Area, it’s now considerably easier to get into the investing ecosystem at some level and start to make small investments. It could be a micro-fund, or being a scout, or working at a larger fund with a small checkbook — whatever the model, putting $25K or $100K into seed rounds is relatively easy. Investing this early shouldn’t be an exercise in over-thinking, but some thinking and judgment is required.
One element that new investors don’t immediately realize (and I say this because it took me 4-ish years for this to sink in) is that those decisions, those investments, regardless of size, become burnished in stone on your track record. Your track record follows you around, like a shadow. There will hopefully be items on that track record you can celebrate forever; and, yes, there will be items on there you will have to explain away forever.
It’s not popular to admit, but I believe there’s really no way for very early-stage investors to control what deals they ultimately see. Yes, they can filter their inbound and hone their decision-making skills and processes, but given all the new startups forming, unless you’re Y Combinator or First Round, I don’t know how you can see even 50% of what end up as great companies. Deal flow, then, is often a random walk. Investors can control their time, who they choose to engage with and meet, how much goodwill they put into the ecosystem. But after making an investment, most investors lose control, but the decision (that flash point of holding control) follows you around.
I’ve personally found that if I invest too quickly (meaning, overall fund pace) or write check sizes that aren’t somewhat uniform, it’s easy to not be as careful about why you add something to the portfolio — and it can catch up with you over time. The associations with the founders and the logos of the companies stick around, for better or worse. I experienced this in my Fund II, which was small ($3.2M) but invested far too quickly. I attempted new things in this fund — some chunky follow-ons, 2-3 investments per month in some months, and lumpy checks that I wish now could be sized differently. Ultimately in that mess, I hit a number of companies, but I am not personally proud of that particular fund and draw a bunch of lessons from it for myself. Luckily for me, it was early and it was a small fund — any mistake in there wouldn’t be a crater.
Slowly I have learned – the association investors have with certain founders, syndicate partners, and downstream VC firms matters; the people one chooses to work with as investor matters a great deal; and while the decisions may happen quickly, they stick around for a long time. The established VC firms are usually most thoughtful about this — look and see who is invited to present at their annual meetings with LPs, and that will begin to showcase how long and deep these associations can be. This becomes most clear when raising future funds — sophisticated LPs will access your data room and literally run through your bank ledger in and out for funds, and they’ll see items which stick out. It’s not bad to have those marks in there, but knowing why the decision was made and learning from each cell on the spreadsheet is critical. The portfolio is, indeed, your path. Pick carefully and wisely!