Proactive vs Reactive Investing
Making the shift from angel investing to fund investing
As a seed stage angel investor, my strategy was largely reactive. Deals typically came from founder referrals, demo days, venture funds, and cold outreach. Deals would “find me” and I would have a short window to make a decision. The median “time-to-get-to-know-the-founder-before-investing” was probably about 2 weeks.
Now, investing out of a seed fund, the strategy has evolved. HorizonVC takes a much more proactive approach to finding opportunities. About six months into investing through HorizonVC, we have invested in 5 startups:
-3 where we have prior, multi-year relationships with founders
-1 that we got to know over a period of months
-1 that we got to to know over a period of weeks (that we had been tracking for months)
Why the change from reactive to proactive?
First, heightened clarity on the IFP or “ideal founder profile” with whom we will work best. This the product of 15 years experience in angel investing. We want to work with “blank check founders.” That said, it takes time to get to know someone - we’ve come to embrace a great line from Mark Suster: investors want to invest in lines, not dots. While it disqualifies us from many fast-moving, “hot” deals, we have high conviction that founders in our portfolio are the people we think they are. This works both ways: our founders get a better chance to know exactly who we are before we enter their cap table.
Second, referral dynamics have changed. As we have shifted from angel checks of ~25-75k to VC checks of ~500-750k, some referral sources can’t provide the same volume at our target check size. In addition, competition at the seed stage has intensified in the past few years, making it harder to get even a small allocation in many seed rounds.
Third, we believe in the value of having a differentiated process. This great post from Geoff Yamane has a quote that sums up our thinking:
• Most investors describe the “quality” of their investment process, but this is only one part of what generates alpha; it is investment process relative to your competition which matters more
Candidly, we think there is alpha in moving more slowly. Or, with a more positive spin, there is alpha in building a relationship with founders before deciding to invest at the seed stage. In our experience the best risk-adjusted returns at the seed stage come from investing after a trusted relationship has been forged between investor and founder.
As of today, we have invested ~11% of our fund. It’s early days and market conditions seem to be changing as I write this, so perhaps we’ll evolve our approach. For now, we are choosing proactive over reactive.
What does this mean for founders? We hope to meet you before you are actively raising a seed round. When it comes to pre-PMF founders focused on bottoms-up or product-led software models, we think we can be helpful on Day One, if not Day Zero. We look forward to meeting!