Track Record

Early-stage investment is a dark art.

Very few investors are forthcoming about their results, and so there is a lot of misunderstanding about what is “normal”.

The common belief seems to be that you just need to invest in ten companies and one of them will be a winner. I actually don’t think those sort of results are typical. My observation is that most investors have a selection bias which skews their returns significantly in one direction or another.

Either way, I thought it might be helpful to others to consider my own experience to date.

My first early-stage investment post Trade Me was Xero, in March 2007. It was a relatively easy decision, as I was also joining the team ahead of the IPO later that year. With the benefit of hindsight, I probably should have stopped after that, and I could now claim a 100% hit rate!

Instead, in the seven years since then I’ve made fifteen further direct investments. I’ve also made follow-on investments in six of these.

In total I have invested just over $4m so far.

This is the list in chronological order ¹:

• Xero
• Areograph - Presumed Dead
• Sonar6 - Exit
• PlanHQ - Exit, nominal amount
• Valuecruncher - Exit, nominal amount
• Fishpond
• Thinking Cactus - Dead
• SMX
• Pacific Fibre - Dead
• Vend
• New Ground Media
• Go Vocab
• Timely
• Atomic - New
• Revert - New
• Respondly - New

Sonar6 is the only real exit to date, after they were acquired by Cornerstone On Demand in April 2012. As an investor in their later rounds, that represented a ~2x return for me.

Four are sold or confirmed dead (in a couple of those cases there were very small amounts returned to investors, but only cents on the dollar so more of a gesture than something that should be considered a return) and one other is missing presumed dead, so 31% by count or circa 16% by value invested have resulted in a loss of the money I invested. That compares favourably with the 40% figure that Fred Wilson has written about although, as he says, that’s maybe just a signal that I’m not taking enough risks.

Thankfully, I’ve invested larger amounts in the companies which have been successful thus far. This is partly good luck and partly, I think, a function of the approach I take - typically investing a small amount at a reasonable valuation initially and then more later, once the company has proven they can execute and start to scale and as a result have significantly reduced the risk.

Xero is clearly the biggest success on that list at this point. The small portion I’ve sold has repaid my initial investment several times over, and the majority that I retain is worth more than all of the others combined, even after the recent share price correction. I remain very long and patient.

I’m also very optimistic about Vend and Timely, which take a large chunk of my time today. I am chairman at Vend and a director at Timely.

Atomic, Revert and Respondly are three recent investments, so far too soon to tell, but I’m very excited to be working with all of them too.

And, the jury is out on a few of the others - I’m hopeful there may be a couple more winners in that list too.

Overall, the portfolio doesn’t owe me anything at this point.

On top of that I’ve also gained some useful scars from the early failures. This is what I mean when I say get started and be prepared to suck for a bit. I suspect that is actually the only option, if this is something you’d like to be good at.

Some of the biggest lessons, so far:

I’ve learned it’s better to invest in the best companies, not the most companies. As the list gets longer I feel less and less inclined to do more and more.

I’ve learned that investing passively from the sidelines doesn’t provide much personal satisfaction, even if it goes well for the company, so my recent investments have been in ventures where there is an opportunity to get involved in some capacity in addition to investing cash.² The downside with this approach is that time is finite. At the moment I have my hands full to overflowing with the things I’m already invested in and working on, so I’m focussed on those rather than looking to add anything new into the mix (and, as I have to constantly remind myself, focus means saying no or, aspirationally, having an assistant to say no on your behalf).

I’ve learned that you can achieve a lot more if you’re not worried all the time about who gets the credit, but if you take that approach you have to assume that you won’t get the credit and be comfortable with that.

I’ve learned that as a potential investor aimless networking, coffee meetings and events are a black hole, and you can spend all your time there, but it doesn’t really help you to find the best investments or contribute much of value to the companies you’re already working with.

Time will tell how this goes.

It will be interesting to look back at this list in another seven years and see whether the companies that I think are the possible winners now actually worked out that way, or if there were any surprises. And, who knows if there will be more names to add to the list which at the moment are nothing more than an idea.

I continue to make it up as I go. No doubt there are many more lessons to come.

Perhaps this post will prompt other local early-stage investors to talk more openly about their own results and experiences too. If so, please add a link in the comments below.