Seed Investor’s Guide to Finding the Next Twitter
I had breakfast this morning with my friend Ben Lerer. He, and his dad Ken Lerer, have recently put together a seed fund to make angel investments in early stage consumer companies. He asked me a question, which two years ago, I would have been able to answer in a heartbeat, but today caused me a moment of pause. He asked me what companies are on Twitteresque growth trajectories that would be worth investing in regardless of price. The reason I paused was because working at a venture capital firm for a few years, you get to a point where your thinking is probably 6-12 months ahead of the curve. But lacking thousands of data points on blazing markets and the companies within them, I have probably lost that 6-12 month advantage. I still read a ton, and spend time with smart folks from the entrepreneurial and VC communities, but the fire hose of information isn’t quite as fat.
Part of the job of an Associate at a venture capital firm is to identify new and emerging spaces that are worth investing ahead of, and exposing those opportunities to the partnership. Microblogging in 2007 was one of those spaces. To this day, Joel Cutler (who happens to be absolutely brilliant) at General Catalyst will tell you he owes me “a good drink of wine” for passing when I insisted we should fight to bet on Twitter, despite what seemed like a hefty price tag in the first venture round that Union Square Ventures ended up leading (the round got done at a $20M valuation, and two years later Twitter was just valued at $1 Billion).
That’s sort of the nature of being a junior guy at a venture firm. Because you have less responsibility with the existing portfolio, you are able to spend more time than the old guys taking in new data and expanding the firm’s thinking into untouched markets. You develop theses around that data, and when you find something you truly believe in, you need to pound the table so that the Partners who have not spent the last 3 months learning this new space with you will listen and understand the opportunity. Even still, there is a very good chance that nobody will be willing to use one of their bullets on your idea. Each partner at a venture firm gets to make 3 or 4 bets a year (might vary a bit from firm to firm depending on size of fund and number of partners), and a firm probably looks at 2,000-5,000 deals a year. Passing on winners is part of the business. Bessemer actually has a great page on their site where they display the firm’s Antiportfolio. The Antiportfolio is a list of all the massively successful companies they could have invested in, but didn’t. A star studded list of billion dollar logos is accompanied by hubristic quotes from the “passing partners,” explaining why they would never invest in the likes of Ebay, Apple, Google, Intel, Paypal, etc…
So in the absence of an immediate answer to Ben’s question, I can perhaps supply a recipe for any early stage investor who is trying to get ahead of the curve. This is my process for finding the next Twitter:
1) Read: Macro (i.e. Economist) and micro (vertical blogs) content ingestion (30%)
2) Try: Personally experience as many products and services as possible in markets of interest, identify game changers (15%)
3) Experts: Develop and test theses with thought leaders from industry and academia (15%)
4) Entrepreneurs: Speak/meet with every entrepreneur attacking a given market, identify current state of the market and who is best positioned to capitalize on sea changes and future direction (40%)
5) Repeat steps 1-3 over time and across markets
Oh, and if you’re the next Twitter, and investors haven’t found you…you can email me, I’ll try to put you in touch with the right folks…
Jordan Cooper's Blog: startups, venture capital, etc... 
Absolutely love the anti-portfolio link.
I have often wondered what value tracking passed upon deals presents to a VC. On an individual investment professional level I’m sure the value is clear, but as a firm is there lots to learn from tracking what was passed on and why?
Jon McJonJon
December 2, 2009
I don’t know if tracking is the right approach…i think catching winners early is a lot about vision, and not something you can manufacture through pattern recognition (which would be the benefit of trying to identify patterns what you passed on)…Although, I suppose there are always “lessons learned” on an individual deal basis: i.e. i passed on this deal in 2006 because they were trying to build a company inside an existing platform (Facebook) and I didn’t think you could build a big business like that…that company turned out to be Zynga…and now I know if I see another company building inside an existing platform (i.e. companies building twitter apps), there is the potential to build something big enough.
jordancooper
December 2, 2009
Jordan, what are your thoughts on the Augmented Reality space? I think it is a fledgling industry that has real promise, but must overcome the following two immediate hurdles: 1. more effective, immersing display method (glasses that connect with the mobile device that render the “layer” would be much more effective than viewing through the device’s built in screen), 2. No “kill-app” – some are cool and marginally useful, but none that I’ve seen have driven me to immediately say “I must have that, now!”
jeff iacono
December 3, 2009