Sep 032009

Ten Characteristics of Great Investors

Ten Characteristics of Great Investors

Fred had a great post today called Ten Characteristics of Great Companies.  This link includes the comments, which numbered over 70 when I last looked.  Great discussion overall, especially for Fred’s having come up with the list on a 15-minute subway ride.  Fred used to write a series of posts about VC Chiches, and I would periodically write a Counter-Chiche post from the entrepreneur’s perspective.  This post inspired me to do the same.

So I’ve taken 15 minutes here, pretended I’m on the subway, and here is my list of Ten Characteristics of Great Investors, in no particular order:

  1. Great investors know how to give strategic advice without being in the operating weeds of a company
  2. Great investors get to know whole management teams, not just CEOs — in fact, great investors become part of the extended management team of their portfolio companies
  3. Great investors invite you to do diligence on them by giving you a list of every CEO they’ve ever worked with and asking you to pick the ones you want to talk to
  4. Great investors ask great questions
  5. Great investors don’t publicly take credit for the success of their investments, even if they were major drivers of that success
  6. Great investors show up for meetings on time and don’t spend the meeting using their smartphone
  7. Great investors treat their portfolio companies’ money as if it were their own money when spending it on things like lawyers or travel
  8. Great investors look for connections to make between their portfolio companies or relevant people but have a strong relevance filter and don’t send junk
  9. Great investors never have a ready-made list of the ways they add value to companies — and they specifically never talk about the help they give in recruiting executives or making sales/bus dev introductions
  10. Great investors recognize when they have a conflict around a portfolio company and are clear to represent their separate points of view separately

I’m not sure I’ll be invited to present this anywhere, but there it is for discussion.

36 responses to “Ten Characteristics of Great Investors”

  1. mbsolon says:

    Matt,

    This is a terrific post and a must read for all of my peers. We talk all the time about how we can become better a better investor and partner for our companies. I'll be sure to share this with my partners. – Mark Solon, Highway 12 Ventures

  2. druce says:

    These things make a popular and value added VC investor from the perspective of the CEO.

    But a VC could be the best in the business at every single one and never make a dime.

    A great VC has to do these things while sourcing great investments, knowing when to hold 'em, fold'em, or double down, and getting great value for their own investors.

    (and of course lots of great investors are not even active investors)

  3. That’s a great point – of course this is my perspective but only as CEO.  As an LP (and I’m a teeny tiny LP in a couple funds), you’re absolutely right.  It’s almost worth another list of 10 from the LP’s perspective!  I should have labeled this post Ten Characteristics of Great Board Members.

  4. Rob Go says:

    Great list. But I don't understand #9. I think investors do add value in this way – and isn't it helpful to provide specific examples? Maybe I'm missing your point.

    But otherwise, very nice post.

  5. Greg Boutin says:

    A very good list. I especially like #3. I have yet to meet investors doing that, but it would be great if it happened.

    I'd only add that investors who don't fit the above profile can also make great investors by being silent investors!

    Of course, everyone likes an investor who contributes productively, but there are times when recognizing there are too many cooks in the kitchen and piggybacking on more qualified investors is the best quality an investor can have.

  6. gMan says:

    This sounds more like it should be titled "Ten Characteristics of Investors Who Behave Like I Wish They Would" – I see little or nothing here that would actually make an investor "Great" in a financial sense. Seriously, showing up to meetings on time makes you great? I doubt even half the top investors on the planet match this criteria.

  7. Good point – someone already commented that this was more about what makes a great VC board member as opposed to strong deal/financial acumen

  8. Some investors add value in those ways, but it’s pretty unusual.  Every “Grade B” or lower investor I’ve ever met claims they do these things, and that’s why you should take their money.  The good ones never mention specifics of how they add value, and in particular never those two.

  9. Mine have all done #3 over the years

  10. Fun exercise. A thread that pulls most of these ten together might be, "a great investor is personally invested." Or acts as if she or he is.

  11. Greg Boutin says:

    We must live in parallel universes 🙂

    How did you know ALL ceos they worked with were there? Did you ever collect negative feedback on any from a ceo you called…? I'd doubt they would leave that one in…

  12. I guess you do have to trust that they’re giving you a full list, but portfolio data is usually at least semi-public.

    I had at least one conversation with a CEO who the VC had fired.  He had mixed things to say, but they were specific and quite helpful to my process.

  13. Greg Boutin says:

    Good, thanks for sharing this story. I guess I'll expect great investors to do that from now on!

  14. Krishna says:

    A nice first list. Commitment, besides an eye on ROI should be the hallmark of a truly great investor. The one that draws on her experience to pick up on weak signals (of distress and opportunity) and alerts the entrepreneurs to get their act together and get around the bend.

  15. Ryan Graves says:

    Matt-
    At the very early stage of interacting with investors, I am starting to see why certain traits here become important.
    I'm currently hunting for a firsrt round angel investment and I'm wondering if your list would differ from VC's to Angels?
    Great list, keep it up!

  16. Keith says:

    Problem is that when you research 'value add' from a VC you struggle to find any impact. Meanwhile how many of a VCs portfolio get this help – especially when they really need it but the VC has written them off as living dead.
    #3 is crucial – do your due diligence on the VC and don't forget to go beyond current portfolio – there's a huge survivor bias otherwise.

  17. Definitely on #3.  The Internet Archive/Way Back Machine is useful for this.  Look at the firm’s site from four years ago, hit the portfolio page.

    Matt

  18. Angels are definitely a little different – and there are some things you’ll want at the raw startup stage that aren’t useful later on.  For example, #1 on my list – you may want an angel who’s operationally savvy and able to help in an area where your team doesn’t have experience yet. 

  19. Totally.  Or if not a native intellectual interest, they need to be able to cultivate a deep strategic understanding.

  20. Dan says:

    As others have noted, this is a list of "Characteristics of a great investor – for the company" (rather than 'for their LPs'). That said, There's a crucial one I see missing. A great investor has high tolerance for failure. That may mean standing by a founder who's doing a reasonable amount of learning on the job, or standing by a company through a recap and a reset. While portfolio returns may benefit from aggressive culling, it's usually in the company's interest to have an investor who believes in second chances.

  21. Shurtleff says:

    Matt on #1, an investor with relevant experience can be of great help in the weeds, but they have to wear a very different hat, the key is to be able to switch hats back and forth (communicate) and only go into the weeds with explicit permission. i find this analogy works on both private and non-profit boards i work on.

  22. Derick Harris says:

    Some of the VC people I deal with are pricks. They have far too much power, which reduces to money, or access to it. This list is a good start. It should encourage entrepreneurs to boycott VCs with bad reputations. The basics or benchmarks for me are: (1) Acknowledge your email as a common courtesy; (2) Read what people send to you as a part of that courtesy, or post on your web site that you don't accept unsolicited proposals; (3) Don't gate keep with return email addresses for executive assistants. Be courteous enough to use your own email address; (4) if you can't do those things, where do you get off presuming to extract surplus value from the intellectual property of others, just because you either have money, or access to it.

  23. James says:

    Anyone want to offer up a "10 best investors" list based on this?

  24. greg says:

    Great post! It's my team's first go-round with a particular VC, and frankly, we have been getting increasingly concerned the further along the investment process has gone. (Luckily, there is no term sheet yet.)____Four areas in particular are concerning: First, the investor, who is not technically proficient, is speaking with my CTO directly more than he is speaking with me, and without my knowledge (Am I being paranoid?). Second, he has said he will get me a list of CEOs of companies he has funded, but has hemmed and hawed on that. Third, he has somehow decided that despite amazing partnerships already in place, and our product (and ability to start having revenue) a day from launch, and our extremely conservative pro forma estimates, wants to give us a valuation less than half of what we (very conservatively) believe it should be. And my favorite he wants to rewrite our employment contracts to eliminate options, severance and minimum terms. Boy, this has given us all a warm fuzzy feeling about him. Luckily, there isn't a term sheet yet, and other investors are coming alog in their own diigence.

  25. Nancy says:

    I would add "a great investor is honest and willing to deal with the real issues". In my business, i have seen too many investors who want to ignore a problem, hoping it goes away, then just replace the CEO when the problem gets to big, hoping the new person will fix it

  26. GREAT addition.  VCs who claim to be risk takers and are risk averse in the end make for bad partners.

  27. Very true.  Permission is key.  The younger the company, the more this is usually relevant.

  28. We can start a new list of Ten Characteristics Shitty Investors Need to Avoid.  These would all be on it!

  29. Someone should.  I will work on that.

  30. Yeah, there are a bunch of red flags in there.

    But you are being overly paranoid about the investor speaking to your CTO directly.  Unless you are concerned about your CTO’s ability to handle the questioning, that kind of exposure (both ways) is good in general.

  31. Geoff says:

    Nice list; From the other side..I would just add, great investors can empathize with management teams, i.e. the constant battle with strategy, market forces, etc because great investors most likely would have been great operators at some point. Being able to see through the eyes of those you invest in can provide unique insight.

  32. Donna White says:

    Fascinating! I've passed this along to some of my Private Equity friends. While this could certainly be applicable to PE, it would be great to see a list that specifically addresses these investors.

  33. Kyle says:

    Couple questions Matt, what's a VC Chiches, or Counter-Chiche ?
    Also, what do you mean "and they specifically never talk about the help they give in recruiting executives or making sales/bus dev introductions", how can they do these things without talking about them?

  34. The second point was about bragging about those two points of so-called value add, almost as much about the bragging as the fact that those two things almost never work out.

    Fred's blog used to feature a whole series of posts a few years back called the VC Cliche of the Week. I frequently wrote a response post from the entrepreneur's post on mine called Counter Cliches. You can search either site to find them.

    Matt

  35. Hi, great post. Also confused by number 9. I think that value-add is immensely important for start-ups, for example a VC who has experience of running similar businesses and can help shape the direction to avoid pitfalls.

  36. It’s not that they can’t add value.  It’s the “ready made list” – especially saying they can help recruit execs and open sales leads.  VCs should add value with every interaction.  And they can help on sales and recruiting things based on their experience.  But they’re not sales people, and they’re not recruiters.