Years slaving away as an associate, cold calling startups, and trying to find the next hot deal for the firm is the way many venture capitalists get their start. Learning the ropes of the industry after graduating from a top business school. The other well-known pathway is having a huge success as an executive at a large company or as an entrepreneur and then leveraging that huge success and the relationships gained along the way to enter the venture industry.
The dream of making a living investing other people’s money in startups has outgrown the traditional paths to get there. More mid-career technologists, financiers, entrepreneurs, and inventors are starting out their office windows imagining what life would be like on the other side, holding the purse strings, and picking the best entrepreneurs. Like most day dreamers only a few find a way to make it a reality.
Semil has taken his day dream and bootstrapped his way to become a venture capitalist. His vision and journey inspired me to connect with him on twitter and invite him to be interviewed for the book. Semil’s following is rather large given his work with TechCrunch, StrictlyVC, and his own prolific blog and twitter account. This interview was really the start to the education I’ve received from Semil and I hope that it’s just the starting place for you as well. Semil outlines his investment thesis publicly for every investment he makes, including investments in Datos IO, Onfleet, HelloSign, and many more.
How did you get started investing?
When I moved to Silicon Valley, in the back of my mind I thought I would be good at selecting early stage companies, having helped start one in Boston. I didn’t really understand what that meant. I spent the better part of a year trying to network with people and explore roles.
I actually had one interview with a firm. The general feedback was, “Okay thanks, but no thanks. You’re way out of your league. You don’t have experience. You don’t have any network here.” Now, looking back on it, I missed what that means. I knew I was interested in it, but I was absolutely not prepared for it.
Through those interviews, I was able to build relationships with people that previously said no. Over time, as I started working more at mobile technology companies, they started calling me in and wanting me to help them evaluate deals, I often got, “Hey, what do you think of this?”
The second piece of the story is that I was exposed to a lot of people who were already investing, watching professionals work, and then I decided, “Okay, if I’m not going to go down this big pressure path where the professionals are working, how do I start with very limited experience, not a technical background, and knowing that investing is really hard and you need a lot of practice, I think, to get better over time?”
One of my friends pulled me aside and said, “Stop trying to ask for an investing job and just create your own.” So I created a fund which has room for two slots. The first fund I raised about 15 months ago. I made 32 investments. I’m just in the process now of raising the second fund to invest. I invest a little bit of my own money, which is not much, and then other people’s money.
When you raised from your LPs, you didn’t have any issues without the background in investing?
At that point people had known me personally, so I had those relationships with friends. I didn’t have any track record investing in companies. It ended up being 25 percent people wanting to support other entrepreneurs and 75 percent people taking a chance on somebody who is passionate about something. Luckily I was able to demonstrate a passion and interest in investing. Luckily some of those people felt, “Okay, you’ve done pretty well,” and “Let’s get this guy started.”
I also made it very clear to everyone why I was doing it. I also didn’t charge any fees. I just said, “I’ll expect the funds to pay for the required people and accounting, but as a show of good faith, I’m not doing this to earn a wage through fees.” I was trying to basically lead with that message, at some point I’ll charge a fee, but I’m not going to start out charging 2 and 20.
Are you focusing on a particular type of investment, like a particular sector?
That’s an interesting question because my thinking has changed on that. When I started, I thought I would be super “smart” and precise about what where I was going to set as my standard. Halfway through, I discovered it was better for me to be broad, meet really great people, and just let them guide me rather than pick a sector. There’s something about just meeting anyone and not being concerned by any sector. Kind of something I learned along the way. I could be wrong this time, but that’s how I evolved.
Do you care about deal structure at all? Are there particular terms that you’re trying to invest using?
Usually, because I’m a smaller investor, I’ll have a more casual discussion or relationship with the entrepreneur. I’ll talk to them about terms and consult with them on the right terms. I’m not setting the terms even though I’ve invested in 32 companies.
Are you always saving money to double down on the investments?
You’re asking a very good question because that’s why people make good returns, they can double down. I definitely make sure to reach out in advance to the entrepreneur if they’re doing well to say, “Look, I’d like to put in some more money.” I’ve followed-on in probably three or four total.
How do you interact with other firms in a given investment round?
Typically, I don’t. It’s not because I don’t want to, it’s that it doesn’t come up, and I sort of have a direct relationship with the entrepreneur. It doesn’t really come up, I think in the future it will, but I haven’t been in that situation yet. I haven’t been in a situation yet where it’s gotten contentious.
The investments that you do, what are you looking for when you do your due diligence?
I try to look at things that I know a little something about. I feel comfortable in evaluating it based on my own judgment. My judgment could be wrong. There are sometimes I meet great people and I’m working on something I don’t fully understand. So, I will try to spend time with them to see how much I can understand it. Also, I share that idea with people that I’m close friends with, usually on the phone, and ask them what they think of that situation or approach.
I’ll try to get a sense of if the company does everything that they say that they want to do, who would be the next person that would fund this deal because it’s not going to be me? I try to envision that person.
Is that a deal killer for you, if you can’t figure out who’s going to fund it next?
Most likely, yes. Most entrepreneurs when they’re just starting will only have two risks. Risk meaning if things don’t really work out, somebody would be there to give them a soft landing.
For a new early stage investor, what would you say are the top three things they should do to optimize for success?
I would quote somebody that I’ll share with you and then modify it. I’m quoting this guy named Noel Fenton, one of the founders of Trinity Ventures and has been around for over 30 years. One is some sort of gravity about you that is able to attract people. Going outbound all the time is not always going to pay off. The second thing you need, based on experience, is some sort of judgment about everything you see. The third thing that’s needed is some type of experience and network where you can add exponential value to what you’ve invested in. Noel’s somebody in the big leagues. I’m a little leaguer. I like to say I’m playing T-ball right now.
Someone just starting, what do they need? They obviously need capital established. They have to be able to tell a story. Secondly, they would need some ability to be in a network where deals are passed around and opportunities are passed around.
They have to sell what they call “value add” or what they can do for the company. Long term, I think, it’s just basic civics. You’re making an investment in the company. Once you decide to do it, I guess the moral thing to do is you should be available to help within reason, if they ever call you up.
What’s interesting is sometimes people’s portfolios get really big. Sometimes, the company is not going well. It’s going sideways. Sometimes, relationships break down or people just sort of disengage. That happens, I guess. That’s when I would say people need to start looking for someone to help them manage their funds.
I was lucky to capture Semil’s thoughts at an early point in his growing career as an early stage investor. Semil continues to be a sought after speaker, co-investor, and advisor. His unique perspective and approach are supported by persistence and great execution. Follow his blog to learn more about why he makes each investment he makes. Semil’s not alone, although everyone bootstrapping their way to becoming a venture capitalist do it in their own way.
Pick up a copy of the book for deeper insights from Charlie O’Donnell on how he built an early stage micro fund in New York or how Nicholas Wyman navigated his way to launching a venture fund in Colorado. Both dive deeper into why they pick particular companies