Successful Early Stage Investors are Optimists

Imagine yourself in an office looking at business plan after business plan. Doe eyed first time entrepreneurs and seasoned veteran entrepreneurs with a few successful exits under their belt all approaching you eagerly and trying to put their best foot forward. Each one is explaining what their company does and is looking for funding. "We are building a social network for X", "I want to transform the educational system", or "We have developed a mobile application that will save you $100's of dollars a month". All the entrepreneurs that you meet are all qualified in one way or another and usually very passionate about their idea.

As you can imagine, after a while, you get good at distinguishing crummy business plans from strong business plans and good entrepreneurs from bad entrepreneurs. The problem however, is the fact that the business plan usually changes dramatically (especially seed stage investments), and the entrepreneurs usually learn a ton through the process. So the current business plan that you are reading is only used as a general framework and you are left to rely on your intuition regarding how good the entrepreneur is, and whether they can successfully navigate the impending changes the business will have to make.

An early stage VC's job is figuring out if the management team can handle those changes well. In order to make any investment, they basically take a gamble on a management team. In the end, they do not really know what the business will become. For example, Peter Thiel, Elon Musk and company initially started on a very different idea that had to do with Palm Pilot cryptography and payments. After learning that the idea was pretty crummy, they salvaged what they could and came up with PayPal. Groupon, started off as ThePoint.com, a group campaign website. Twitter started as a side project out of a podcast site called Odeo.

Over and over again, you see the same story ring true. A group of quality entrepreneurs get together and start working on a business. They realize that their businesses stink and they move on to create something else. They iterate over and over until they hit it big with something.

This is why I think early stage investors are some of the most optimistic people I have ever seen. As a VC, how are you supposed to make an investment in a company that you know is going to change dramatically. Outside of going on a gut feeling on the entrepreneur's business chops (that is why it makes sense to only go with experienced entrepreneurs), there seems to be no real way. This is why I'm amazed by investors like Ron Conway, Peter Thiel, Fred Wilson, etc. People who have somehow managed to repeatedly find quality businesses run by high quality entrepreneurs - which is no easy task when they are inundated with thousands of business plans every year.

I have a hard time figuring out how these successful investors always hit it big, but I really think that it has a lot to do with the optimism and support that they provide to the entrepreneurs. And that is why I titled this blog post "Successful" early stage investors are optimists.