The 3 key limitations of “spray and pray” investors

This sponsored post is produced by Doug Renert, Co-Founder of Tandem Capital.

Remember during the dot-com era when your mail carriers and cab drivers were giving you stock tips? Now it seems as though they’ve all become angel investors, pitching their countless early-stage portfolio companies to anyone and everyone who will listen.

Yes, the arrival of the “lean startup” model — and the heightened exposure of entrepreneurs through online media, pitch events, and social networks — has blasted open the double doors of early-stage investing. And despite the ongoing doldrums of the overall economy, there’s a mob of aspiring angels and VCs rushing in to try their hands at it, hoping to strike gold with the next Facebook or Google.

Some of these new-wave angels keep their focus and commitments narrow. They select a certain domain to invest in and make just a few bets at a time. Maybe they even dedicate their time to working with each founding team as a part-time executive or advisor, helping refine and scale the business. These folks can add tremendous value if they have the right experience, skills, and network, and there’s a culture and personality fit with the founding team.

But many investors take the more traditional approach of portfolio diversification, looking for the equivalent of an early-stage index fund. This wave of “spray and pray” investing will leave a wide swath of carnage in its wake.

When it comes to public companies, we all have the same access to information and stocks as Warren Buffett, and we can buy and sell at the times and prices we see fit. But in the private company world, investors have to create their own deal flow, and their moves are limited once they invest their money. Only a fraction of companies make it to liquidity, and today’s early-stage deal economics make it challenging for the small number of successes to pay for the more common failures. This means that “spray and pray” investors have to be able to spot the best companies and move when they do. Only a few of these investors have the brand and skills to do this. The overwhelming majority will simply lose money during this frenzy. At least it will mostly be their own.

Entrepreneurs can avoid getting burned by this pending fallout of “spray and pray” investors. Here are three key limitations of spray-and-pray investors to watch out for along the way:

1. Limited face time

If an investor is making five bets a month, he simply won’t have any time to spend with you. Even if it’s an investor group, they will be spending most of their time selecting their next companies or managing details across their portfolio. This means that you’ll end up with a meeting now and again, hopefully along with a helpful network of fellow entrepreneurs in the same boat. Before you accept money from any investors, ask to speak with their other companies and find out exactly how much time the investor spent with them and what results were delivered.

2. Limited attention span

The definition of “spray and pray” is that you make lots of bets and count on the few that “make it” to bring home the returns. As all entrepreneurs know, things very rarely go as planned from day one, so it’s critical to have the support of your investors even during the tough times. Unfortunately, spray-and-pray investors have a hard time justifying putting more money or time into the majority of their companies along the way – their model forces them to narrow their funnels quickly and ruthlessly. Another useful step when checking out potential investors is to talk to portfolio companies that went through tough times and see how their investors handled it.

3. Limited domain knowledge

Far too often, angels and seed funds invest based on some broad criteria of market size or monetization potential, or who else is involved – not based on their areas of expertise. They might know the basics of SaaS, group buying, or HTML5, and maybe they can rattle off top stories from the tech blogosphere, but this really doesn’t help a budding entrepreneur. For an entrepreneur building a business, the only thing that matters is how much people around the table know about the company’s competitors, users and partners, as well as the key tricks of the trade. The mobile space, for example, might seem like a quick learn, but there’s a lot to learn. There are particular ways to move apps into the top charts; there’s a science to monetization; and there are relevant partners to know (including device manufacturers, carriers and development platforms). Having firsthand knowledge of these industry-specific requirements is critical.

The good thing about this early-stage investing wave is that strong entrepreneurs now have many potential sources of capital. They should use this dynamic to their advantage and partner with investors who are focused in their specific sector and are active with their companies. In other words, founders who have the luxury of choosing their investors should bring in those who will add value at the outset and will stick around over the long haul.

Doug Renert is the co-founder and ‘deal maker’ at Tandem. He has nearly 20 years of tech experience building and helping startups at Oracle, DLA and Tello. Follow him on Twitter @dougrenert.

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