When we launched SparkLabs Global Ventures two years ago, we faced a lot of uncertainty and risk as a new seed-stage fund. How would the chemistry work out between the six partners? How would entrepreneurs respond to our vision and team? How would investors respond to our thesis as a global seed-stage fund?
After two years, we’ve invested in 54 companies across five continents and backed many inspiring and awesome entrepreneurs. We’ve also learned a lot from those entrepreneurs, industry veterans, and each other. We had a recent discussion as a team (HanJoo Lee, Frank Meehan, Net Jacobsson, Jimmy Kim, Jay McCarthy, and myself), wrote down a laundry list of all the things we’ve learned along the way so far, and whittled it down to the top 12 lessons we want to keep top of mind:
1. Team decisions work. While it’s difficult to track the success rate of our decision process (all six partners have to say yes to an investment) versus an individual partners’ success rate, we’re confident that our process has led us to the best decisions. Over the years, I’ve conducted dozens of survival simulation training sessions, which examine decision-making by groups versus individuals in harsh, life-threatening environments (i.e. Death Valley or Antarctica). I have never experienced a session in which an individual scored higher than the group. Regardless of free riders or having a few weak links on a team, the team decision prevailed and scored higher in the probability of the group’s survival over any single person. I believe this has held true for our approach to startup investing, and I can state confidently that my five partners made me smarter.
2. Exceptional entrepreneurs can be found anywhere. We started with the thesis that awesome innovations and innovators can be found anywhere, not just in Silicon Valley. Our experience over the last two years has proven this to be the case. We are seeing great companies rising from all corners of the globe.
3. True grit matters. Call it grit or hustle, but I can’t overstate the importance it has to a startup’s success. And successful entrepreneurs know how to leverage that hustling attitude without crossing the line into stubbornness. They also know when to pivot and when to fold.
4. Speed matters. Speed can be a good indicator of whether a startup in the seed stage will be able to survive. How quickly can the founders close their funding round? Find and hire the right talent? Quickly hustle their way to the right VP to pitch their product?
5. Integrity matters. This is not good for goodness sake. Integrity is an absolute starting point. Don’t lie to your investors, don’t lie to your company’s partners, don’t lie to your employees, and don’t lie to yourself.
6. Money and time, baby. Money and time. The givens for a startup’s life are the amount of money you have and need, the time it gives you, and time you need to raise your next round. Every other factor is fungible. A common mistake that we saw over the last two years by otherwise great founders is that they get stuck on a certain valuation level, delay, or don’t close their round, and decrease their runway and lifeline as a result. In other cases, we’ve seen founding CEOs who don’t closely track their burn rate and cash, which leads the company to operate under circumstances that should have been more in their control. Situations like these put companies in unnecessary trouble.
7. Do not optimize your valuation. Optimizing your fundraising valuation will come back and bite you. Our team has seen this play out several times within our portfolio and among other startups, where companies underestimate their cash needs, run out of money, and can’t raise a bridge round from their existing investors. Why? Because the first set of investors don’t want to put in at the higher valuation, such as $12 million, and the second set of investors realize that they won’t get as good a deal as the first set of investors but will have the same outcome. Or a startup seeks out a bridge, but with a bump in valuation without much justification. Of course the founders believe it’s justified, but investors don’t, and no one invests. Then it’s too late to go back to investors with a lowered valuation. If you are in need of a bridge round, keep it at the same valuation or a very small bump because speed is essential, not your ownership percentage.
8. Low versus high burn rate? We have seen both approaches work, but each requires associated tactics that make sense in its context. If you are working on a mobile app or game, you absolutely need a low burn rate. This is because you never know what idea will stick. So you need to ensure your survival until you figure out the puzzle. However, if you are in hardware, you need a good amount of capital up front so that you are not scrambling all the time. Also, with ecommerce and certain fintech plays, you absolutely need a lot of capital and need it fast if you’re going to matter in the market. So know the characteristics of the sector you are playing in, and cater your strategy and tactics accordingly. Of course, regardless of industry sector, spending on private jet rides and vacation trips is a quick path to failure.
9. Always fundraise. Whether we are raising for our own startups or a new fund, it seems like we spend half our time on fundraising. If you are an entrepreneur or newbie VC, it’s something you can’t avoid so you have to embrace it. Since my late twenties, fundraising has always been my second job.
10. Ecommerce outside of China and the U.S. has awesome potential. We believe this for several reasons: a proven business model, easily tracked KPIs, immediate revenue growth, and still so much opportunity to disrupt traditional retail.
11. Fintech, cybersecurity, deep tech, and enterprise are focus areas for 2016. While our team jokes around that “we look at anything online but not illegal,” we will continue to look strongly into fintech and cybersecurity while looking more actively into enterprise and deep tech plays.
We believe there will be much more disruption in the commercial banking sector and across more markets, such as in Asia and Western Europe. Cybersecurity across industry verticals and platforms will continue to increase.
Our team has seen more academic researchers seeking to commercialize their deep tech discoveries. While most are difficult to productize or build a company around, we believe there will be some diamonds in the rough that can be developed into world-changing companies.
12. Hardware is really hard. We have invested in six hardware companies so far and also seven from our affiliated startup accelerator in Seoul. We love IoT and hardware and will continue investing in this space, but we have learned along the way that making a physical product is much harder than it seems. One minor design or manufacturing error can double your costs, set you back three months, or kill your company altogether.
If it’s a consumer product, we look for what my partner Net Jacobsson calls the “holy trinity of IoT” (product, subscription, data). If it’s an industrial IoT play, the revenue or revenue potential has to be crystal clear. Saying that you are collecting a billion data points that someone will eventually buy isn’t moving the needle on our team.
We know there will be dozens more insights that we will gain over the next two years from our portfolio companies and each other, so we look forward to it!
Thanks to HanJoo Lee, Frank Meehan, and Net Jacobsson for writing most of these points. I wholly admit that I plagiarized their work.