Investing in a companies earliest stages can give investors great returns and have a significant impact on a business’s success. But it’s not easy to analyze a company in its early stages and predict their future success. Fortunately, we had the chance to catch up with Justin Caldbeck, a silicon valley venture capitalist, American businessman, financier, philanthropist, and former Duke basketball player to learn more about some of the dos and don’ts of early-stage investing.
Why do you like early-stage investing? What’s the benefit of investing in a company in early-stage rounds rather than later on?
Justin Caldbeck: What I love is working with entrepreneurs who are thinking about the world in a fundamentally different way than most people, trying to solve a problem or create a “wow” experience in a way nobody else has. To me, it’s much more interesting at the earliest stages when very few others believe [in the company] than it is in a much later stage, trying to figure out what EBITDA multiple to bid. I also think there is a special bond that you can build with an entrepreneur being one of the early believers in him or her and a trust that’s built which is hard to replicate when the relationship is built at the later stages and every potential investor loves the business.
What do you look for in companies in their early stages?
Justin Caldbeck: I love to invest in early-stage consumer technology businesses. At the earlies stages, I look for an entrepreneur that is aspiring to create an entirely new consumer experience that feels like a “WOW” experience. This is key for me. I don’t want it to feel incremental, and I don’t want it to feel the same as though it is just replicating the experience of another company in a different vertical. At the earliest stages, I also rarely focus on the growth numbers (which I realize sounds odd). What I want to see are the “leading indicators of growth.” I want to see that when a user tries the product, that he or she uses it again organically the next natural time that they should want to use that given the use case. AirBnB’s frequency would be different than Grubhub, and I generally seek out high-frequency behaviors. I want to see that it is becoming a fixture in their life. I then think about their motivations for sharing their usage of the application with other people (and the subsequent likelihood of it growing organically). For example, I have concerns over completely anonymous applications because people don’t tend to want their friends on the same anonymous threads they’re on because it ruins the point of being anonymous if you’re worried your friends might uncover you
What is a clear red flag that will prevent you from investing in the early stages?
Justin Caldbeck: Misrepresentation of the numbers in an intellectually dishonest way. I also don’t tend to gravitate toward founders that talk immediately about their ambitions to sell the company. I love backing entrepreneurs that fundamentally want to re-invent a massive industry so they aren’t typically concerned with how they can exit at the earliest stages
Do you see any patterns when it comes to companies that are successful in raising funding and achieving success once they enter the market? If so, what are those patterns/common qualities/similarities that successful companies share?
Justin Caldbeck: Maniacal focus. The best entrepreneurs I have worked with have a very clear north star around what product experience they are focused on creating and don’t let feature-creep destroy the experience. They are also very focused on what the KPI objectives are for the company and how to measure success. Lastly, I really look for a thirst for learning. The best partners I’ve worked with were constantly trying to learn more about their industry, leadership, or any other of a number of areas they thought they could improve.
What advice do you have for anyone interested in working in VC and participating in early-stage investment rounds?
Justin Caldbeck: I’d say there are a few things someone can do: First, try to think about what companies you would want to invest in at the stage that interests you and WHY. Then try to crystalize those thoughts in a fantasy portfolio of sorts. Try to identify companies that aren’t household names or even invested in by brand name funds. Find your own path. Build out a network of investors and start to share those opportunities with those VCs in the hopes of soliciting feedback and potentially surfacing an opportunity that the investor moves forward on. There are very few better ways of getting in venture capital than sourcing new investment opportunities for funds you’d like to join.