Pattern Recognition, by Ian Sigalow

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“What Are You Investing In Now?”

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“What Are You Investing In Now?”

Introduction

Hardly a day goes by when someone doesn’t ask me some version of the question above.

Many people don’t think of VC funds as a “business” – we get put in a different group called “investors” – but just like all the companies we invest in, Greycroft has a business plan, too. Every now and then we dust it off to see if it still makes sense. Usually this is in conjunction with the timing of a new fund, since investors want to know what we are investing in too.

I went back to our most recent plan, and here are the five criteria we use to identify Greycroft investments:

1.) Companies that are in the Internet and mobile sectors.
2.) Companies that have gained some level of commercial adoption (except for a small segment directed to seed investing).
3.) Companies that have reasonable initial pre-money valuations.
4.) Companies that are capital-efficient.
5.) Companies with experienced management teams.

You will notice, our plan is intentionally silent about sector focus.

In our early days, we used to say we would fund a pizza chain if it delivered pizzas over the Internet. That was funny in 2006. But now we have a half-dozen companies that actually deliver pizzas online (Foodsby, Shipt, Boxed, Thrive, Plated, and Munchery to name a few). These six companies will do about $700MM in revenue this year, so it turns out people like pizza.  Who knew?

We intentionally left our sector focus vague because the market we invest in is constantly changing. Nobody could have predicted that the largest VC acquirers in 2016 would be General Motors (Cruise Automation), WalMart (Jet.com), and Unilever (Dollar Shave Club). It is only a matter of time before the Internet invades every sector of the economy.

So, if you go back to our list above, the secret is that every dollar we make comes from point #5. When people ask me what I am investing in, the real answer is “Great entrepreneurs”. That comes off as short and glib, but it is the truth. One meeting might be with a company that sells software for power utilities and the next with a tele-health company, but as long as they are both run by great entrepreneurs I am interested.

You may wonder what a great entrepreneur looks like. This is hard to decipher unless someone has an extensive track record, so a couple years ago I made a two question test that I ask myself for each investment:

Question 1.) Is this entrepreneur someone I would work for?

Question 2.) Can I learn something from this entrepreneur?

The first question is the most succinct way I know to describe all the things I look for in a manager. It is also one of the reasons that many great VCs have been around for a long time, because evaluating talent is a tough skill to learn.

In terms of the second point, I have come to realize that the best entrepreneurs I work with teach me far more about business (and life) than I teach them. If you had to put all the good parts of being a venture capitalist on the table, learning from smart people is probably the best.

While our business is always changing, and the technology trends come and go, the one universal constant is the pursuit of talented people. And no matter how an investment turns out, I have never regretted investing in a great entrepreneur, because eventually he or she will be very successful.

profile

Ian Sigalow

http://sigalow.com

Ian is a co-founder and partner at Greycroft Partners in New York City. He has been a venture capitalist since 2001.

Comments
  • user

    AUTHOR Chris

    Posted on 7:18 pm June 16, 2017.
    Reply

    Ian,

    You make great points above. I agree with all the points in your five point criteria apart from point number 3. This is quite relative.

    As I run THE company that will change the world and how people shop, pay for goods and how they receive goods while at the same time ensuring the seller is able to manage his business in one easy to use application, my pre-money valuation would be quite debatable.

    On the one hand, someone would call me crazy, coz i personally believe my valuation should be about $400,000,000,000. But you, as a VC, will probably only value my domain name and a few cents of sales.

    What i can say is this……im 39 years today, been around for sometime, lol. I have a passion for what im doing and will soon rival whatever Amazon has built and what Wal-Mart thinks its trying to build.

    Assuming you are actually reading this article i will put my name and email below. And will give you an option. I havent done this with anyone else. i sort of like you and how you look at things having read all your articles here.

    If you send me an email saying you are game, I will NEVER contact you Until my company has a valuation of $10 Million ($TEN Million). I will offer you 5% of the company at $5 million ($100 million valuation). What do you have to loose? If you are not interested, no problem, just ignore this comment and one day when i meet you, i will remind you about it. If you take my “crazy” offer and just reply, you may one day own 5% of a $400,000,000,000 company.

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