Lessons from our Anti-Portfolio

Following our announcement last month looking at the investments we’ve made since 2007, Carlos Espinal and Reshma Sohoni have written this piece on Seedcamp’s anti-portfolio – the startups we didn’t invest in and the learnings we’ve made along the way. 

Investors are generally judged by the size and volume of their successes, for, after all, it is expected that you will lose some to win some, but rarely do investors talk about their mistakes and misses. There are a few investors out there, however, who have had an investment portfolio they call the ‘anti-portfolio’ which highlights their most regretted ‘passes’. Effectively, which companies would have yielded them amazing outcomes had they invested. Not all anti-portfolios are the same, however, sometimes companies will go up before they ultimately don’t materialize into what was expected of them. So in the short term, some companies might be part of an investor’s anti-portfolio, even though in a longer term, they might ultimately (or not) be satisfied with their decision – just comes with the territory.

It is, therefore, no surprise that in spite of our successes, with 280+ companies backed to-date and $5Bn in follow-on funding raised by our portfolio, here at Seedcamp we’ve had our own anti-portfolio in the making since 2007. This includes companies such as Citymapper, Bulb, Flux, Strapi, Impala, Colvin, GTMHub, Cognism, Unmind, Patch, Rahko, Pipedrive, Deliveroo, and SimilarWeb to name the most notable ones. Whilst the process of decision-making internally is beyond the scope of this post, what I would like to do is highlight the kinds of issues we felt companies like the above had that, at the time, we felt were sufficiently significant that we chose not to invest. Hopefully, this effort to highlight the investor decision process and how, like everyone in life, we can get it wrong.

When we get things wrong, we learn. Here’s what we have learned from these misses which happened between 2007-2011. We have learned to invest in more companies than less. We learned that 6/10 investments a year wasn’t enough. We learned we need to make 30+ in order not to miss any edge cases. We have learned to invest all year round. Historically we only invested a few times a year. Now we invest 365 days a year. We learned we need to be flexible with structures. Today you can see we offer pre-seed equity, a warrant option, and seed equity. We also do convertible notes.

We are often told by founders that pitch to us that we are very clear about our decisions and the Pros and Cons of why we ultimately say Yes or No. Learning from our misses and our successes has directly enabled us to be just this clear and upfront. Because we fully know, some will have been the right decisions and some will be ones we regret. We don’t have a crystal ball and our views of where markets or technology are going may be right or wrong.

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At the pre-seed stage, there are many variables that are in flux across every crucial aspect of the business – product, marketing, talent, business model. There are holes and weaknesses nearly everywhere you look. As such, when we meet a founder/founding team it isn’t always clear how they’ll be able to execute their vision, or worse, they’re unable to articulate their vision in a way that will bring a customer, team, or investor along with them. Sometimes we haven’t been able to envision product development out far enough. Or we struggle with the go-to-market being considered. In a few cases we question how they will make money because, for most of them, they will need to do just that at some point.

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One of the things investors are regularly criticized for is having a ‘lemming’ mentality, whereby as soon as one investor of note is ‘in your round’, others naturally want to jump in. However, what if you’re an investor who chooses NOT to be part of that lemming mentality? What if you feel that you just can’t wrap your head around the viability or scalability of the idea? Then what? Sometimes there is a reason why smart mentors, advisors, and investors come together, and it’s because something is worth the time in spite of your anxieties! And likely, if so many people we respect push for a founder/company, then it’s as likely that users and customers will also love the product.

Many times we follow these recommendations and choose to invest. In a few cases, we don’t, and we agonize over these decisions. Investing is also about saying No, not just about saying Yes.

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It isn’t unusual to have investors invest in a new segment across several companies competing for the same market at the same time. You want to ensure that the company you back will be the winner. That it’s this team and this product that will be the one that attracts the most brilliant talent and can raise the required amount of follow-on funding to enable the business to be the category leader and create enough distance between itself and its competitors. The investor anxiety, therefore, is around all the question marks about whether that particular team and product have what it takes to go the distance and whether the time is NOW. Companies often need a sizable amount of capital to grow. The worst thing to see is a smart team and product that just can’t raise enough capital to reach escape velocity versus competition.

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When one invests at the early stage, it’s difficult enough to value companies. Added to that if you operate as much of a standardized investment model as possible, there is a relatively narrow band of valuations typically associated with seed and pre-seed investing. There are always outliers and when an investor is confronted with one and it isn’t clear how the company merits this higher valuation to break through to the company being worth its valuation, this can also create a paralysis moment for investors. As much as standardization of valuations and terms allows for a better outcome for both startups and investors, time does pass between the first time you get an application or meet a team and when you ultimately are in decision-making mode. And in that time, gaps can build between valuation expectations of the team and the investor.

With the recent announcement of the numbers we’ve had to date, we’re very excited about the companies we have backed, many of which are in line to be a hugely disruptive business that will affect the lives of many.  In that spirit, in spite of sharing with you all part of our anti-portfolio, we are excited for what the future brings, even if it comes, at times, in the form of the ever humbling realisation that we can’t predict this future and that sometimes we will get surprised by the brilliant founders in whom we did not invest. Hindsight is clearly 20/20.

Seedcamp applications for pre-seed investment will open again soon, for more information go here

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