INSUBCONTINENT EXCLUSIVE:
Ashton Kutcher
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Ashton Kutcher is an actor and investor
He is the co-founder of Sound Ventures.
A lot of people ask me how I choose to invest in startups.StageRevenue metricsSector
I&m not
proactively funding at different stages
I&m proactively funding brilliant people trying to solve hard problems.
Focusing on this simple goal of identifying and enabling amazing
entrepreneurs to create a better tomorrow is the crux of my investment strategy.
My startup investment &formula
A lot of venture funds try
to optimize for returns.They run complex ratio economic models to determine what their diluted value will be at the end of the life cycle of
the optimal and non-optimal case of every given company.
I don''t do that
I just try to fund the best and brightest.
I love working with the smartest and brightest people in the world on some of the hardest
And oftentimes I make a return as a result of that.
I weigh investments based on two vectors:
Return
Happiness
The primary litmus I put on
any investment is on behalf of my LPs
Will the capital have a potential of 6-10x returns in five, eight, 10 years If not, it not going to be worth our time and money.
But it not
the only factor.
If we&re happy doing the work that we&re doing on behalf of this company and relatively confident that we can return for
our LPs, it an investment worth making.
It seems counterintuitive, but it actually works — our first fund is showing 8-9x returns.
I&ve
had the experience where I&ve lost all my money
But more often than not, I&ve had the other experience.
A lot of companies might not have 100x return, but they have 5-6x return and they&ve
solved an important problem
By measuring both the financial return of the investment and the happiness of being a part of that journey, I can holistically gauge the net
outcome.
Image: Bryce Durbin/TechCrunch
Know what you don''t know
It really easy to box yourself out of really great companies by having
mathematical guard rails that don''t necessarily hold up over time.
At the time of investment, it can be difficult to anticipate the future
products that end up being the largest revenue drivers.
If you had the insight to know that the value they were returning to customers was
great enough that eventually they would find a way to monetize it, you would have invested in Facebook.
But if you&re operating on a purely
mathematical model, you might not have been able to do that.
I remember sitting down with one of my mentors around eight years ago.He listed
10 companies on a white board and said &rank for me from top to bottom which company you think is the most valuable
Now rank for me from top to bottom which company has the most revenue.
I had a mix of ones, fives and sevens; whether I thought they were
going up or down the list on both sides.
It turns out that the company with the least amount of revenue was the most valuable
And the company with the most amount of revenue was the least valuable.
Image: Lee Woodgate/Getty Images
What I look for in founders
When I
make an investment in a startup company, I plan on the likelihood that I&ll end up working with that person for five to 10 years.
I don''t
have a magic formula, but there are four important factors that must all check out for me to invest in a founder.
1
Domain Expertise
The best founders have some unique insight in the domain where they&re building a company that gives them some edge
I often find that it one of three factors:
Deeper understanding of consumer behavior
Historical insight
Data
There usually some initial edge
that is really clear and that gives you confidence that they have absolute domain expertise for whatever problem they&re trying to solve.
2
Grit
Founders need some capacity of perseverance through really, really tough situations.
I&ve never heard a single story of someone
building a company where everything went the way they thought it was going to go.
And when things don''t go the way you think they&re going
to go, will you have the capacity and the willingness and the perseverance to sort of go through it
This one is difficult to assess, and I
generally go by gut instinct on meeting with the founder.
3
Purpose
Is whatever they&re building someway connected to a greater purpose in which they&re personally invested
Whatever they&re building
has some resonance relative to who they are, how they are and what they believe — because belief systems don''t go away when you get into
trouble or come across a difficult challenge.
4
Charisma
There a level of charisma that many great founders have, especially if they want to be the CEO of their company.
When I meet with a
founder with true charisma, I usually come away feeling like I want to quit my job and go work for them
Because if I don''t get that sense or that feeling that I want to quit everything that I&m doing to go work for them, the best person for
the job that they are hiring for isn''t going to have that feeling either.
Recruiting is the hardest thing that any CEO has to do.
They have
to be able to sell themselves, sell their vision, and sell their company
If they don''t have the charisma to sell it to me, I find it hard to believe that they&re going to be able to sell it to somebody
else.
Image: Boris Austin / Getty Images
What makes me wary of founders
A founder can do many things to represent themselves poorly, but
Display questionable principles
I&m a very principle-driven person.
I have certain litmuses around gender equality, racial equality and
I only want to work with founders and invest in companies that share my principles.
I want to be connected and associated with people who
represent their brand in a way that I would represent mine.
It so easy to get distracted by the numbers and models and projections — and
don''t get me wrong, these are important.
But also, I&m looking at human beings build businesses
I want to work with good people and people who respect other people and people who have good moral fiber.
2
Lack of domain expertise
If the person doesn''t know their numbers it an immediate killer.
I often drill down into the domain the founder is
There are often brand new, disruptive ideas that I&ve never seen before
It easy to get caught up in the excitement of that, but the economics still need to make sense.
If someone doesn''t understand the economics
and the motivational drivers within a given sector, it becomes rapidly clear whether or not somebody has domain expertise.
And if they
don''t understand the domain and have a unique insight, they&re probably not going to be able to build something special
Lack of respect for time
The biggest key people often forget when they&re busy trying to sell what they&re doing is a basic, human
understanding of other people.
Smart people know the right time and the right way to connect with someone.
I&ve answered cold emails from
people who are really well-formulated, thought out, respectful of my time and respectful of me.
I&ve taken elevator pitches from
people.
I&ve had meetings set up with strangers.
If you know somebody hasn''t even sort of taken the time to consider your time, they&re
probably not going to consider the time of other people
And I think that going to negatively affect them and their company.
When a founder or company approaches me in a way that not considerate
and respectful of my time and what I&m interested in, I have a hard time looking past that.
Image: Bryce Durbin/TechCrunch
My role as an
investor in the growth of a startup
I believe the job of the investor goes way beyond fueling the company with cash
It about fueling the company with expertise, intelligence and connectivity.
On paper, growing a startup can roughly be summarized as
follows:
Early-stage validation
Have an idea
Crank out an MVP
Get that MVP to customers
Establish feedback loop
Make sure customers
appreciate the product
Establish a customer/product development feedback loop so the customer can improve the product
Build a company
Hire to fill initial capacities
Find product market fit
Market product to reach all target consumers
Build teams
Raise more money
Over
the last 12 years of being an investor I&ve seen companies at every one of those life cycles
Each one of those transitions is a different discipline; a different challenge in and of itself.
As a founder, I think it really important
to surround yourself with people who have seen it before, understand it, know what it like and know how to persevere through it.
That what
an investor group does.
Image: Shutterstock
For example, going from a bootstrap company into a company that can scale is a tricky
discipline.
A lot of founders make the really early mistake of hiring people just like them, instead of hiring people who bring unique
diversity and expertise to their team.
And after the initial batch of hires is made, you transition from micromanaging into macromanaging;
building startups within your startups, the variable divisions required to properly scale the company.
Investors who have helped companies
through similar transitions can help you avoid pitfalls associated with these milestones
These are the very pitfalls that often derail early-stage companies.
Fast-forward to the growth stage and fundraising is a monster in and of
You have these checkpoints where you&ve got to go and raise additional funding — and the future of the company relies on executing.
And
then eventually you get to the point where either you&re going public or there an acquisition
That incredibly tricky and not something that a lot of founders are ready for.
Every company situation is different.
If you&re a small team
— two or three people — you might look to add 10 investors
I recommend building an investment team that has variable experience across different firms and individuals.
A lot of founders only target
But you really want to get the person who understands your needs, your challenge and can help guide you through it — regardless of where
they come from.
It all comes back to the purpose and principles
Make no mistake: I have a rigorous process around numbers.
Estimated TAM,
IRR, NPV —we run them all
But when weighed against potential impact for humanity and capability of individuals at the helm, I put slightly more value than most
Maybe in the long run, I&ll fall into an even more disciplined manner of allocating capital.
But for now, I&m just going to keep working
with great people on the problems that I want to work on
Find good people solving tough problems and the financials often sort themselves out.
This post was originally published on Atrium.
