Ramona has been an investor during the last 11 years, and although her portfolio tends to perform better than the average, she has committed lots of mistakes she would have loved to know about when starting. In this article, she talks about the 5 essential ones.
Ramona Liberoff is a 49 years old entrepreneur and investor. She has formed part of 3 founding teams (2000, 2010 and 2018) and over the last 11 years, she has been devoted to investing in 15 different early-stage startups (sometimes with syndicates, sometimes on her own).
Her portfolio has performed really well, and probably, better than the average. However, as every person in life, she has committed mistakes, which she wanted to share in this article.
Lesson 1: Don’t invest in your friend’s business because the founder is your friend
I’ve always been clear about my investment thesis which is to look for advantaged technology businesses that solve complex problems like climate or financial inclusion or democracy.
Despite this principle, one of my larger earlier investments was in a sector that I didn’t care about much: B2C e-commerce, retail to a niche market. If I hadn’t known the founder, my friend, I probably would have passed on investing.
In hindsight, it would have been better for us both if I had supported my friend emotionally and not financially through her journey. The business has turned into a lifestyle business in which my capital is now stuck. I’ve had to compartmentalize my thinking not let this wreck our friendship, but it’s something I definitely wouldn’t do again.
Lesson 2: If the founder isn’t well known to you, do your diligence
This is the flip side of the lesson above. It’s always more risky to back early-stage teams where you don’t know the team and haven’t seen them operate ‘in real life.’ While angels can’t conduct particularly extensive due diligence on an idea, they can be very diligent on meeting founders several times, doing competency-based interviews, and seeking references: imagine you are hiring them rather than writing them a cheque, and you’ll probably be more careful.
This goes for joining the team as well as investing: twice now I have taken a founder at his word and found a lack of ethics and a track record of broken promises after the fact. It doesn’t matter if the start-up survives in spite of itself, you’ll never be able to trust what you hear and act as a booster for the start-up if you doubt the integrity and character of the founder.
Lesson 3: Make sure the founding team is diverse-and adequate to the mission
The research is out and conclusive. Diverse teams (and by this I mean diversity not just for gender, the most obvious, but age, ethnicity, life experience) perform better. So check your stereotypes at the door and realize that if a team contains variety, it’s likely to stay the course and perform better, not to mention be more likely to understand its users better and be able to grow more effectively.
On the side, there is a fashion for having one ‘tech’ cofounder and one ‘commercial/general’ co-founder. If the business is in a heavily regulated or within a complex area, and you have only two founders, make sure the advisory board is adequately furnished with the right expertise and connections. Current research in Europe shows that the vast majority of capital goes to all-male teams, for example-which means we must be leaving a lot of value on the table!
Lesson 4: Plan your cash well for the long haul
There’s a paradox to being an angel. Just when a company you’ve supported for years starts to do it well, it begins to cost you more and more to maintain any meaningful stake in the company and its success.
Invest less money and more time upfront, and keep at least half your portfolio for follow-on rounds. VCs do this for a reason and more angels should.
It’s also a good discipline to watch how a start-up is performing and build your confidence before investing all you have in the bank.
Lesson 5: Cut your losses early
Life’s short and time is more expensive than money. If you’re miserable on a founding team, not finding product/market fit, or dealing with toxic colleagues or investors-move on. It’s bound to end in tears and your life is worth more than that.
I’ve seen people grit their teeth and stick it out for years beyond when it was clear that something wasn’t working right, and then come to the conclusion that they shouldn’t be entrepreneurs. It wasn’t you, it was them.
Bonus Lesson: The best predictor of future success
Across the whole set of experiences, I’ve found one of the best predictors of a company’s success is how founders and CEOs communicate with the team and investors.
Frequent communication builds trust. In companies that communicate infrequently, you find there is usually a laundry list of ‘crisis asks’: “Help, we’re about to run out of money!”; “Help, we need customers, please introduce us to your network!”; “Help, we lost our CTO, we need a new one!”.
Everyone’s aware that an early stage is a risky business, but if you don’t share the journey, don’t expect anyone to come rushing to your aid when you hit a tough crunch.