Over the last few months, we’ve seen the emergence of super-angels and micro-VCs as early stage investing comes into its own. Out of conversations with many in the industry, I’ve boiled the strategy down to two categories: pickers versus sprayers. Before we get into who is a picker and who is a sprayer, let’s talk about them in their extreme stereotypes.
Pickers
A Picker is:
1. Someone who goes through a more involved process of picking particular startups to invest in.
2. They will do due diligence, ranging from calling references, to looking at research in an industry, to collecting lots of legal paperwork from the company.
3. Someone who likes to manage more closely the startups they invest in.
4. Generally are more disciplined and follow a game plan of investing.
5. Invest in startups where they can leverage their preferences, personal interests, and areas of expertise to help the startups gain an advantage.
6. Invest in both people AND the idea.
7. Are more conservative than not, in an already highly risky investment class.
8. There is an upper limit to the number of startups they will invest in, either per year (or other time period), per partner, or even over the life of a fund.
9. Shoot for the big outcome/exit with every investment.
Sprayers
A Sprayer is:
1. Someone who goes through a less involved process to choose startups to invest in.
2. Often, they will invest in startups with no due diligence at all. They may not even meet the entrepreneurs in person.
3. Will invest in an enormous amount of startups, ie. >50 in a year (hence the term “spraying” their money around, or from the more deragatory phrase “spray and pray”).
4. They rely on social proof and others to do due diligence and to help the entrepreneurs, since they have no time themselves to devote to individual startups.
5. Their main exit return strategy relies on exits of mid-size (ie. >$20MM) all the way up to big outcome/exits. They are betting on a more index fund approach to investing in startups.
6. Someone who bets almost exclusively on the team, and on the assumption that smart, adaptable, entrepreneurial people will always find a great outcome (versus those who are not superstars). They bet less so on the idea and will skip a great idea if the team is lacking. (Woe to entrepreneurs who do not graduate from MIT, Stanford, Berkeley, etc.) Also, this means that they do invest in more exploratory projects by entrepreneurs (ie. projects without a clear plan, features-type projects, etc.
7. Speed is of the essence, as the competitive nature of today’s early stage market is intense and you have to have a fast decision process to get into deals.
8. They will try to get into every great, hot deal out there. In order to execute on their return strategy, they will have to get into as many hot deals as possible.
9. They have a higher risk tolerance and tend towards being OK with taking on high amounts of risk in the investments they make.
Who is a Picker and Who is a Sprayer?
The descriptions above are, as I said, extreme and stereotypical. The truth is, everybody is somewhere in the middle. Investors may lean more towards one way or another, but they rarely are at the extremes, except perhaps on the Picker end where many disciplined investors employ set strategies.
Sprayers, for example, do pick a little. If they didn’t, then they would invest in every startup with only smart people in it, which is definitely false.
Even pickers may start placing some smaller bets, which act as good lead gen for later stage deals, or education into a given space.
For me, I would say that I am a Picker with Spraying tendencies.
My personal capital pool alone limits me to pick the investments I make. I do not have the capital to place bets in a ton of startups. So I am forced to pick. But I also like to get more involved with the startups since I get a lot of personal enjoyment from working with them. So time constraints mean that I need to pick. And personally, I like to resonate with both the team and idea versus just the team and an idea with an unknown (to me) future.
But since starting to invest in 2006, I have invested in 21+ startups. That puts me in the low end of the Sprayer group. I will sometimes also bet on less certainty on the idea if I merely like it or it resonates with me somewhat.
Which strategy is better? Here’s my prediction:
Like startups, I think that success in investing is highly dependent on the person and their ability to execute whatever strategy they choose to employ. We can sit and argue about which strategy sucks and who’s gonna lose but I think in the end it will boil down to how the person operates and their skill and perserverence in pulling exits out of their investments.
Then, you couple that with external factors, like industry trends, competitive factors, and the economy, and that can either suppress a strategy or enhance it. Keeping an eye on the external factors and executing an investment strategy appropriate to the external factors, and that which resonates with a personal strategy will win big more often than not.