Invest In The Mess

There's a front page story in the NY Times today about the hyperactivity in web startupland. They quote from a few posts I've made on this blog and I think Jenna and Evelyn did a nice job with the story.

The thing that's clear from reading the story is the hyperactivity is in the early/seed stage market and the late stage market. Investors are throwing money at energetic entrpreneurs with plans, hopes, and dreams and at emerging winners like Groupon, Gilt, Twitter, Facebook, etc.

But from where I sit, there is none of that hyperactivity in the middle stage, which I like to call the ugly adolescent stage. The ugly adolescent stage is when you've built the product and are now building the business. It is when the team grows beyond the intial founding group and not everyone is getting along so well. It is when you are no longer that "bright shiny thing" that everyone wants to talk about. It is when your users are complaining that the service is not reliable or they hate that new feature or interface. It is when you have to figure out how to make money and get profitable. It is when the founder starts to wonder whether this CEO thing is for him or her. It is when you need that next round of financing and it isn't so easy to raise this time.

This is the messy stage of startup life. I have watched hundreds of startups go through this phase. Some don't get through it at all. Some throw in the towel and find a home for the company and the team. Many make it through and into adulthood.

Right now, this is where venture capital investing remains attractive. Like all forms of investing, the hard investments to make are the ones that are the most rewarding. Everyone knows that Facebook is a winner. Investing in Facebook is not hard and it is expensive, although it may well be rewarding.

Not everyone knows how to invest in the mess. But experienced VCs should know how to invest in the mess because they have all had to help their companies get through this stage. They understand the issues, they understand what it takes to cure them, and they should have the courage to know that investments made at this stage will be handsomely rewarded when the companies emerge into a successful adulthood.

We have plenty of portfolio companies in the ugly adolescent stage. And most of them are not finding it easy to raise money. We are doing many of these rounds as inside rounds, meaning the existing investors are funding the company without a new lead investor. I see this as a big opportunity for our firm and I am excited about it and entusiastic about making these investments. I know that not all of them will be great investments. But I know that many of them will be. And we are getting to make these investments at attractive valuations that don't have the least bit of irrational exuberance written on them.

I know that many of my friends in the VC business are doing these inside rounds in their portfolio companies as well. And I think they will be similarly rewarded. What I don't see is a lot of firms interested in leading these messy middle stage rounds as a new lead investor. I'd like to see more deal flow from other VCs at this stage because I think this is where you want to be in the VC business right now. I think you want to invest in the mess.

Enhanced by Zemanta
#VC & Technology

Comments (Archived):

  1. kurtains

    Thank you Professor Wilson. If only business school was as insightful as your blog.

  2. Steve Hallock

    Great post, Fred. I really had not thought of that before. It seems that the word between the lines is “execution”.Of course execution is everything. It’s easy to invest in a cool product at valuations low enough to take a risk on whether they can execute or not.It’s easy to invest big money after a team has proven they can execute.You seem to be describing a point of inflection where the risk is perhaps the greatest. Those are always the points that separate the men from the boys.Thanks for the insight.

  3. Richard Heitzmann

    Mess has always equaled hard work which equals opportunity

  4. Richard Burton

    I guess that’s where experience and the instinct that it gives you matters the most. When I meet people with ideas I can just kind of *feel* if they’ve got the grit to deal with the blows.

  5. Matt A. Myers

    Is it because not many investors get what it takes to move through the ugly adolescent stage, or is it because there aren’t many companies worth investing into that stage – not enough proof of concept, traction, etc.?Maybe the founders just didn’t think through far enough ahead. Maybe enough investors don’t know how.

    1. fredwilson

      it takes a lot of work to invest at this stagei think that not enough investors are willing to do that work

      1. William Mougayar

        100% agreed. Not all VC’s want to (or have the ability to) do the hard work. That mid-stage mess is like the “muddled middle”.

      2. abnerg

        This same principle applies to new products and market entries in large companies as well. Investors and senior managers alike, need to pay lots of attention to what happens once the sexy has worn off, but profits and market share are still elusive.

      3. Donna Brewington White

        May be like adopting a teenager.

  6. John Surmont

    Fred, thanks for the post. Sounds like the folks who are avoiding the mess are making decisions based on fear – which can be a huge opportunity for you and others. The problem for them (and their fund partners and investors, etc..) is that they don’t know they are afraid (of the mess) and that’s the missed opportunity. I mean think about it, have you ever done anything or been in any relationship that was worthwhile that didn’t get messy?

  7. Akshay Mishra

    This almost reminds me of option theory – hyperactivity in deeply out-of-the-money and in-the-money – and people staying away from the higher-volatility (or at-the-money) region – only seasoned players survive in the ATM region.

  8. howardlindzon and are two of our investments where investing in the mess helped me get in. Both companies are cooking already sold to comcast.I think there are two types of investing in a mess, one for venture capitalists and than true turnaround private equity deals which are TRULY messy and a different skillset than what you mention here

    1. howardlindzon

      this comment from the sky baby

      1. fredwilson

        where are you headed to?

        1. howardlindzon

          your favorite city…paris. landing in nyc for a few hours first

          1. fredwilson

            i am jealous

  9. Akshay Mishra

    (Of course in the actual option markets, most activity happens in at-the-money regions – thought the above was a reasonable analogy)

    1. John Surmont

      sounds like a quant describing a financial model to me. I think it may be that people can try to “win the lottery” or they can carefully and methodically manage risk, fear and uncertainty through knowledge, courage, guts and emotional intelligence.

      1. Akshay Mishra

        what can be quantified can be better managed! ๐Ÿ™‚

        1. Rurik Bradbury

          Yeah but you can’t really quantify early and early-middle stage investments. It’s more art than science. Too many unknown unknowns in the pipe. The best investors can do math, sure, but they win on the strength of their convictions about the future.

  10. Mark Zohar

    Great headline and great post. The question I’d ask you back is how many deals USV has closed as a new lead investor “in the mess”, as opposed to insider-led rounds?

    1. fredwilson

      very few, if anyi hope to change thatthis is 2011 planning done publicly ๐Ÿ™‚

      1. Harry DeMott

        One question out of yours:are you moving to the “mess” stage for new investments because you think there a re superior opportunities there? or because your preferred stage of investments (Twitter before they had much traction) is simply unavailable at the prices being paid these days?AS someone who has moved through every imaginable asset class – I understand moving around completely – just wondering where your preferences are – all pricing being equal?

        1. fredwilson

          i want to make 10xfinding it hard to do that in early and late stage right now

      2. JLM

        Years ago when I first got interested in turnarounds, I used to go to banks and troll through their “failed” deals inventories. I was looking for a bargain and one that was priced even better because of the chaos associated with it.I decided to focus on real estate for a number of reasons but I am always reminded that I found a great number of great “little” businesses hidden inside a bunch of failed “big” businesses and I found banks desperately trying to salvage something — anything — because it was costing them something to own the failures.It has always nagged at my mind that there is a huge opportunity to do just that — steal good little businesses from the corpse of dying big businesses particularly when in the hand of financiers rather than operators.The other thing is that once the bank or any other financier owns the problem, they have both mentally and literally written it down to a level at which the financial attraction may be rekindled.I am sure there must be a parallel opportunity amongst failed VC funded deals — they hate it at $50MM of capital ingested and digested but maybe there is a hidden asset base worth $5mm and the VCs are just so tired of it they are willing to take their loss and move on.

        1. Kate Huyett

          In private equity there is a subasset class called Distressed, one of the functions of which is basically what you describe here…is there anything like that in VC at the moment?A quick Google search only brought me one result, whose timing feels a bit early for the current cycle:…Feels like SecondMarket could be interesting here too.

  11. William Mougayar

    Blog Warning #4. (I’m counting them). This one is more subtle.Here’s the key question. Is it possible to still have great companies emerge without a period of irrational exuberance, overvaluations and spray & pray. Think of it- the current stars of the show, FB, 4Sq, Groupon, Twitter, etc. were all started and funded during a regular period of quietness when people’s heads were more leveled.I’m not saying we should be totally conservative,- just saying we need to be more sensible about the right investments. Don’t let money go to waste just because it’s available.

    1. Matt A. Myers

      Yes it is possible. The cited examples are the more obvious needs and broad simple business models that exist. They’re simple and quick to grow if executed properly. The reason Twitter and Foursquare exist is because of USV’s thesis which is why they were found. I hope they would have existed at some point if Fred et al hadn’t discovered those narratives for the future.Re: Waste – sadly all of society is extremely wasteful. We have the resources to feed the world, but we don’t — and it’s a bad idea to do so without proper management in place to begin with — and we also pollute the environment when we really don’t need to. I’m hoping the groundwork for this waste willI think because of the internet and related technologies that waste in society will continue to be lessened; less wasted time meaning people are more efficient, less wasted food, less pollution, and less wasted money, etc.. HOWEVER, in order for these systems to be created, there will still need to be the waste in the investment sector to allow ideas and systems to be tried and tested to see what works. That’s the idea of having capitalism and the main perceived benefit of increased speed of innovation. When money is no longer wasted in the investment sector then there should be no more need for as rapid innovation (therefore not the need for such a rigid capitalistic society).Anyway, these experiments / investments let us learn user behaviour, UI and UX, and what’s acceptable to people, and we are learning in many other areas of seeing what works and what doesn’t work as much. I think most entrepreneurs are aggregators. I consider myself an aggregator. I take in everything and formulate ideas based off of the ‘best I know’ – and so my ideas are ever evolving too, which is what keeps me addicted to this game of life and survival – and I’m sure most other passionate entrepreneurs.Anyway – people should remember that money is a concept, it isn’t real – it just means people’s time, and when people are bored they will be creative, and create and innovate.Sweet. I’m back into my multi-tangented comment flow… ๐Ÿ˜›

  12. JLM

    Damn, Fred, that’s the “order from chaos” investment thesis that has been my life and which has paved the way to the paywindow more than once.”When order is made from chaos, value appears.”Your views on the segmentation of the VC business are real time, insightful and instructive. You really should be charging tuition. I hope that this audience appreciates the cutting edge perspective you provide. I know I do. Thanks.Having been a turnaround guy for a long, long time I can only echo your sentiment from a different perspective.When something gets chaotic, the guys who made it so — run.When something is chaotic, the new guys have a damn hard time understanding what is there and become overly cautious.Opportunity in this arena is born of having the veteran intellectual skill set of knowing that even in the midst of chaos there are hidden jewels and real values which can be attained or controlled below their original creation cost.Lots of pioneers die with an arrow in their back and the money gets made by the guys who can be a quick #2.

    1. fredwilson

      my only regret is this post doesn’t use the phrase “pay window” in iti love that phrase and i love seeing mgmt teams go there

      1. JLM

        If one thinks about it, isn’t the VC business really all about —“The Journey to the Pay Window”?And is not your job really to shepherd the flock to the Pay Window?

        1. Matt A. Myers

          Just want to note the obvious that the financial reward itself isn’t generally what guides people to make it to the pay window – it’s what they want to do with the money that I’m hoping in more cases than not is admirable.

    2. Scott Barnett

      Great post, and great reply JLM. One other thing is the ugly mix between chaos and ego. When things start to go sideways (or at a minimum don’t go forward), people always look for someone to blame – as if you can have a sacrificial lamb that you put out to slaughter and then magically everything is all better. Or even worse, those folks who refuse to pivot because they are sure they are right, and others who pivot too fast because they have no conviction.

      1. JLM

        I think you have hit upon perhaps one of the most significant elements of mining for value in chaos — simply changing the perspective or optics of the leadership, management, ownership can often allow the vein of value to be seen more clearly.One of the most gratifying things I have ever encountered in my life is taking control of a chaotic situation, making a change and it not working immediately — maybe even exacerbating the situation — but knowing in my gut that it should have worked.Damn it, that should have worked!And then having the strength of my convictions not to give up based upon the initial and even subsequent feedback — and then, then seeing the first glimmer of hope, the first little sense that maybe the ship is turning.And, then, having the sheer balls to double down and pile on and then to remember sitting in a military science class and learning Tsun Szu’s The Art of War maxim — “exploit the advantage”.In some ways this intellectual wrestling match with the “unseen” is the currency that is unique to turnaround entrepreneurs — the heady sense that your vision was just a bit keener but your conviction was keener still.It is also one of the most enervating and energizing experiences you can ever imagine.

  13. Keenan

    Fred love metaphor!This phenomenom isn’t specific to VC’s, rarely do people take the tough risk. Too often we’re looking to make the bet we can best justify at the moment. Messes are hard to justify.Is USV taking the lead in “mess” stage startups outside of your portfolio? Seems, if your right, the space is ripe for those who do. What’s your approach to investing in these companies outside of your portfolio?

    1. fredwilson

      i hope we do of this next year

  14. Alex Murphy

    Fred – Great post!When I read or hear the “call to action” that you are laying out here, it reminds me of my favorite quote ever:”We choose to go to the moon. We choose to go to the moon… (interrupted by applause) we choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.” – JFKThe money quote is “… but because they are hard.” Nothing worth doing is easy. The things that we have the are most precious are the things that are hard. Children, Freedom, and Love.Too many businesses are focused on the “easy” things and don’t do things that are truly meaningful. It is great to hear you call this out in the investment world too. Again, great post.

  15. Michael Priceless

    I’ve always felt the same way. In fact, I think there’s too much enthusiasm in web tech start-ups that are over valued. I hope this sensationalized approach to investing doesn’t become the lead to the next bubble burst.

  16. awaldstein

    Kudos on this post. A terrific one.

  17. Dinesh Vadhia

    Is one solution to include more investors in the first round to mitigate against finding lead investors in the middle round?

  18. Jake McGraw

    Sounds familiar, I’d be more concerned about the internal structure of a company during the awkward phase than their ability to raise money. The question I think needs answering: is a dysfunctional group caused by an inability to raise capital, find a profitable business or is their dysfunction the cause?

  19. Kevin

    When I read the article in the Times this morning I thought you’d blog about this. I am glad you did.I know little about the VC world other then what I know from this and other blogs. However, as you and others describe it, this sounds like issues that faced and face the real estate market leading up to that burst. When reasonable, smart, people have a hard time finding reasonable investments, things don’t make sense. Though there is always competition, it “shouldn’t” be that hard to find things that make sense, and it sounds like it is getting that way in your business.Investing in your own mess – assuming that you still have confidence in the outcome – is not only a great opportunity, but also highly ethical.Investors in start-ups should be different than investors in established businesses. You don’t kick your kid out of the house the first time they’re in trouble. You help them get through it and it almost always pays off. Yet so many people refuse to invest in a mess – especially their own mess. Doing so as investor in a start-up is letting them die on the vine. That is wrong, and it is unethical. Nobody is obliged to keep financing anything of course, but not doing so (again, assuming you still believe in the company) is chicken shit. People that don’t shouldn’t have hopped on board in the first place. And they certainly don’t deserve the rewards that come when the team gets it right.

  20. Tereza

    I love messes, they give you permission to come in make the changes everybody’s been resistant to.And the attention you give can make a bigger difference.Interestingly, in thinking through my kids’ education I talked to a number of experts asking the question — if you have limited resources to pay for private school, when would it be? They always say — middle school. That’s when the tighter ratio makes the biggest difference and when a kid could swing off wildly in a number of different directions.I love that you called it Adolescence because that’s exactly what it is.But it also probably takes a more mature investor who understands that dynamic, to ‘get it’.

    1. Kevin

      Very true.

    2. JLM

      Both of mine are out of college (though one doesn’t quite admit it yet) and I can tell you that the best money ever spent was sending them to what I thought was the best private middle and high school in Texas.

  21. MartinEdic

    I’ve joined two companies in the ‘mess’ stage and it is hard. Things are simpler at the start-up stage, then they gradually get more complex and at some point they definitely hit your ‘mess’ point- which is where it gets harder for the founders to understand everything that is going on and very hard for new people to grab all the threads and understand them- it can take months to understand the dynamics. But once you do, if you’re lucky, you see the opportunities unfold. That’s the cool part.Note: underline ‘if you’re lucky’!I think a lot of start-up entrepreneurs would benefit from having been through a mess before their start-up. That may be a reason why some many of us have to fail once or twice before we win!

  22. Dave

    Great point and great post. Many of the best returns I’ve seen are from companies that nearly failed (or failed and recapped) in the middle stage. It is the stage that sorts out great idea finders from great investors in my mind. Companies at this stage need to get to real sales, real traction, consistent business model/development/product, etc. while still being startup nimble. Most difficult for the investors is that they need to figure out whether all or part of the founding team is the right one to take things forward–do you need to stick with founders, supplement founders or (hopefully rarely and only after careful thought) replace founders–all while deciding to write larger checks so support the companies.

    1. fredwilson

      those are some of the key issues

  23. Jeremy Campbell

    Is a lot of the mess created in the early round or rounds when the valuation is somewhat subjective and potentially much too high? Then follow on rounds are tough because the valuation has gone up exponentially since then?!

    1. fredwilson

      yes, that is one of the issues

  24. jon

    Fascinating perspectives as always, Fred. What advice would you give to startups who are in that adolescent phase and having a hard time finding VCs wanting to invest in the mess?

    1. infoarbitrage

      Funding the mess is best one by existing investors, which is one of the arguments for why pure angel syndicates are risky, e.g., they might not have the risk appetite or the resources to bridge a company during the ugly phase. If inside investors are resistant to supporting the mess, it is much tougher row to hoe. I’d leverage your existing investors for personal contacts at other firms, as these are the most likely to yield results (and encourage your existing investors to participate).

    2. fredwilson

      i agree with rogerfirst look around the tableif that doesn’t work, then look for someone who really understands your markets and businessbe prepared to take money on terms you won’t like

  25. William Mougayar

    Bless that messInvest more, not lessStartup, adolescent or adultThe VC business is like a cultHoward telegraphs from the skyHe sees no bubble, but lots of pieJLM says it’s order from chaosSeen this baby before is his ethosArnold says the post is terrificHis comment needs no lipstickBubble, inflation or deflationAre we talking tires or business creation?Invest, re-invest or harvestGrow customers and you will be proudestReaders study Fred’s blogThey say it clears the fogThey comment, like & shareAt AVC, it’s a love affair

    1. JLM

      There needs to be something above and beyond a LIKE for something like this. Superb.Somewhere in the world is an unemployed poet because of YOUR poetic skills. LOL

      1. William Mougayar

        Coming from you JLM, it’s a beyond Superb compliment.Poetry needs inspiration – which this blog provides.

        1. CJ

          “Poetry needs inspiration” – Truer words were never spoken.

      2. Matt A. Myers

        A multi-step action / button.I’ve wanted to include the functionality below in my own projects but I haven’t had the chance yet to implement it yet.Essentially once you click ‘Liked’ it would turn into an action step to favourite it – another option being allowing a drop-down with multiple options …”Liked” -> “Top 10 Favourites” “Top 100 Favourites” “Top 1000 Favourites” which could auto-sort over a long-term your favourites, and in personal statistics can breakdown into categories via the blog category (or based on keywords found I guess).. could have non-ranking options as well.You could of course let the user who has their comment Liked or Favourited be able to see how many people have Liked versus “Top 10 Favourited” their comment or posts.I’d use this functionality if it was in Disqus, I wonder if other people would use it?

        1. ShanaC

          too many steps, stop torturing the less experienced

          1. Matt A. Myers

            Expert users will figure it out, novices won’t need to figure it out. Could be something that can be toggled in settings as well.

        2. William Mougayar

          How different would that be from a 3 star system (which I’ve seen elsewhere). It’s 1 click: instead of clicking on the Like button you hover on 1, 2 or 3 stars and click. That’s it.

        3. Buzzwordguy

          “I’d use this functionality if it was in Disqus, I wonder if other people would use it?”Spammers would. They’d figure out how to game the system and the top 1000 favorites would be a mix of Viagra links, ways to win a free ipod/ipad/imac, and Nigerian money scams. You know, essentially what they do with facebook and twitter, and…Anyway. Why does posting information to the web have to be about ego stroking? Just post something worthwhile and stop trying to breed digg with foursquare.

    2. fredwilson

      that’s awesome. i’m speechless

      1. Matt A. Myers

        I think this should prompt a community contributions section somewhere on AVC. I’d love to see this kind of creativity fostered.

    3. Mark Essel


  26. johnmccarthy

    Different times, different context, but I’m reminded of Mao’s quote “There is great chaos under heaven, and the situation is excellent.”Guiding a company from the early, optimistic Startup phase through this ugly adolescent phase is not for the faint of heart.

  27. R. Taylor

    It’s worth considering the entrepreneur’s perspective. Seasoned professionals with solid, unique business models that will disrupt entire industries are being universally rejected for funding by VC’s who prefer to place a 1000-to-1 bet on kids with clever ideas. It’s no surprise that a subsequent mess needs cleaning. That “opportunity” is virtually assured. A good question (and the greater opportunity for investors) is how to close the knowledge gap between entrepreneurial industry insiders and investors … how to get investors interested in and comfortable with smarter, safer game-changing opportunities and take their attention away from the sexy roll of the dice described in the New York Times article. Thatโ€™s the โ€œall-winโ€ scenario.

    1. Dave

      Except for the fact that the venture investment return model is built on finding the 1000-to-1 bet, not on a bunch of safer and presumably lower return investments. The lack of the 1000-to-1 returns though would explain the VC industries horrible performance as an asset class though.

      1. John Surmont

        People respond to incentives and until the people who provide the VC’s with the money they invest the incentive is squarely for the VC to chase the “1000-1 bet on kids”. I think that’s why so much money gets concentrated on so few deals (if you really think about it). Just like the buzzwords we are all aware of now from the financial meltdown (derivatives; CDO’s; reverse mortgage; mortgage backed securities..) we continue to hear and see the herd talking, following and funding the same old web x.x social networking, mobile, search, ideas etc. (chasing the same deals or 2nd/3rd tier me-too deals.) It takes guts (and not being lazy or entitled or arrogant) to actually look around and see what else is going on. Anybody can sit on the doorstep of standford or harvard with bags of money and dole it out to genius kids with a great idea and produce 1 percent return over 10 years.

      2. R. Taylor

        Your comment is valid. Investors are pressured to go for big returns. Is it also possible that investors reject a great many 100-to-1 returns that have a very high likelihood of success because they don’t understand each unique opportunity? But then, how could they? To mitigate risk and maximize ROI, the investor must understand the competitive advantage as told by an entrepreneur who is likely so far out front in his or her own industry that colleagues don’t even “get it” (domain expertise with vision). The theme that “hard works pays well” is echoed in other posts herein. To understand fundamental changes in huge industries and safely leverage those very worthwhile returns, more listening and thinking is demanded (the needed skills). Until and after the next crash comes, I suggest that those who have successfully enabled lots of survivable 100-to-1 returns will be happier than those pursuing the 1000-to-1 bets. Venture Capital could become a stellar performing asset class, if it chooses to, with smarter, less trendy investments.

  28. Dan Ramsden

    Wow, this is a really interesting post. I wonder if it’s fair to take the theme a couple of steps further in this fashion: If there is a barbell-shaped bubble happening, in which the pure startup and the highly-proven/dominant platforms garner the most attention and capital, this is because the visible potential (i.e., option value) is greatest at those two ends on a risk-adjusted basis. In the murky middle, the glimmer of a startup (when anything is possible) is not there, and neither is the opportunity of Facebook (to take over the world). In the middle, investors really have to work to find the value potential and so domain expertise is crucial. The investor with the greatest domain expertise will be best positioned in that domain, and many investors take this to mean that the “existings” will have that edge, always. Because it’s hard to compete for domain expertise with those who have lived it. If all this is true, more or less, I don’t know how the ice gets broken for outside investors to start to take the lead in Series B rounds, and if this should happen, I wonder if that in itself would be suggestive of a bubble.

  29. aweissman

    What particular skills do you think an investor – a venture investor – needs or should have to invest in mess/middle stage rounds vs other stages and types of investments?Secondly, do you think this is “where you want to be in the VC business now” because the price associated with financings for these companies is more in line with that which will generate outsized returns?

    1. fredwilson

      skills:1) knowing how to play nicely with an established group (board & mgmt)2) willing to roll up sleeves and get hands dirty3) having the credibility to suggest some changes4) having the patience to know the changes won’t happen as quickly as you want

    2. fredwilson

      yes, this is the only stage where i see value right now

      1. aweissman

        Thanks for the replies Fred

  30. infoarbitrage

    Fred, absolutely terrific post. Timely, insightful and non-standard.I think this is a very hard thing to do in non-portfolio companies. Not only does it take lots of work, but you need to be able to ferret out information that is presumably better than the current insiders or have a substantially different view of the risk-adjusted opportunity. Not that it is impossible, but it is a much higher wall to scale.To me, funding the adolescent stage in your own portfolio is what separates good long-term investors from fair-weather investors. Supporting management teams at difficult times, as long as the business potential is there and you have confidence in the team, build long-term trust and can provide a unique opportunity to increase you stake at reasonable prices. Does it involve more risk that a runaway winner? Of course. But the upside potential is commensurately greater due to the valuation differential. I have spent a lot of time as an angel thinking about this issue, and am now employing these learnings in my role as a venture investor.Super, super important stuff.

    1. fredwilson

      it is harder in companies you aren’t already in, but i think its worthwhileand its where i see value right now

  31. Josh Strike

    “the ugly adolescent stage … is when you have to figure out how to make money and get profitable.”What? Sorry, that’s dead wrong. When I worked the paid end of designing startup sites in 1997-8, it was almost daily that engineers, data architects and designers sat around cheap Chinese by Levi Plaza, rolling our eyes at these half-baked, unprofitable ideas we were building for people with enormous piles of VC — most of whom were already driving Porches, by the way. While the capital kept rolling in, all of us on the building end had already long since determined that this was absolutely a bubble. It was just patently obvious that these people were spending money on figuring out “who they were” while building a sandcastle on an idea with no profit model.The really hard years, for us web designers, between about 2001 and 2005, were a time during which many of us assumed that we’d never make that kind of money again. That assumption was based on a belief that venture capitalists had learned from their mistakes. Apparently, it was false. A new generation of VC viewed the late ’90s as a false start. After all, the internet’s not going away, right? And so they helped engender a new crop of startup kiddies just as shortsighted and technically ignorant and twice as financially blithe as the last one ever was. Apparently the mere fact that the internet hadn’t disappeared by 2005 was proof that really bad ideas without any conceivable profit model were viable all over again.Your statement — your article — reflects a view that I think a lot of sweet talking hipster kids with abstract ideas are desperately trying to foster among investors. The view can be summarized as: Let me do my fun thing and I promise I’ll make you a ton of money…because after all, the guys who make it in this industry are the ones who have play rooms and open plan, brightly colored lofts.The thing is, that just puts the cart before the horse. No investor should ever get involved in anything that didn’t have a coherent profit model on day one — you know that, they know that, and the rest is a shine-on as the bubble inflates all over again. Personally, as someone who makes money by actually building these things rather than trying to con people into investing in ludicrous ideas, I’m a lot more interested in seeing a slow and steady growth of viable concepts than another explosion of idiocy that’ll line my pockets now and leave me desperate next year.

    1. JLM

      The “truth” is always multi-dimensional.You speak the truth beyond question. Absolutely. With the voice of wisdom, experience and insight. A knowing and guileful truth.It is however only one version of the “truth”.The fact that there are other versions does not make anyone else’s version wrong, it just indicates how complex the reality of things can really be.It is the blind men describing the elephant.

      1. Josh Strike

        Well, JLM, take a war for example. Everyone’s got their own experience and their own truth about it. One truth may be that some people make a fortune. Another might be that a lot of people get killed. Still another could be that it’s the right thing for the country to do under the circumstances. But if I wanted to find out what a war was really about, I’d be more inclined to ask a guy on the front line than a politician, or someone far off with a thick pocketbook who was bankrolling it.You’re right that from where I stand, I can watch these things rise and fall like successive little empires and I’m not embroiled in their drama…nor do I have anything at stake, nor am I the visionary with the overarching, billion-dollar idea. I take no credit, or blame. And I can appreciate what people put on the line for their ideas, and I don’t begrudge the visionaries or their successes. What bothers me is that if VCs could see the sausage being made from where I stand, they’d know millions of dollars sooner if they were backing the wrong horse or the right one. There are just certain dead giveaways.Being a web startup visionary is kind of like claiming you’re going to build a flying car. The engineers working for you will know in short order whether you’re full of it or not… but the investors may not find out until it crashes and burns.

        1. JLM

          Josh, I agree with you more than you do with yourself. LOLWell said and well played.

        2. George A.

          “The engineers working for you will know in short order whether you’re full of it or not… but the investors may not find out until it crashes and burns.”This is absolutely the truth and I couldn’t have said it better.

    2. John Surmont


    3. Mike O'Horo

      Your remarks remind us that the reliable winners during the original CA gold rush were the prospectors’ merchant/suppliers, e.g., equipment, clothing, food, horses, etc.

  32. Harry DeMott

    My dad use to say that the best way to make money is to solve a problem.The problem with the very early stage now is that there are no problems to solve – it is all ideas and hope – and some high prices for both of those.At the late stage – you can certainly make $ investing in sure things – but you are going to pay a high price for the privilege – and you know that the exit is out of your control.Which leaves the middle ground as you say.The problem with the middle ground – as I see it – is that you come in later into the process and unless you are able to have a meaningful say at the board level – and have the trust of the management team – you could end up with more of the same. I figure you need to roll up your sleeves and really build at this stage – which means that not only do you have to have the willingness and skills to do this – you need to have a receptive audience as well. That’s got to be part of the due diligence process.

    1. JLM

      Harry, your Dad must be a very smart guy. You are lucky.You hit on something very interesting. When there is a bit of chaos, it is more likely to be solved by some conceptual, planning, operational or marketing fix rather than a financial fix. It is easy to talk people out of money to throw at a problem. Witness the damn Stimulus.If you are that guy who has the skill set to assess what is wrong and what needs to be done, you can create a huge amount of value with almost no incremental financial investment.A savvy VC can and should put together a set of “first aid” skills that are able to be deployed at this stage to change the fortunes of the organization. This could take the form of a set of exemplars — monkey see, monkey do — which could be implemented immediately.

      1. Kate Huyett

        On your last point – the first aid skills – I suspect that this is part of why Gary Chou (@gcsf) was hired to be the General Manager of the Union Square Ventures Portfolio Network. Seems to be a timely hire (Q2 2010) for the type of investment approach Fred outlined here.Maybe the 2011 USV strategy is a classic example of Steven Johnson-style slow hunch.

    2. John Surmont

      Harry, that’s a great point. By the way, can someone smarter than myself describe what the specific problem twitter and facebook are solving? Just so I’m clear?

      1. Harry DeMott

        Sounds a bit facetious.If I had to answer I would say the following:Twitter is group IM. The premise is to allow you have a ton of IMconversations without having to do it 1-1. It is broadcast IM. You candebate the usefulness for sure – but millions seem to be finding it usefulOn Facebook, it is a fantastic aggregator of social information. To my mind- it doesn’t do anything fantastically – but does a ton of stuff extremelywell – which is why 500M people seem to find it useful.Hard to argue with run away success.

    3. Joe Marchese

      Thanx for focusing attention beyond the purely financial issues, important as they are. If an adolescent company is to grow into a thunder lizard (per Mike Maples), they’re going to have to develop a management advantage to supplement their other competitive advantages. I’m not suggesting a process straitjacket, but a management system that is generative, inclusive, and easy. The great news is that it can be done.

  33. Elie Seidman

    Important topic. Good to see you leading the charge.

  34. Adrian Scott

    Excellent analysis, bang on. Full marks.

  35. ShanaC

    Confession: I was an ugly adolescence. It’s an extremely hard to stage to be in either as a person or as a company.The most important thing I learned from it – there are answers and there is help out there. If you want to succeed and grow you have to keep looking.FYI, those with an easy adolescent may not be having it so easy not. Also from experience.

    1. JLM

      Hahaha, Shana, cher, you are not old enough to be able to grade your adolescence yet.You won’t really know until you are in your 30s. Only then will you know.You will have to trust me on this one.

      1. ShanaC

        Well I can tell you I stopped hiding in my clothing and I am less embarrassed by my hair (it’s a start)

  36. Brian Smith

    How can you really say this when one of your examples, Twitter, has been plagued by reliability and scalability problems, yet still continue to get exorbitant evaluations? I mean Twitter’s reliability has been so unreliable that it has become a meme (“Fail Whale”).

    1. fredwilson

      the Twitter round that Bijan Sabet at Spark led, in 2008, was a classic example of thisnobody else was interestedthe company was a messBijan and Spark have been rewarded immensely for investing in that mess

  37. gregorylent

    reading these comments, AVC could be on its way to becoming a magazine (2.0 style)

  38. kyork20

    Interesting post— thanks for sharing the thoughts. We are experiencing the growth here at but in a 100% bootstrapped sort of way. Feels like we just are fighting through the end of this stage this post talks about and on the cusp of blowing it out. The leadership is more comfortable in its roles and tiers of management are now created. Be fun to watch over the next 6-12 months.

  39. paramendra

    If 20 wild angel investors collected 100K each and said, Fred, please let us invest 2M in one of your messy companies, would you let them?

    1. fredwilson


  40. Larry Bruce (@pcmguy)

    Fred if you have the beginning of a mess any tips on how to vet the right investor to help with it?thx

    1. fredwilson

      someone who is known to get involved and help

  41. Jon Callaghan

    Agree completely here, Fred. Tons of value to be created in the building phase. We refer to many of these rounds (inside or outside) as “rational B rounds.” This is the zone where $3mm creates tremendous value in the company.

    1. fredwilson

      rational vs irrationali love it

  42. David Y. Kay

    Great post. Quick note: typo on the second-last line: “busines.”

    1. fredwilson

      thanks.fixed it.

  43. Rianne

    It’s a nice idea to hit on the opportunities these messes creates but be prepared, be very prepared.

  44. Jacob Slevin

    Great article. I struggle with a lot of these questions each day.Speaking very candidly, I’d be curious to hear more “adjectives” of the adolescent company (as I have a hard time placing ourselves). Questions like: years out of the gate, initial/earlier funding, revenues, burn, etc. Anything will be helpful. Thanks.

  45. panterosa,

    Chinese is “crisis”, which is formed by the characters for “danger” and “opportunity” together. For years, this idea has fueled many a project for me, as well as a perspective in general. I love the chance to make a sow’s ear into a silk purse, and it is becoming my greatest skill. While half my work is in creating art/design, and using that chaos, my other half has been in business.I am about to step up to the pay window on a 15 year tangled investment which was a complete dog, with messy, uncooperative partners and tax rules, and which I made into something through long hours and positioning. At the same time, it is a quit the day job moment, which is pretty big too, but since I hate that work it is long overdue.This change in direction was much influenced by reading AVC this past year. And my new venture has also been influenced by AVC. I applied to TechStars, and will apply to WE, and another thing through Startl. Thanks, Fred, for all the interesting topics, links, and sheer enthusiasm about opportunity.

  46. George A.

    Nice post, I am not sure the names demonstrate your point though: Groupon and Gilt alone have raised $200m in follow-on investments from other vc’s over the past 6 months.

  47. Mark Frankel

    Fred, isn’t the stage your recommending for investing the Crossing the Chasm stage which Geoffrey Moore describe as an extremely difficult feat. Therefore it makes sense that people don’t invest there.Are you asking why people invest early stage when you’ll still have to Cross the Chasm or are you implying that Crossing the Chasm is not as difficult as Moore makes it out to be?

  48. Donna Brewington White

    Love this post!So much so that I am returning to tell you this a day after first reading it– had to rush off the first time.There is something so deeply satisfying and inspiring about business advice that is filled with such sagacious wisdom.When I initially read this, I was struck by your metaphor of “ugly adolescence” since I’d just had a bout with my teenager who is going through a particularly messy stage. I had been reflecting on the realization that while my investment as a parent may not be as emotionally fulfilling at the moment, the stakes are higher than they’ve ever been — which gave me new energy for the task.It often amazes me how much the wisdom applied in your role as a VC resembles the wisdom needed for good parenting.

  49. Yaron Samid

    Fantastic insight as usual Fred. From your keyboard to other investor hearts may it travel well.I wonder though whether you’d turn away a “shiny” overpriced seed/A stage deal with a 10X probability you got personally jazzed about. I assume the answer is no considering your amazing early stage track record. The venture value game as far I understand it is skewed toward proactively pursuing the 1-2 important early stage deals a year and making sure you’re cozy in them, for the most part regardless of price. Do you see that tactic decreasing for you and others over 2011 because of exuberance in the web space and the green field in messyland? One things for sure, bulls upstream leave poop downstream. Investors — If you don’t love the mess, get out of the startup game.Thanks Fred.Disclosure: I’m a founder/ceo of a shiny startup, and previously founder of a startup that went through messy stage.

  50. Venkat

    Excellent and very timely post. Paul Graham called out the related phenomenon of the funding “gap” between the typical larger super-angel investment and the low-end of the VC first round (the gap seems to be the range of 0.5 – 2m range).One thing is not clear from this post. How does the “ugly adolescent mess” stage synchronize with product-market fit?I think the majority of products do NOT hit PMF by the time they’re in the ugly startup stage. That uncertain period where you have enough users that it’s a demanding live operation, but not accelerating adoption and buzz and inbound interest to claim PMF.I think there is now a strong bias towards products that have the right DNA to hit PMF at the super-angel level itself. Which means the ugly adolescent is at least growing very fast.There was also a back-and-forth recently on multiple blogs that seemed to converge on the figure that only about 30% of the angel-bubble startups would get money for their “ugly adolescence” stage.

  51. Bg

    I think I will just go back and do some javascript.

  52. JESSICA BIEL dresses

    Thanks rannie for ur observation. I also noticed it..they are too clean and tidy.,,hahaha. BTW, amazing works, right?

  53. Matt A. Myers

    I think this is why Fred likes to scope out teams for at least a year.It’s common sense you don’t commit to sleeping with someone long-term before knowing if they’re good in bed and satisfy your needs.P.S. I don’t mean that as a hit on people who wait for marriage before having sexual relations…