Naval: Angel investing is a game of exceptional outcomes; it’s not a game of averages. You’re better off with a portfolio in which nine out of 10 investments go to zero and the 10th one goes 1,000x, than a portfolio where all of them are 2x or 3x.
If a founding team hints, signals or even just appears likely to sell the company early, it’s a strong negative indicator. Teams that are overly financially motivated often will sell a company for $100M or $200M. That’s a life-changing outcome for them; but it doesn’t matter much to you because you own so little. It’s not going to move the needle on your net worth.
As Bill Gurley famously said, “Venture capital is not even a home run business. It’s a grand slam business.” The smart VCs look for extreme outliers.
This is why smart VCs let founders sell secondaries early on. They take some money off the table in exchange for going for the gold.
When you invest in a company that is going to sell early, you miss out on compounding interest. Also, VCs downstream will read that signal and pass on that deal, and the startup won’t be able to raise the cash they need to become a big company.
It’s difficult to pull this signal out of founders, although sometimes they offer it.