Leveraging Entrepreneurial Experience as a Venture Investor

By Clifford Holekamp, an EO St. Louis Elumni, and General Partner of Cultivation Capital

Successful entrepreneurs are often solicited for investment in startups. Fellow EO St. Louis member Rick Holton and I professionalized our angel investment activities by joining three other entrepreneurs starting an early stage venture capital fund, Cultivation Capital. A recent Kaufman Foundation research report concluded that early stage venture funds managed by former entrepreneurs yielded higher returns than those that weren’t, and our first year results are confirming that conclusion. Reflecting back, we have identified a few advantages that we have as entrepreneurs when managing early stage venture investments.

Perform Better Due Diligence

We use our experience to perform better due diligence. Entrepreneurs understand the obstacles that lie ahead and can read between the lines of optimistic investor pitches. Early stage investment decisions can’t be made based on financial analysis alone. The subtle nuances that differentiate the winning teams and formulas are easier to recognize when you can think through the prospects with the prism of your own experience.

Leverage Empathy

As an entrepreneur investing in other entrepreneurs, we have a level of empathy for our portfolio company founders that others wouldn’t have. Ironically, we can leverage this understanding to set higher expectations from our investments. We understand the challenges our founders face, we appreciate the difficulty of the challenges, but we also know that the founders are capable of overcoming these challenges.

Lend Credibility

An already successful entrepreneur has something very valuable to share with a new entrepreneur besides money – a track record. This credibility can be shared with the companies in which we invest and can be leveraged by their management teams. We have already seen how an investment by our firm immediately spurs interest from other investors, from potential strategic partners, and from key management hires. Our perceived seniority is also a tool that can be used to help bridge the communication and information gaps that can sometimes occur between the entrepreneur, other investors, and outside parties.

Provide Counsel

Many of us have had high-maintenance investors who required a level of attention that competed with the needs of the business. As a result, sometimes former entrepreneurs can be more passive as investors in consideration to the founders. However, staying actively engaged is to the benefit of the company and of the investment. Smart money is always hard to come by, and the free advice and counsel of an experienced investor is invaluable. So far, our portfolio companies have needed the most guidance in the familiar areas of accounting, legal and financing strategies where we have all had first-hand experience.

Share Relationships

An experienced entrepreneur has a depth of Rolodex that can only be acquired through operating a business for many years. A new founder hasn’t developed such a network yet. We have had the opportunity to make introductions that have led to new employees, new vendors, and to new opportunities for sales and in business development. While garnering resources is a tremendous challenge for startups, it can actually be one of the easiest ways for an experienced investor to help.

Helping other entrepreneurs find success is one of the most meaningful and rewarding ways to share the knowledge we have learned in the course of our careers as entrepreneurs. When leveraged thoughtfully, this experience can also provide quite the advantage for selecting and managing successful venture investments.