Leveraging Entrepreneurial Experience to Invest in Startups

By Clifford Holekamp, General Partner at Cultivation Capital

As successful entrepreneurs, we are often asked to invest in new startup companies.  Last year, fellow EO St. Louis member Rick Holton and I professionalized our angel investment activities by joining three other veteran entrepreneurs, starting an early stage venture capital fund, Cultivation Capital.  A recent Kaufman Foundation research report concluded that venture funds managed by former entrepreneurs yielded higher returns than those that weren’t, and our first two years of results are confirming that assertion.  Reflecting back, we have recognized a few ways that our entrepreneurial experience has helped us be better investors.

Perform Better Due Diligence

We have a better perspective when researching our prospective investments.  As entrepreneurs, ourselves, we understand the obstacles that lie ahead and can read between the lines of optimistic investor pitches.  Early stage investment decisions can’t be 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 possibilities with the prism of your own experience.

Leverage Empathy

As entrepreneurs 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.  We understand the challenges our founders face, and we appreciate the difficulty of the challenges, but we also know the founders are capable of overcoming these challenges and help them do so.

Lend Credibility

An already successful entrepreneur has something very valuable to share with a new founder besides money – a track record.  We share this credibility with the companies in which we invest, and their management teams leverage it.  We have already seen how an investment by our firm immediately spurs interest from other investors, potential strategic partners and key management hires.  Our perceived seniority is also a tool that can be used to help bridge 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 in our businesses who required too much time and attention.  As a result, sometimes seasoned entrepreneurs can be more passive as investors, in consideration to the founders.  However, staying actively engaged benefits the company and your investment in it.  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, marketing and financing strategies, where we have all had first-hand experience.

Share Relationships

An experienced entrepreneur has a depth of Rolodex cards that can only be acquired through operating a business for many years; a new founder hasn’t developed such a network yet.  We’ve taken the opportunity to make introductions, which have led to new employees, new vendors and new opportunities for sales and 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 personally rewarding ways to share the knowledge we have learned in the course of our careers.  When leveraged thoughtfully, this experience can also provide experienced entrepreneurs financially-rewarding investment opportunities.

Clifford Holekamp is a General Partner at Cultivation Capital and is the Senior Lecturer in Entrepreneurship at Olin Business School at Washington University in St. Louis. Email Cliff at [email protected]