Moby-Dick and the “White Whales” of Angel Investing By Tom Tierney14 November 2011It’s the anniversary of author Herman Melville’s “Moby-Dick”. First published in the United States onNovember 14, 1851, “Moby-Dick” chronicles the relentless pursuit of the white whale, Moby-Dick, byCaptain Ahab. Ahab had earlier encountered Moby-Dick, lost a leg to him in a battle at sea, and spentthe rest of his life hunting, and ultimately dying, in his pursuit of the “White Whale”.Angel investors, other early stage investors and even entrepreneurs each sometimes get “possessed” intheir pursuit of their own “White Whales”.For investors, the “White Whales” hunted might include: 1. “The 100X Return”: most investor returns are described as “singles” or “doubles” etc. Small returns are much more common than “10X” or “100X” return (homerun) on your investment. To enhance the odds of success, early stage investors must place many bets on many companies in varied segements of the market to build a portfolio of investments. Having many investments will increase the odds of that one “White Whale” of an investment returning 100X of your capital. Even so, this “White Whale” is elusive… 2. “An IPO”: for an investor, most company investments will exit to failure, or merger/acquisition - - an IPO (Initial Public Offering) is the “White Whale” exit most don’t experience. For small companies, scaling the business to the position of public ownership is difficult: it takes lots of money, lots of time (usually) and many positive breaks along the way. Although the IPO exit is often discussed by entrepreneurs and investors, we don’t see this “White Whale” often… 3. “Good money, after bad…”: when an investment fails (management under-delivering or over- promising, product issues or simply the market never materializing), investors sometimes can fall into the trap of putting in more “good money” after bad. Re-investment must be analyzed as a new investment all over again, investors have to be able to let go of bad outcomes. As Captain Ahab learned: mistakes happen, learn from them rather than repeat them.For entrepreneurs, the “White Whales” pursued might include: 1. “Disruptive Technology”: Clayton Christensen’s book “Innovator’s Dilemma” describes “disruptive technology”, technology that meets some minimum requirements to take a foothold, and then later grow, to disrupt a market segment. There are a lot of entrepreneurs who present to early stage investors and claim to have “disruptive technology”: the truth of the matter is that there are very few truly disruptive innovations, this “White Whale” is not as
common as entrepreneur investor pitches would make it seem… if you claim “disruptive technology” be ready for the investor’s “disruptive due diligence” to smoke out that claim! 2. “Products without Competition’”: although entrepreneurs may describe the “White Whale” of a product without any competition, this is again, a whale rarely seen. Even if a product has no direct competition (and that is highly unlikely) there will always be a “substitute” or product that the customer uses in place of it. Entrepreneurs (and investors) should not be afraid of competition – it’s a good thing – it shows there is a market for the product!Remember Captain Ahab and the “White Whale”: choose your battles wisely and good luck hunting!Tom Tierney lives in Encinitas, CA and is a member of Tech Coast Angels (www.techcoastangels.com).Also see http://en.wikipedia.org/wiki/Tech_coast_angels for more background information on the TCA.