I do a lot of private investments, over 90 so far. People are pitching me all the time. I have made many bad investments and a couple of good ones. The other day this questions popped into my head after one pitch:
“Am I getting paid or getting laid?”
“getting paid” means investing in a strong business with good fundamentals, strong team, and great growth (actual not pro forma). Even if the business isn’t profitable, if there are solid fundamental margins, they are able to attract customers at a good cost and they are solving a real need, the business is likely to work. As I evaluated all my investments, the ones that I was “getting paid” returned about 4X the average return.
“getting laid” means investing in a sexy dream. The team may be great, the market is huge, the product idea sounds amazing, but the execution has not delivered the fundamentals yet. There is still much execution to turn the dream into a product and a business. Many times founders want a valuation of over $10M for their dream with little or no execution. As I evaluated all my investments, these tended to perform below average. Basically because it took more money than the founders thought to execute and “get paid”.
Now the Unicorn is BOTH. A strong fundamental business in a huge sexy dreamy market. There have been a couple of those, having nothing to do with my intelligence in picking them, just pure dumb luck. The Unicorns performed 10-20X the average. That is why they are unicorns.
I am not telling you how to invest, or which type to invest in. This is just one of may questions I ask myself before investing. I weigh this against the valuation, stage, management team, my investment size, risk tolerance at the time, and make a decision. What asking this question has done for me is to REDUCE the number of “getting laid” deals I do. Not because there is anything wrong with them, but I can identify them up front more easily and I know the average returns are less. So I tend to pass.