My journey transitioning from late-stage investing to early-stage VC

The transition from late-stage to early-stage investing proved to be a significant learning experience for me, and I’d like to share my journey.

by Ramzi Rafih

As an investor who spent c.10 years investing in late-stage companies at KKR and Silver Lake, I thought I had seen and learned a great deal about investing. However, a few years ago I was intrigued by the early-stage investing world and decided to venture into it by using my own capital to invest in start-ups.

After doing my first angel investments at the early stage, it became clear to me that the early stage investment world was very different from the late stage. I had to learn by putting my own capital at risk. During this time, I realized a three important things:

  1. Portfolio construction is crucial at the early stage. At the late stage, no deal is expected to lose money, and the range of outcome is narrow. A cash flow approach to investing is necessary at the late-stage. In contrast, early-stage investing, particularly pre-seed and seed is probabilistic, and investors need to accept that losses are a normal (read necessary) result of taking on risk.
  2. Sourcing opportunities at the early stage is very different. Over time, I learned that the best early-stage founder intros come from the founders I backed, from building direct relationships with founders and from other angels. Targeted outbound sourcing is also a great way to find new opportunities.
  3. Assessing opportunities at the early stage requires a different approach. I realized that early on, I had been focusing too much on data and KPIs and not enough on understanding the founders’ character, motivations and relevance. Spending a lot of time with founders, making reference checks, and understanding their vision for the company is critical at those early stages.

Despite the differences, I found that some skills are transferable from late to early-stage investing. A lot of the mental models used at the late stage to assess markets, founders as well as relationship building and networking skills, institutional fund management skills were very similar.

Being an “outsider” to early-stage investing also gave me some advantages. Those include:

  1. Intros to clients and downstream capital: as an angel, thanks to the network I had developed at the late stage, I was able to help founders in ways that other investors couldn’t. For instance, I was very often able to offer the startups i backed access to large potential clients owned by growth or PE funds, as well as access to later stage investors;
  2. Knowing what great should look like: having backed a lot of scaled companies who found product-market fit, I knew how to help founders on what they should be targeting and doing to grow and raise further capital;
  3. Spotting opportunities in VC where others don’t: being an outsider allowed me to spot opportunities that others in the VC world didn’t, likely because they got used to the status-quo. One of those overlooked opportunities formed the thesis of my VC fund, No Label Ventures: backing immigrant founders in Europe and sponsoring their visas.

I also discovered some other interesting differences between early-stage and late-stage investing. A couple I would highlight: 

  1. The speed of doing deals vs the length of partnerships with founders: deals between VCs and founders in the early stage get done very quickly (sometimes a few weeks), but those partnerships carry on for 5-10 years. Late-stage deals, on the other hand, take much longer to get done (a few months), yet the partnerships typically only last for 3-5 years;
  2. Making an impact is easier at the early-stage: I realized that as an angel investor at the early stage, it’s easier to make an impact than as an institutional investor at the late stage. One good intro to a client or investor at the early stage can potentially influence the trajectory of the company. It’s arguably much harder to make an impact as an investor at the late stage, where the management team is established, and the business has found product-market fit.

In conclusion, I learned that early-stage investing requires a radically different approach. Yet having a late-stage experience certainly gave me advantages that helped me differentiate as an early stage investor. Being an “outsider” gave me a unique perspective that I could use to spot and help founders in ways that other investors couldn’t.


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