Xconomist of the Week: Bill Warner’s Rules for Angel Investing

First, a word to the wise. These investment rules may work for Bill Warner, but they’re not for everyone. Because Warner is one of a kind.

The renowned Boston-area techie founded Avid Technology (NASDAQ: AVID) in video production and Wildfire Communications in voice-based systems, back in the day. In recent years he has dedicated his career to mentoring entrepreneurs and helping them build new companies. Indeed, he has been part of a bigger movement to reinvent how startups are created—and to reinvigorate the Boston tech scene. Warner says he has made 21 angel investments in the past year and a half, and another 10 to 15 before that. He certainly qualifies as one of the top angel investors of New England.

Some of his most successful investments include Posterous, the blogging platform acquired by Twitter this year (terms were undisclosed, but Warner says it was a very good return); and Leap Motion, which is apparently going gangbusters with its gestural interface for computers (he was its first investor). Warner’s portfolio also includes startups such as Axio, Ginger.io, GreenGoose, ImpulseSave, Libboo, Memrise, and Urban Hero Sports. He likes to invest across a wide range of technologies: Internet, software, electronics, and mechanical stuff.

In recent years, we’ve heard Warner (an Xconomist) speak about his approach to building companies and investing in entrepreneurs. About building startups from the heart, not the head. About delivering joy or pain relief—and being smart enough to know the difference. But if you spend time with Warner, you know he’s constantly tweaking his own approach, adapting his philosophies to work with the right people, learning from successes and failures.

One example: He has evolved from working mostly with individual founders to working with small teams. “The founding team is where the real energy emanates from,” he says. “If you just have a single founder, it’s problematic.”

So here’s an update on how Warner is currently thinking about investing in startups:

“I like to be very, very early stage,” he says. “I like to invest before there’s traction, because I like to invest before the key product decisions have been made. I invest in the entrepreneur, not so much in the first product. I work with them to help them build the company, and then to have the products come out of that design. Instead of focusing on the first product and the first market. That has often resulted in companies changing quite a bit from their first product to what they launch.”

Clearly it takes a certain kind of relationship, a lot of give and take between Warner and the founding team, to make this work. It’s not for everybody, and I suspect finding the right fit with a startup is more of an instinctive thing than an intellectual exercise. But when it works, look out.

A few more contrarian points from Warner:

On product-market fit: “Instead of looking for market fit on markets that exist, I like to focus on the intentions of the founders,” he says. For Warner, working with founders often turns into “a process of creating a market.” That’s different from a lot of other investors’ philosophies. “Most investments, it’s to prove that there is a market. For the most part, if an entrepreneur can prove there’s a market, I’m usually not interested. If they can prove it, a lot of other people can prove it. I like to work with entrepreneurs who are working on things that really are new.”

On getting traction with first products: “Usually the more traction there is, the more worried I am,” he says. “It’s like having a car that can only go straight, it can’t turn right or left. Those companies are better for other investors. So the things I do are different and unusual. I don’t look at products. Even when entrepreneurs have a product, I don’t look at it before I make an investment. For the kind of investment I do, the product is actually a false signal. How good the product is, is not [necessarily] representative of them.”

On assessing skill sets: “I tend not to be very focused on skill sets. I’m a believer that when people want to make something happen, they’ll learn what they need to learn to do it,” he says.

On how much time it takes him to invest: “I make the decision in one meeting,” he says. “That forces me to do it from my gut instinct.”

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and Editor of Xconomy Boston. E-mail him at gthuang [at] xconomy.com. Follow @gthuang

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