Tom McInerney on Investment Thesis, Saying No, and Valuations

“Be authentic to your abilities, your expertise, and your world. You should start with what you know and then you can expand from there.” — Tom McInerney

In angel investing, there are no overnight success stories. Proven investor Tom McInerney from TGM established himself over the course of making 70 deals in the past 12 years, specializing in early-stage internet companies. Tom calls investing “the get rich slow business,” and says, “best case, your winners take years and years and years to mature.”

Despite how difficult succeeding as an investor is, Tom knows that to others, it looks easy. “As an investor, I think entrepreneurs probably don’t realize investors have a hard job. It looks easy. I think if they understood fund returns they would be wildly disappointed. You just naturally read about things that work,” Tom says.

Tom joined Cory Levy on the Spearhead Podcast to talk about his experiences as an investor and to share his advice for fellow angels. Among the long list of successful investments he’s made over the years are missed opportunities in now large tech giants, including Thumbtack and Airbnb.

A tactic used by angels to prevent missing investments that match their criteria and beliefs, turning those into an investment strategy, is an investment thesis. Cory asks Tom if he has an investment thesis. “I think thesis is for suckers because the world changes so fast and (it’s) very hard to predict the future.” Instead, Tom takes leaps of faith based on conviction. “One thing I took away was, as I continue to do well — take risks. As an investor, you have to take risks,” says Tom.

Tom takes risks on founders he believes in, regardless of the other angels or firms involved in a round or if he’s the first check or the last. “One thing I would say is just because a bunch of great folks are in a round, doesn’t mean that it’s going to work. I probably overvalued some, like ‘Goldman Sachs and Excella are coming into this round, so it’s got to be good.’ That’s not necessarily true. You still got to believe in the company yourself I think to write a check.”

Writing a check, for Tom, has significance over and above the capital it provides to the company. “When you invest in a company, as an angel, you should think about it as lending your credibility.” By signing a check, you’re putting your name and the name of your investment group publicly on a company, and by lending your credibility to a founder, you’re helping them leverage your name and brand to help accomplish their goals. When you’re not willing to endorse a startup and back them with your name and money, you need to give a “no.”

“Giving good no’s as an investor is hard but it’s really important,” Tom says. Tom explains that he tries to give the best no possible to help founders understand why he’s passing on them. Despite the importance of giving a good no, Tom also cautions founders from taking them as a sign that something is wrong with their business. “Founders shouldn’t over-read a no, and investors should make it clear that just because they’re saying no doesn’t mean that they are right.” However, if a group of founders is consistently hearing no for the same reasons from different investors, they should address this concern.

In the episode, Cory and Tom also discuss the current state of the market. Valuations are high, which could scare investors who are looking for good deals. Asked how he takes the investment climate into consideration when making deals, Tom says, “if you’re betting on a good team that’s creating an innovation, then they’ll still be successful. They’ll have to manage their cash more efficiently, but it’s what good teams do.”

Listen to the full interview between Cory Levy and Tom McInerney here on the Spearhead Podcast.

In the interview, Tom McInerney and Cory Levy talk about:

  • How to start as an investor
  • Cultivating a network
  • Negotiating terms
  • Investment thesis
  • How Tom says no to founders and why he takes this approach

Show Notes

  • Cory and Tom begin the episode by discussing his history as an investor and the biggest investment that got away (1:29)
  • How Tom met the founders of Airbnb and when he realized he should’ve given them a deal (2:37)
  • “I still think most fundamentally you’re betting on the team at that point” (5:10)
  • Cory asks Tom when he’s certain that he wants to invest in a founder (6:43)
  • “Often times I’ll see something and I’ll think right team, wrong idea, wrong space, wrong market” (7:15)
  • Tom’s advice for brand new angel investors, including how to stand out from other investors (7:54)
  • Cory asks, “How do you say no to a friend or a former colleague, what is that like?” (8:16)
  • Tom shares a story of how an investor who said no to a founder was later hired by them, and explains why (8:30)
  • Tom discusses Thumbtack, a missed investment opportunity (10:50)
  • How to manage tracking the entrepreneurs you meet with and keeping in contact with them as an investor (11:50)
  • “Is now a good time to be investing?” Cory asks Tom (12:45)
  • Cory and Tom discuss the importance of being the first check in an investment round (14:22)
  • Cultivating a network is key to the success of an investor. Tom believes it happens “organically over time” (17:10)
  • What Tom would tell his younger self to help him become a better investor (18:08)
  • Tom has strong beliefs about investment thesis and if you should have one. Listen in at (19:09)
  • How to negotiate terms as a new investor (20:11)
  • Not every part of being an investor is enjoyable. Cory asks Tom what parts of his job aren’t fun (21:15)
  • Show close (23:08)
Tom McInerney on Investment Thesis, Saying No, and Valuations