Early-Stage Investment Insights from Alexander Zorychta

What motivated you personally to get started as an investor? Please briefly share your story with us.

I started my journey as an undergrad student entrepreneur at UVA. Frustrated with the lack of support from the university, despite the plethora of well-meaning programs seeking to support entrepreneurs, I began to seek out other student entrepreneurs to learn from. 

I realized that the most engaged student entrepreneurs also felt frustrated. As we grew in number, we formed a small community of practice, where peer entrepreneurs helped one another with resources, best practices, connections, and mutual accountability. Iron sharpens iron, and many of these peers started finding real traction.

When some began raising money, I invested in their friends & family rounds well before most angels (especially local) would ever consider a company that early, because I believed that the strong foundational qualities of these founders would be some of the safest bets I could make.

More specifically, what was your introduction to investing in private markets? 

My first investment was in a peer student entrepreneur’s startup which yielded an 8x MOIC. My decision was based on firsthand witnessing over time of his ability to make rapid progress on the product combined with rapid sales traction – which directly correlated with his impressive resilience.

Could you describe your investment philosophy and discuss how it has evolved over the course of your career?

My approach to investing has largely stayed in the same vein. I still believe that an investor must first develop a strong conviction in founders who demonstrate– through their behavior, over time–that they are the jockey to bet on. At that point, it’s not a question of if, but when. Over time I have refined this into a longitudinal metric that I’ve used to identify high potential startups pre-idea, 10 of which have gone on to be funded by Y Combinator. (Y Combinator has been the best earliest stage investor over the last 20 years – 5% of their portfolio become unicorns and the Rebel Fund recently calculated that if you had invested in all of YC’s portfolio companies you would have a 176% IRR.)

Earliest stage, high growth tech startups are “the highest value real estate” you can access in private investing, according to Barry Eggers, co-founder of the legendary Lightspeed VC firm, who saw this firsthand with a 2250x return off of his firm’s initial early investment in Snapchat. With high-risk, comes high-reward though. I’ve combined my Behavioral Engagement Metric with that time-tested criteria of Y Combinator to develop what I believe to be the least risky way to do earliest stage investing. 

Over the years, what have you found to be your biggest challenges as an investor? Are there any that are specific to investment focus areas? 

Because I focus on the liminal phase when a proto-startup goes from not-a-venture to being a venture, best practices have not yet been established like they have in later stages. This is often a flash-in-the-pan moment which requires both having your finger on the pulse of a large number of proto-startups and the perspicacity to know which ones to focus on that are close to escape velocity. The biggest challenge here has been finding the line between capturing value in my ability to identify such early potential, and not being predatory toward founders. Reputation is everything and is the biggest asset over the long-term, so getting this right has been a major focus. Fortunately, I very much enjoy digging in the ‘dirt’ of the low-signal proto-startup space for unpolished diamonds, so this challenge has been a joy to pursue.

Which specific industry trends have influenced your recent private investment decisions, considering the rapid changes in the private investing ecosystem and global macroeconomic landscape?

The industry trends most relevant to me now are that:

A) It is now cheaper than ever to start a technology company (this has been true most years for the past century)

B) High growth, billion dollar startups need less and less capital to achieve outsized exits

C) Generative AI is replacing the need for human workers at a rate that soon we will see the first one-person billion-dollar company, so a focus on the founders’ abilities, mindset, and especially behavior is becoming more significant

All of this means that being on the cutting edge of this frontier of selecting great companies at the earliest stage is going to continue to be more important than ever before. At this earliest stage, the traditional best practices of angel investors become like a compass in the Bermuda Triangle because these startups are not yet mature enough to exhibit the conventional hallmarks of good early investments, such as huge market, proven traction, or even a defined concept. 

Specific industry trends don’t concern me, as I am seeking to find future market leaders and market creators. Paul Graham, founder of Y Combinator, has famously said that the best startup ideas often look like terrible ones. Seeking to follow specific industry trends at this earliest stage is a recipe for missing out on the next big thing, and it’s better to stick to the fundamentals aforementioned.

What are some of the best investment lessons you’ve learned during your career?

• Longitudinal data and behavior is better than any snapshot information in a pitch deck or executive summary. 

• Brand names and logos of high pedigree firms and schools on the team slide do not correlate with a less risky investment.

• Never discount someone on a first impression; leaving every founder you meet better off than you encountered them is a recipe for generating high quality deal flow. It’s not a no, it’s truly a not yet. When everyone is saying no to the next Airbnb, you’re going to be their first call when they’re ready, and you’ll have enough data to make a strong conviction. 

• Mechanisms and processes outperform natural talent and grind every single time.

• Not everything can or should be automated. Over-automating the investment process, in particular, obscures the black swan opportunities that will be career-defining.

What’s your favorite non-business interest or hobby? We’d love to know a bit more about your personal side.

Rock balancing, which is an art form and a meditative practice that involves stacking rocks on top of each other in seemingly impossible ways without using adhesives, wires, or other supports. The discipline requires patience, a steady hand, and a keen sense of balance and spatial awareness. Here’s a picture of a 30”x18” rock I balanced in the Niagara River.

This is a form of impermanent art and helps me regularly refocus my mind away from trying to hit a finish line and towards improving processes that improve the odds of crossing finish lines. It also makes nature come alive for me and provides others some magic and a bolt of childlike joy in a seemingly ordinary natural landscape.

Please leave us a book recommendation. 

The Artist’s Way by Julia Cameron – an old one but this book helps restore meaning, focus, and purpose to those who are passionately curious and interested in many things. 

On a scale of 0 to 10, how optimistic are you about the current market conditions?

10. 

Stressful and hard economic times are when the best companies are formed. Airbnb in 2008, Uber, Square in 2009, FedEx and Microsoft in the early 70s, Disney during the Great Depression, GM during the Panic of 1907, etc. Startups who begin their life with good financial discipline tend to be good investments, and the worst performing startup investments in hard market conditions like the current ones can often outperform the best early stage investments in good market conditions.