Fred Wilson wrote a nice post on seed investing this morning. This is directly in line with my thoughts on the benefits of getting into an investment early.
One key discipline that you have to have in order to be an early stage investor is to know when to fold your hand (in keeping with Fred's poker analogy). Although the decision to stop backing an investment is very tough, it's easier to do it with a real early stage company as fewer people are involved and less has been put at risk. There's always the risk that the VC and the entrepreneur don't agree. The VC may think that the business won't gain any traction. The entrepreneur is usually an optimist. In that case, the VC can back away gracefully and convert their preferred shares to common shares. If the entrepreneur can get someone else to finance the company, the VC won't be in the way.
I always prefer to make my own mess than to inherit someone else's. If you build a company from scratch, you know the risks and you know where the bodies are buried. If you come in later, you have to build in financial protection mechanisms in case surprises come up. Later stage investors often describe the "first board meeting blues" when you come back from the first board meeting after an investment is made, now finally knowing what the REAL situation is at the company. As many have said, the vacation doesn't often match the brochure.
I also think that investment style has to match investor personality. You can make money investing early and investing late. Your feel for an investment very much matches your ability to tell in your gut if an investment is going well. That's why it's important to stick to your knitting in this business. There's a risk that many VCs are now getting away from what they know best. That will almost certainly mean that their returns won't be as good as they where when they stuck to their sweet spot.