How to pick startups to invest in? 10 tips from top VC and angel investors
One of the most difficult parts about investing in startups is spotting the winners early.
Nobody, not even seasoned investors, can know for certain which startup is going to become a unicorn: so do they do it? We’re sharing tips and advice on investing from 10 world’s leading experts, angels and VCs.
Brad Feld has invested in Zynga, MakerBot, and Fitbit. In “How Can This Be A Billion Dollar Company?”, he writes:
“I’ve never, ever felt like the “billion dollar” aspiration, which we are now all calling [a] “unicorn”, made any sense as the financial goal of the company. Nor have I felt it made sense as a VC investing strategy, especially for early stage investors.”
Brad is much more focused on the product and the founders, asking questions like:
- “Do we think they are amazing and deeply obsessed with their product?”
- “Do we understand their vision?”
- “Do we have affinity for the product?”
- “Do we believe that a real business can be created and we can get at least a 10x return on our investment at this entry point?”
Paige Craig (@paigecraig) has invested in Wish and Klout. Upon his $1B mistake of very narrowly missing out on investing in AirBnB, he writes:
“In the earliest days, metrics will mislead you or simply lack the cumulative data to give you a real answer (to give you the certainty about product-market fit that you will never find at this stage).
Metrics are mainly useful for understanding how the founders themselves think about them — but they don’t mean much on their own. Focus your time understanding the people building a company, not its charts and spreadsheets.”
Fred Wilson (@fredwilson) has invested in Foursquare, Twitter, and Coinbase. Like Paige, he talks openly about his mistakes, like when he missed out on Feedburner (acquired by Google), because “You Can Do Too Much Due Diligence.”
“First, trust your gut. I was using Feedburner and knew it was a very useful service. I felt that others would see that too. They did, but it took some time.
Second, I learned that a service can get traction with the little guys and in time, the big guys will come along. I have seen that happen quite a bit since then.
And finally, I learned that you can do too much due diligence. It’s important to talk to the market and hear what it is saying. But you have to balance that with other things; the quality of the team, the product, the user experience, etc.”
Jason Calacanis (jason) has invested in Tumblr, Uber, Evernote, and Robinhood. He states:
“I think on the angel investing front, if I were looking for the big binary outcomes, I would have never been a marketplace investor or taxi-cab investor. My two top investments are a transportation company and a marketplace company.
I didn’t ever think I was going to be in those businesses, but now I think my biggest company after Uber or Thumbtack probably would have been Café-ex, which is about coffee machines. I never thought I would be in the coffee business either but here we are.”
On what founder qualities he looks for, Jason lists out 10:
- resiliency,
- relentlessness,
- debatability,
- intractability,
- curiosity,
- networkability,
- product vision,
- fearlessness,
- resourcefulness,
- and charisma.
Mark Suster (@msuster) has invested in Adly, MyTime, and Treehouse. From his blog “Both Sides of the Table”, he gave out his investing wisdom in “How I invest”:
“I have to believe the founder is cost-focused, mission-driven and aligned on cultural values to me, which mostly relates to integrity and how to treat other people.
I like over-communicators who err on the side of transparency and candor. I need to know when we’re in tough times that we’re in it together, with mutual respect and trust in each other to be good actors.”
joanne wilson (@thegothamgal) has invested in Le Tote and Parachute.
When musing on investing decision, in her blog post “What do you look for?”, she says:
“It is a hard one to answer because there is not really a specific answer. I want to see someone who I believe is an entrepreneur. That means they have a fire in their belly, are super smart and imho has the ability to scale, listen, be agile. Those are just some of the qualities of an entrepreneur.”
Mary Meeker has invested in Bitstrips, Waze, JD.com, Groupon, Apple, and Facebook. Her annual Internet Trends Report is a must-read for tech investors. In her interview with WIRED, she gave valuable advice on venture capital.
“I’ve made my best personal investments when I’ve been a user of the product. Like Apple. The epiphany for me came when I purchased my fifth iPod and I hadn’t unwrapped my fourth. It was still in the plastic case.”
“In the Digital Growth Fund, we have a rule: For every company that we invest in, someone here is assigned to get to know and use the product intimately and well. But that can’t be the person who leads the investment — or even the person who happens to be most passionate about the product.”
On evaluating founders and management team, she said:
“You have to separate the missionaries from the mercenaries. In the good ones, there’s an unbelievable product passion. Daniel Ek at Spotify is a great example. If you ask him a question, he’s got an answer, he’s already thought it through. When he doesn’t know something, he figures out how to find out.”
Ron Conway has invested in Facebook and Google. In his interview with Zurb, he gave many investing gems.
“We invest in people first, idea second, market size third. It’s our belief that the idea that we’re seeing is going to morph so much that we should not get wedded to the idea, we should get wed to the individuals.
The traits we look for: Can this person be a leader? Can this person lead a team?”“…Lots of entrepreneurs come to us after six months and say, “I’ve got bad news. Don’t shoot me, but I don’t think my idea works” That’s something we actually love. That’s when we pat the entrepreneur on the back and say, “Awesome. We didn’t have to tell you weren’t getting traction. You saw it, and you’re fixing it yourself.” That’s what we call a flexible entrepreneur.”
Naval Ravikant has invested in Twitter, Uber, and Stack Overflow. In his writings on Venture Hacks, he says:
“Generally, you need teams of two founders at least. You want someone in the company who can build and someone who can sell and if there’s going to be an imbalance; it should, probably, be in favor of the builder.
One learning that I’ve found the hard way is that is that, especially in consumer web deals, traction matters more than anything. It’s very hard to predict mass consumer behavior. It’s a very efficient market out there.
So, it’s good to find real customer adoption before you put too much money to work, whereas in enterprise deals, where you are selling to a small number of large customers, the team can make a meaningful difference.”
Rebecca Lynn has invested in Lending Club and Check. In her interview, she has a few things to say on investing.
“Timing is everything when you build a company like that. The biggest companies ever created were created when the regulatory environment was uncertain. When the entrepreneurs navigate [the regulatory framework] in the right way, they can be very successful, because that creates a huge [competitive] moat behind them.
Usually when I decide to never invest in the space, an awesome company will come along. That’s usually when it gets interesting, because the entrepreneur has found something special and their understanding of the market has worked.”
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Want to read more? Take a look at Mattermark’s Beginners’ Guide to VC. We haven’t found a better list of curated resources to get started. It explains how VCs work, has links to databases to do your own research, along with podcasts, documentaries, and books.
Remember — always do your own due diligence before investing in startups!
We’re looking for more gems. What is your favorite startup investing advice?
Originally published at Republic — head over to read more about investing & fundraising, or to invest in startups.
