Investing in startup companies may be as much an art as it is a science. There are very few certainties, and many variables that can impact the future of a venture. But there are definitely factors, criteria, and themes that are commonly repeated in how startup investments are made. In fact, the best venture investors are those that are able to have a pattern recognition when coming across opportunities that resembled other successful investments they may have done in in the past.
- Multiple founders
- Coachable founders who are easy to work with
- Proof of product/ concept
- Multibillion dollar market potential
- Something that the investor can add value to
Startup investors generally invest in, or even only seriously explore investments in 1 in 100 or 1 in 200 pitches they receive. Professor Scott Shane of Case Western Reserve University notes that the first filter most fundraising startups go through is who referred them to the investor. If the opportunity wasn’t recommended by a trusted source it will almost inevitably wind up in the trash. This is what is called in the venture world as social proof. In this regard, if you are looking for a template to pitch investors your business you can use for free the one below which has been used by hundreds of founders to raise millions.
In addition to the above, Shark Tank investor Robert Herjavec notes that entrepreneurs must have the skills and knowledge in place to both launch and manage a business, not just an idea.
Tim Ferriss who has invested in Shopify, Evernote, Alibaba, Blue Bottle Coffee, and Wealthfront, and has advised both AngelList and Uber reveals he has a very specific set of criteria for selecting startup investments.
- Consumer services and products
- Products and services he could personally be a power user of
- <$10M pre-money valuation
- Demonstrated consistent growth (without paid acquisition)
- User demographics including popular tech cities, and his exiting audience profile
Startup investors can set their own criteria for filtering opportunities. This can be adjusted at any time, but may help filter some of the noise, and funnel in better matching pitches.
This may include:
- Sectors investors are most passionate about
- Size of investment
- Size of valuation
- Number of founders
- Caliber of people investing alongside you, or leading the round
- Ability to add value in a specific way
- Synergy with individual values
To aid in selecting the best startup investments, the process funnel normally follows this pattern…
- Receive recommendations from trusted sources
- View executive summaries or pitch decks
- The Shark Tank moment; meet the founders, hear the pitch, ask questions
- Conduct thorough due diligence
- Review term sheets
- Execute the documents and fund your investment
While operations should be left to the founding team and board, there are always opportunities for investors to facilitate the success of their startups. Peter Thiel does this by going big into fewer startups so that they have the capital to win. Others amplify success by coaching or integrating the product and service into their established distribution channels. At a minimum every investor ought to be able to recommend, share, introduce, and shop their startup. Not doing so just doesn’t make sense. For example; investors in Tesla wouldn’t be driving a Toyota or Porsche. If you invested in Coach, you don’t want to be rocking a Michael Kors bag.
Startup isn’t just fashionable; it can be very profitable. There are some common threads in what leaders in this arena invest in, though the spread of sectors and niches savvy angels put their capital into is quite diverse. What may be most important in choosing a great startup investment is taking a page from Warren Buffett and carefully vetting each opportunity and weighing on its own merit.