How to Invest in Startups

In the world of startups, there's an abundance of advice for founders, but relatively little for investors. This guide aims to fill that gap, providing insights on how to become a successful startup investor. However, it's worth noting that we're currently in a challenging investment climate, with more people seeking to invest than to found companies.

The Three Pillars of Successful Investing

To excel as a startup investor, you need to master three key areas:

1. Gaining access to quality investment opportunities
2. Making sound investment decisions
3. Convincing promising startups to accept your investment

Let's dive into each of these pillars.

1. Accessing Quality Opportunities

Surprisingly, hard work is the most effective way to gain access to good investment opportunities. Many investors don't put in the effort, creating an advantage for those who do. Here are some strategies:

• Network actively: Don't just "touch base" or "grab coffee". Offer real value to respected investors and promising founders.
• Provide meaningful help: Offer to spend time assisting a VC's portfolio company. Focus on areas like recruiting, fundraising, customer introductions, and general advice.
• Build your brand: Create long-form content that demonstrates your expertise and thoughts on the startup ecosystem.

2. Making Sound Investment Decisions

The key to making good investment decisions lies in identifying great founders and promising markets.

Identifying Great Founders

Look for these qualities in founders:

• Scrappy yet formidable
• Mission-oriented and obsessed with their companies
• Extremely smart (necessary but not sufficient)
• Decisive and fast-moving
• Courageous and willing to be misunderstood
• Strong communicators and infectious evangelists
• Potential for toughness and ambition

Pay attention to founders who show rapid improvement over multiple meetings. Often, the rate of improvement is more important than current abilities, especially for younger founders.

Evaluating Markets

When assessing markets, consider:

• Growth rate and potential size (focus on the 10-year outlook)
• Industries with rapid technological change
• Platforms that are new, important, and rapidly growing

The best startups often have:

• A product so good that users spontaneously recommend it
• A rapidly growing market
• Network effects and low marginal costs
• Potential for fast growth
• A product that's fundamentally new or 10x better than existing options

Remember the power law in startup investing: focus on opportunities that could become $10 billion companies.

3. Closing Deals

Once you've identified a promising investment opportunity, you need to convince the startup to accept your investment. Here's how:

• Spend significant time with the founder
• Clearly explain how you'll help their company
• Ask founders you've previously backed to vouch for you
• Build a reputation for being exceptionally helpful and accessible
• Develop a founder-friendly reputation
• Be decisive – founders appreciate investors who can make quick decisions

Remember, the best founders will likely have multiple investment offers. Your goal is to stand out as the investor they most want to work with.

Helping Your Portfolio Companies Succeed

Once you've invested, focus on these areas to help your portfolio companies:

1. Encourage ambition: Help founders think bigger and believe in themselves more.
2. Provide tactical advice: Offer specific, actionable suggestions rather than general strategy.
3. Make key introductions: Connect founders with potential hires, customers, and other investors.
4. Offer emotional support: Often, founders just need someone to listen to their struggles.

Conclusion

Becoming a successful startup investor requires hard work, keen judgment, and the ability to build strong relationships with founders. By focusing on accessing quality deals, making sound decisions, and positioning yourself as a valuable partner to startups, you can increase your chances of success in this challenging but potentially rewarding field.

Remember, the startup ecosystem is constantly evolving. Stay curious, keep learning, and be prepared to adapt your strategies as the market changes. Happy investing!