What I Look For in Startups

You’ve been meeting with investors day after day. You get a lot of “very interestings” but no actual checks.

What are these people looking for?

Today, I thought I’d explain what I look for in a startup.

As an angel investor, I invest in about 1-2% of the companies I see. Here’s how I choose:

1) Are you solving a big problem? Take Uber: it gets you from anywhere to anywhere, anytime, easily.

Mobility is a huge problem. Any technology that can make it easy to get places has a giant potential market.

What is an example of a company that isn’t solving a big problem? Imagine a better way to search tweets.

That’s a feature, not a product. It’ll probably get copied by Twitter or Twitter will buy it for a small sum.

2) Are you growing revenue 20% month over month? I want to see clear signs that your vision is shared by customers.

Dollars in the door are the best sign there is. I find about 2-3% of seed stage startups are growing this fast.

If the company is pre-revenue, I would also find a similar growth rate in users quite persuasive. But revenue is best.

The greatest companies of today, like YouTube, had incredible growth early on. That’s what I’m looking for.

3) Is the product awesome? If there’s any way for me to use the product, I always do so before investing.

Maybe you have great early growth, but if the product isn’t solid, it may be hard to sustain that pace.

If I can’t use the product (most B2B SaaS, for example), I ask for a detailed demo. I also read every review of the product I can find.

3) Is there good founder/market fit? If you used to work on M&A at Goldman Sachs and you started a company to help people find sustainable clothing, I’m going to have a few questions.

Why would you start a business that is so far removed from your background? Perhaps you have solid reasoning, like a long-term commitment to environmentalism via volunteer work.

Or maybe you’re just in it for the buck. I have nothing against making money, but starting a company is so hard that if the motivations are only pecuniary, you will likely give up.

4) Are you raising at least $1 million? Most companies I invest in are raising $1-3 million seed rounds.

Why does this matter? Companies that raise a seed round of at least $1 million are far more likely to be successful, per a Crunchbase analysis.

A big round means you can hire lots of developers and sales people. That lets you get ahead of your competitors, fast.

When I see companies raising a round of $250-$500k, I often think this isn’t enough to move the needle.

I hope this helps clarify how investors pick startups. Other investors may have different processes, but I think you’ll find a lot of similarities.

Best of luck and happy fundraising!

More on tech:

The Original YouTube Investment Memo

How Startup Founders Turn Investors Off

Why I Just Invested in Gauge, the Best Way to Sell Your Car

Photo: “Historical Documentation Defenestration WHY Sign” by Lynn Friedman is licensed under CC BY-NC-ND 2.0

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