Three years in, this angel investing thing is starting to make sense. It’s like the optometrist — what’s better, #1 or #2?
Investing, Optometrist Style
Let’s say I meet 3 companies in a day — Startups 1, 2 and 3.
2 is better than 1. But when I compare 2 and 3, 3 is better.
Tomorrow, I meet three more startups — we’ll call them 4, 5 and 6. Startup 3 is stronger than 4 and 5, but 6 was even better.
Keep doing that for a month or so. If you’re doing a dozen meetings a week, you’ve met fifty companies.
You winnow them with that A/B approach. By the end of the month, you’ve got yourself a heck of a good bet.
What Makes A Better than B?
How do we know which startup is better? Here are some key things I look at:
- Solving a big problem. You can’t build giant companies solving small problems.
- Builder founders. To create a software company, you need people who know how to build software. If they outsource it, it will slow them down and cost a fortune.
- Product quality. How easy is it to use? How pretty is it?
- Founder. Is this person obsessed with the problem they’re solving? Are they tenacious?
- Traction. Cash is king! I like to see $200-500k ARR growing fast for seed rounds. That said, I love meeting companies early, when they’ve got just a couple of customers. Then I track them over time.
The Exceptions
I usually make about eight to twelve investments a year. That averages out to around one investment every forty days.
But I don’t do this mechanically. Last August, I did three deals in a month, the most ever.
When the great deals are out there, I take them!
Over 3 years investing, I’ve developed a sense of what a great company looks like. When I meet a startup that’s one of the 10 best I’m going to see that year, I usually know it.
The more founders you meet, the more you’ll develop that sense.
Wrap-Up
The longer I invest in startups, the more I realize this isn’t rocket science.
Deciding what’s the best company out of a hundred is hard. But comparing 1 to 2 and 2 to 3, that’s a lot easier.
Do that enough times, and you just might get lucky!
How do you evaluate startups? Leave a comment and let us know?
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