Beware the Hot Deal

The hottest startup is a great place to lose your money…

Investors threw cash at these companies.

Theranos and FTX turned out to be frauds. WeWork and Clubhouse struggled to make a viable business.

Either way, the investors got torched.

When Investors Get Sloppy

When a startup is hot, investors don’t do diligence. This lets bad investments slip through.

Normally, a VC talks to customers to see if the product is as good as it looks. They also review bank statements, revenue and burn.

In a hot deal, investors throw that diligence checklist out the window.

In the case of Theranos, investors put in millions without ever seeing the device. Even when I invest $10,000, I want to see a prototype!

Are We About to Fund the Next FTX?

Markets are as hot as in 2021. I’m seeing seed rounds at $75 million.

I can feel it all happening again.

In a hot market, another FTX or Theranos can slip through. It feels like everyone’s making money. You don’t want to be left behind, do you?

So you skip your diligence, just this once.

All the top investors are in this company. It must be a winner!

How I Approach Hot Deals

I do the same diligence for every company.

I work quickly. In fact, I can usually get a founder a decision within 24 hours.

But I’m definitely looking into product, revenue, and burn. I’m also going to research the team.

If I skip those steps and the company implodes, I’ll be kicking myself. If I did my research and the company dies, at least I tried my best.

Wrap-Up

Everyone wants to be in the hottest deal.

We’re afraid to miss a big winner. We don’t want to seem insignificant.

But odds are, you’re not missing anything.

I’m staying focused on real businesses raising at reasonable prices. If the rest of the market wants to go crazy, let it.