7 startup investing tips to find winners

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7 INVESTING TIPS

Over 7 years, I've invested in 36 startups and learned a lot. Here are some of my top learnings:

1. Team over everything else

I really resisted on this one at first. I naturally get excited about ideas, not people.

But it is so clear to me now that the team powers everything else.

Businesses need to be extremely dynamic to ride with the changing landscape.

A good idea now will most certainly need to be re-envisioned, re-engineered, and tirelessly corrected over the years.

Invest in a bad team, and they’ll crash at the first challenge.

2. Read the damn filings.

The fundraising page for a startup is an ad.

It only includes the highlights, the positives.

Dig into the SEC filings (linked on every fundraising page), and look at the information there.

These filings are not ads, they’re info required by the government. Sometimes bad things will be hidden in there - as well as useful info like burn rate, revenue growth, company ownership, debts, potential risks, etc.

3. Is this a business that can exit?

It doesn’t matter how good the product is, it needs to scale In order to exit in most cases.

I often see investors throw money at good products that don’t really have a realistic chance of exiting. One current example of this is Vestaboard on StartEngine.

It’s a nicely designed product, but not something that could scale towards an IPO in my opinion. I also don’t see the acquisition angle here. If there’s no exit, you won’t ever see a return.

4. Revenue traction trumps most other metrics, don’t get distracted.

If a startup is in a revenue-generating stage, you can tell how well it’s going by how little/lot they talk about their revenue figures.

If a startup is boasting about how many social followers they have, it’s probably because the revenue isn’t strong enough to showcase.

5. Understand Runway

In VC, funds are cutting checks for hundreds of thousands of dollars, sometimes millions. Your check alone provides ample runway to a startup.

In crowdfunding, your $300 investment isn’t going to singlehandedly keep them afloat.

See how much money the startup has in their bank (look at SEC filing), ask them directly how much runway they have left, and take a gander at how much they’ve raised in their current round.

This should inform how solid their financial position is.

6. Use the product (if possible)

This one is a no-brainer, but test out the product!

7. A strong crowdfunding campaign (with little ad spend) is a huge signal

If a startup raises a ton of money without pouring money into ads, that is a very strong signal.

It shows that the startup has a very strong community (usually representative of strong product demand or brand love).

It also shows the capability of the founders. Crowdfunding is HARD, and to succeed demonstrates strength.