You need to raise money, develop judgment over time and gain access to the right deals
Naval: The three things it takes to get into investing are capital, judgment and dealflow.
Capital is the hardest or easiest to get—depending on your circumstances
To get capital, either you make your own money to invest, or you gain enough trust from other people to invest their capital.
Sometimes you scratch your head and say, “How’s this person in the venture business?” Often, they have family money or married into money; or they managed money for somebody else; or they have a billionaire friend; or they had access to a large fund and that capital got them in the business.
At Spearhead we train founders to be investors by giving them million-dollar checkbooks. Later on, we help them raise more money from limited partners. So that’s another way to get capital.
Money raised from friends and family can be either the hardest or easiest money to raise, depending on your circumstances.
Apply the same high bar to investments as you do to yourself
Second is judgment. They say good judgment comes from experience, and experience comes from bad judgment. You build good judgment over time.
Judgment means applying your highest standards and taste in the things you know the best.
As a founder, you set a high bar for yourself: You only want to recruit the absolute best; you only want to do your best work; you’re constantly improving; you’re the worst critic of your business; every little thing that’s wrong with your product bothers you.
Then you meet someone raising money, fall in love with their idea and ignore other things: the person doesn’t seem that smart; or it’s not someone that you’d work for or even hire; or their product is only half-baked; or they’re executing slowly.
You look past all of that. You lower your judgment because you fantasize about all the things that could go right.
It’s very important when you’re investing in other people that you keep a high bar and use sound judgment. You need to have taste.
Good investors are more pessimistic than good founders
Some of the best investors I know are incredibly difficult people. It’s hard to please them; they see the problems in everything. A good investor often is a lot more cynical and pessimistic than a good founder.
A good founder must be a rational optimist; whereas a good investor can bounce maniacally between being optimistic enough to see the future and get into the deal, and being pessimistic enough to see the potential downsides and pass on nine out of the 10 deals they see.
If you do more than one out of every 10 deals that you look at, you’re probably being too optimistic. If you stumble into great deals all the time, that says more about you than it does about your dealflow.
There are exceptions, of course. You might have a unique advantage to your network: if you’re sitting in the latest YC batch and see everything early; or if you run the Stanford Entrepreneurship Network and are picking from the crop getting funded by VCs, for example.
Everybody has dealflow—the challenge is getting in the good ones
The last piece is dealflow, which also includes access. This is an area we’re going to focus on: How do you get dealflow? How do you get good access?
Dealflow and access are not the same thing. You can get dealflow by going on AngelList; by sitting at Y Combinator Demo Day; by going to any technology conference; even by watching “Shark Tank”—but that doesn’t mean you have access to those deals. It doesn’t mean that you have the ability to invest in those deals when you want, on the terms that you want.
When you get cut out of hot deals, that’s a sign you’re going to perform poorly as an angel investor. You need to do whatever it takes to up your access.