Investing

Founders Almost Can’t Be Referenced

A founder who’s great for one business may be terrible for another
Some angels insist on checking references of founders. This can work if you know what you’re doing, but reference checking is an art that most people haven’t mastered. Founding a startup is an act of creativity. If you think of the great writers, philosophers and artists throughout history, honest references would tell you they’re all crazy. More

Your Reputation Is Built by the Companies That Are Doing Poorly

Don’t invest so much that you’ll behave badly when things get rough
Angel investors tend to be on the tough side when they get started, especially when investing a lot of their own money. Generally, you don’t want to invest money that you’re not OK losing. If you have too much at risk in any deal, you’ll engage in bad behavior when things get rough. More

Coachability Is Overrated

Great founders listen to lots of advice and follow little of it
There’s a meme among venture capitalists—especially inexperienced ones—that a good founder should be coachable. These investors rely too much on their own abilities, thinking they’re right and founders are wrong. Inexperienced investors also rely too much on the idea that you can change people in the short-term. Experienced investors know this isn’t the case. More

You’re Not Investing in Nice People

Invest in people with high energy, intelligence and integrity
I use Warren Buffett’s three-part test for qualities you want in a partner: high energy, high intelligence and high integrity. High energy is obvious. You have to work hard, because startups are the Olympics of business and you’re competing against the best in the world. To paraphrase “Glengarry Glen Ross”: first prize gets a Cadillac Eldorado; second prize gets a set of steak knives; and third place gets fired. More

Invest Only in Technical Teams

If there’s no technical team, you’re not investing in technology
Let’s discuss how judgment applies to evaluating teams, product and market, traction, and social proof. This is the technology business; you want to invest in technology teams. Every great tech startup is highly likely to have a great technologist on its founding team. If they aren’t the most important member of the team, the technologist must be sufficiently compensated and motivated. More

Invest in the Smartest Scientists in a New Field

You’re not going to become a great tech investor by reading TechCrunch
There are many ways to build good judgment. The timeless kind of judgment—good decision-making and the ability to size people up—comes with experience. You can develop it by reading great works at the intersection of science, business and philosophy. Read books that cover how smart people think. Build so-called “mental models” and develop an understanding of microeconomics, mathematics and game theory. More

Don’t Fantasize About What You Would Do If You Were the Founder

You're not running the company—you’re betting on the founder
A common trap for investors—especially if you’re an entrepreneur—is to fantasize about the things you could do with the company if you were the founder. You’ll learn the painful lesson that it’s actually the entrepreneur who’s running the company. It’s important to listen carefully and take the founder at their word about what they plan to do. More

You’ll Get Less Money in Your Winners

Always try to get your standard bite-size in a deal
It’s easy to overestimate your own judgment. It’s perfectly OK to say, “I don’t know.” That should be your answer most of the time. There’s only a few deals where you should say, “I have conviction.” And, even then, be careful how much conviction you have. At the seed stage, if you put a lot of money into one company and very little into another, that begs the question: “Do you really have conviction, or do you simply have better access to one deal?” Generally, the better the deal, the less access you’ll have. More

You Can Give Every Deal One Fatal Flaw

A startup that breaks all the rules won’t get anywhere
You can give every deal one fatal flaw: the thing that traditional venture capitalists will use as their excuse to pass on the deal. If there’s more than one flaw, you have to worry. Startups are rewarded for innovating on something new. If you invest in a startup that’s trying to innovate on things that already work—such as team structure or founder mentality—you’re just taking on additional risk. More

The Best Deals Look Weird

You want to be right when everybody else is wrong
In investing, you want to be non-consensus right. You want to be right when everybody else is wrong. If you’re right when everybody else is right, you won’t make enough of a return. If you’re wrong, you won’t make any return. The best deals are weird. They always have something broken, strange or different about them. More