Naval: There’s a class of startups that look like tech companies on the surface, but then you scratch them with a fingernail and find there’s little technology underneath. These are difficult companies to invest in.
As an investor you need to ask: How much of every dollar invested is going into technology development and how much is going to things like scaling, customer acquisition, subsidizing rides or deliveries, or some physical product.
The full stack startup is a recent phenomenon
Companies like Uber, Lyft, Postmates, DoorDash and WeWork can get high valuations, but they may not produce worthwhile returns for angel investors because they’ll need to raise billions of dollars—maybe even tens of billions—before they can become public, standalone companies.
In the process you’ll get diluted heavily and buried underneath a liquidation preference that is entitled to capital, and maybe even some profits, before you are.
It’s best to invest in pure tech companies; though there are always exceptions. The rise of the full stack startup is a recent phenomenon, although it may be retreating in light of the market downturn. We may be going back to capital-efficient, tech-heavy and infrastructure-light startups.