What Successful Investors Teach Us About Investing In Startups
by Lior Levin
Investing is never a sure thing according to those who have succeeded. If you can’t find a sure thing, the next best bet is to learn from the best practices of successful investors. Here are tips from active angel investors who have enjoyed success with some of today’s leading technology companies:
Investors Rely on Networks
Networking has always been a critical part for investing, especially for angels taking on high risk wagers in startup companies that are unknown quantities. Alan Deutschman writes in Fortune Magazine, “Angels rely on informal networks of friends, past or present colleagues, lawyers, and accountants. They tend to invest in small packs, with inexperienced souls following the lead of seasoned ex-entrepreneurs.”
Since investors live all over the world, online networks are becoming increasingly important for investors to network together. A group such as LinkedIn’s Deal Flow Network has over 11,000 members and provides a simple way for investors to share tips about strategies and upcoming opportunities. Online startup communities, such as Go Big Network and Fundingpost, also make it possible for investors to search for new opportunities.
Look for a Strong Team
While it may be hard to figure out whether the public will catch on to a new product, investors have found that it’s much easier to evaluate the quality of the team in a company. In fact, the leadership is the only known quantity in a startup.
Ron Conway, who is most famous for investing in Google, shares that a company’s team is most important to him. “We start with the people first. We think the ideas that entrepreneurs start with evolve and change dramatically from the beginning and sometimes end up unrecognizable, so we believe in investing in the people,” he says.
Investors Stay Involved
Investors know that they can’t get a good sense for the direction of a startup without becoming involved in the startup and asking hard questions. While some prefer to spread their funds in small amounts among a large number of startups, those who want to know which companies are worth additional investments will often become involved as a consultant or advisor.
Chris Sacca, a former Google employee turned investor, places a high priority on remaining involved with his investments. “He plays an active role in the companies in which he invests by becoming an advisor, further ensuring the brands continue their successful trajectories.”
Investors Look at Salaries
Launching a business often involves dips in revenue, and a startup will only survive if it can manage expenses during this fragile time. Salaries are one item on a company’s balance sheet that catches the attention of some investors.
Peter Thiel, an investor in Facebook and LinkedIn, suggests that salaries tell us more than we would expect. “The best predictor of a startup’s success is how much the CEO is paid. The larger his salary, the more likely everyone else is paid high, and therefore, the faster you’ll burn through money. If the CEO is paid less than average, it more likely his interest will line up with the equity shareholders.”
Investors Seed Multiple Ventures
Risk and failure are inevitable aspects of investing in startup companies. While the rewards can be tremendous, there is no guarantee that an investor will see that money ever again. In light of this reality, many investors explore a wide range of opportunities rather than placing all of their capital on a few companies.
Bill Clark of MicroAngel Capital Partners suggests the following perspective: “Given the high rate at which startups fail, it’s wise to spread your risk by investing in more than one. The goal is for a few successful startups to more than pay for the ones that fail.”
Understand the Exit Strategy
Bill Clark suggests that investors should understand the possible scenarios that may unfold in the life of a company and how failure or success relate to your investment. For example, if the company is successful and is bought, make sure you have planned for that scenario. He writes, “Every startup should have a clear exit strategy that they can share with investors. They should have a list of competitors who might be interested in an acquisition or the plan could be to go public”
Investing in a startup will involve high stakes. Even experienced investors admit they sometimes miss opportunities or lose bets they’ve made. If you’re considering a venture that involves an unknown startup company, seasoned investors have many tips to share that can cut down the potential risks you’ll face.
This guest post is written by Lior Levin, a marketing consultant for an inspection company that provides a container check in China and in Latin America. Lior also consults at a neon signs store that offers a variety of custom made neon signs.
This is an article contributed to Young Upstarts and published or republished here with permission. All rights of this work belong to the authors named in the article above.