Investing in startups can be very rewarding, as you ride the wave with them as they grow and expand.
It can also be nerve-wracking if they aren’t growing at the rate they expected, they have massive issues that they are struggling to overcome, or have a huge hit to their revenue.
Some investments are well worth it, becoming very profitable for the company and you as the investor. Some investments, however, don’t have such success and it’s hard to get your investment back, if at all, when they fall.
How can investors know if the company they are investing in is going to be the kind to grow like crazy, or fall to the ground burning? Investors with years of experience will tell you that there are some key traits that they look for that have proven to be successful traits in the companies they invest in.
If you were comparing two equally promising startups, how would you know which one would be the best one to invest in?
Here are some tips from investors themselves on how they go about determining who to invest in and why.
Weed through the media coverage
Startups often get some – or a lot if they’re lucky – media attention when they get ready to launch or just launched. It’s important to figure out if the media coverage indicates their potential or is just fluff.
David Cowan, partner at Bessemer Venture Partners:
“Hyped startups thrive on pundits’ praise, feeding their confirmation bias. Great startups challenge their own ideas until they have a product that users absolutely refuse to stop using.”
As Fred Schebesta, CEO of finder.com, a credit card comparison site, says:
“My advice is to firstly understand the media culture around startups, and then learn the flavour of their investor portfolio. The important thing to note about media culture is that almost every startup will get an initial kick of press when they launch – journalists need something to write about, even if a brand’s launch isn’t particularly effective.
If you’re seeing media about a sparkly new group acquiring their first million, it doesn’t mean their chances of being successful are any better than the next guy. Getting talked about when you’re new isn’t a sign of success – it’s actually just closer to a rite of passage.”
While media coverage is a great way to learn about new startups and what is generating buzz, don’t be fooled by the buzz. Use it as a starting place to start learning more about the startups and effectively put them on your radar.
As Fred described above, getting media coverage simply is the first step toward gaining traction and getting noticed — it isn’t a guarantee that they will be successful.
Get to know them well
Before investing, it’s recommended to get to know the company and its founders well. There’s more to the founders than just a pitch meeting or a few conversations. Taking the time to get to know them well can help you determine if they are worth investing in.
Rowen Simpson, early-stage investor of Hoku, takes time to get to know the founders of the companies he wants to invest in.
“I prefer to take the time to get to know the founders I’m considering investing in and working with, so if they were not part of my network before that they are by the time I do. I have in the past gone into a new venture without taking the time to do this, but it’s never worked out well for me.”
It’s great that he recognizes those he didn’t slow down and get to know well didn’t turn out to be worthwhile investments. He makes the founders he gets to know part of his network, and then uses the network to help determine the best investments to make.
Choosing the right founders to invest in is as important as any other relationship
You didn’t ask your spouse to marry you on the first date, did you? Then why invest in someone the first time you meet them?
Getting to know the founders and the company, and the company getting to know the investor, is much like finding a marriage partner.
Alejandro Cremades, author of The Art of Startup Fundraising, says:
“Business is still more often about whom you know, not what you know.”
Alejandro Cremades says it best – those who you know will often lead you to better information than what you know. Those within your network may have unique knowledge, insights, or information that can help you make a solid investment. Your network can also provide opportunities for investment as well.
One way to help scout out new investments is through the person’s personal website where reputation, experience, and references should be easy to locate and refer back to as needed.
At the end of the day, you should be investing in people, not companies, so reading through someone’s personal website can give you that insight into the person instead of the company.
Tip: To those reading this article for insight as to why people invest in businesses, we highly recommend you make sure these three things are highlighted well.
In the end
Most of investing into companies comes from intuition and learning about the companies and their founders. As the investors above show, getting to know the companies and their founders is a big key in determining who to invest in.
Whether it is working your network to see if there are investment opportunities, doing your homework on a particular founder or company, or simply weeding yourself through the media hype around particular companies, every investor has their unique way of finding and investing in companies that have proved fruitful to them.