What Investors Look For When Investing In Startups

What Investors Look For When Investing In Startups

Sean: If, for example, I approach you and say, Jeremy, I have a startup and I need funds and I know you’re an angel investor, what are the questions that you start asking? What are the things that you want to know first?

Jeremy: The first question is, why do you care about this problem? And then the second one is why and how it has become $1,000,000,000 company. And the third is what’s the hardest part about this business or how would this company fail?

Jeremy: So, the first is very simple. And you really want to find someone who has found a problem fit. That means, you know, the founders often are looking for a problem market fit, which is what can be built that fits the market that it cares about, and does it make sense from economic basis? But I think as an investor, we’re looking for founders who understand what they’re building and have empathy for the customers and is willing to tough it through. Right. And I’m not saying that if you don’t have found a problem, it doesn’t mean that you can’t succeed in that. On a net market basis, probably the whole population is probably going to take longer for you to understand problems, is going to take longer for you to build a solution. It’s got to be longer for you to fundraise. You know, things are correlated with that. So, understanding founder-problem fit is key.

Jeremy: The second is like, why will this be $1,000,000,000 company? And I think the conversation is there as a form of constructive discussion is like, is this going to be a billion a company and how will it become $1,000,000,000 company? And I think looking for mature, thoughtful discussion to say is, is the market size big enough? Are there competitors? Would this be able to generate monopoly profits over the long term? Those are tough questions that the truth is they don’t know, and you don’t know.

Jeremy: And the last of course is – if this company is going to fail, how would it fail? What are the proof points? Because the truth again is – the majority default case for most startups is they’re going to fail to achieve $1,000,000,000 valuation. And so having that mature discussion, again with the person is like – what are the proof points where if we fail, these are points we fail. So that you are aware as the angel investor that the failure happens at that point in the best-case scenario. And a worst-case scenario that you’re using to manage risk and understand what the tricky parts of a business that you need to support them more on if you choose to come in. Right.

Jeremy: And so, you’re really looking for someone who has that mature discussion across all three because any day you’re not necessarily looking for someone for who delivers three perfect answers to those three things. You’re looking for someone who’s mature enough and has hopefully thought through those three aspects about it, about why they care about a problem, about how it would become $1,000,000,000 company and thinking about what they need to avoid or d risk. And you’re looking for someone who’s thought through those three things. And if you find someone to talk to, those three things actually is choosing one thing. You’re choosing a great founder, right? The two questions are not there to find true. Perfect answers are to find a person who you’re comfortable collaborating with to help answer those three questions on a recurring basis every year for the next ten years.