What are our criteria for selecting an investment? Investments we want to make go beyond a checklist of “box ticking” on our non-negotiable requirements (e.g., that we trust the founders). We also look for important indicators that can bias us for or against investing, too. For us to want to invest, the most important single quality: a startup needs the potential to be more than merely great, it needs a shot at the extraordinary. The good news is that to do that, we only look for at least one reason to believe, at whatever stage the company is at, that it can be an outlier...
Need at least one of the below compared to other great startups at the same stage
- Ever do something singular? Record of unusual achievement
- Best-in-the-world domain experience or punch-way-above-your-weight-class first hires
- Depth of commitment to the problem ("would do this for a decade, and keep going even if funding never appeared"), especially in learning the domain
- Would you work for the team?
- Do any users love the product so much they spontaneously tell other people to use it?
- A wow of a product experience and/or extreme early growth and engagement numbers (for products adopted by individuals)
- Customers don't need to be sold, want to pay full-price immediately -> evangelists (for products adopted by companies)
- Exclusive path to customers -- distribution as a competitive advantage
- Timing -- that One Moment is clearly now
- Surprisingly profitable unit economics
- None. (Good deal terms are never a reason to invest in and of themselves.)
Can bias us for or against investing
- Combination of human / inhuman, presence of cognitive distortions of founders
- Spends only when necessary, miserly with capital until the returns are clear
- Reaction to intense pressure or strong criticism?
- Differentiated value proposition for talent (e.g., only place to work on a problem, unique founder who is a reason to join the team)
- Diverse founding team
- If business shows early signs of success, can founders go the distance?
- Someone else already tried -- good sign!
- Clear initial target market, surprisingly narrow, and high on the gradient of influence
- Clear single metric to focus on now (often engagement or satisfaction)
- Ignoring the business fashions of the moment
- Ability to create a #1 service in its market (e.g., network effects, customer lock-in)
- Could be most important product to its users
- We have a unique ability to help
- Clear sense, if applicable, of any direct competitors and why the company has superior offering for its market
- Clear sense of why to raise capital (i.e., where to deploy)
- Clear sense of why to raise venture capital (we often discourage founders from taking venture at all)
- Founders own enough of the company
- Fair ratio between risk and reward?
- Pro rata rights
- Information rights, especially to financials
- Other investors can help the company succeed
- In success, our eagerness to invest many multiples of our original investment
Need all of the below
- Trustworthy (e.g., will tell us when things are even a little broken)
- Can raise more money or get business to profitability
- Capable of building a diverse team and an inclusive culture
- Background check conducted, any issues discussed
- In Bay Area or New York (and, if not, strong reason to believe we are the best possible investor)
- "Makes business work better," without being in financial services
- We have judgment to identify a winner in the relevant market (i.e., a fit with one of our stated investment areas) -- and enough confidence in our judgment that, when things go sideways (as they inevitably do in startups) we'll remain devoted investors
- Unlikely to compete directly with our other portfolio companies (and verified, if in doubt, by the founder(s) in question)
- Plausible to have sustainable unit economics in the future
- Standard investor protections (i.e., liquidity preference at 1x, blocking right over investments that would get repaid before we do)
- Risk-return work for our fund size (e.g., typical check size, stage)