Throughout history, startup capital has driven the growth of major brands we’ve come to know and love today. Take Google for example -- this giant controls over 68 percent of searches made on the internet, employs over 70,000 staff across the globe and is now worth $527 billion. Google’s earliest angel investors ultimately set the company on a fast-track to becoming the most anticipated public offering since the dot-com bubble burst.
Like most successful startups, early investors bring so much more to the table than just the money -- it’s their connections, advice and endorsement that make the biggest impact. Seven years ago, I began my own journey as an investor. I stumbled upon a golden opportunity to get involved through an angel group, which is a conglomerate of high net worth individuals that review, assess, mentor and invest in local startups.
When I think back to the first investment I made in 2010, I realize that I had a lot to learn. It was an early-stage drug discovery and diagnosis company using shark antibodies that piqued my interest. I essentially rolled the dice after receiving an exciting pitch from the founders and watching my peers react positively. Admittedly, I thought the idea sounded cool.
But, investing is less about gambling and more about making calculated decisions. I quickly realized if I continued to invest based on the same set of criteria, let’s just say I’d be in a very different position. As an entrepreneur and an ideator, I’ve been on both sides of the discussion. I’ve identified big problems and built companies to solve them, while also seeking out startup partners to invest in -- players who have passion, ambition and the dedication to see it through.
Whether you’re an entrepreneur thinking about where to place your next investment or a passionate startup seeking capital funding, here are the five rules I live by:
1. There's safety in numbers.
If you’re new to investing, start by finding and joining a local angel investing group. My Australia-based angel investment group had access to good deal flow and provided ample opportunities for exposure. They brought like-minded people together that matched domain expertise with each investment opportunity. For startups, investors and accelerators, try searching for a local group in your area with Gust.
Related: Getting Started With Angel Investing
2. Passion is worth more than ideas.
Excellent ideas are important, but without a passionate founder who can lead a team and execute on a vision, they’re worth very little. As an investor, you’re expecting to yield a greater return and an eventual exit. When the going gets tough, you need to be able to trust the founders to dig in, keep going and make the most of the situation.
Some key indicators I always look for in a founder or potential business leader include their understanding of the target market, ability to identify key partners, and a sound approach to promote the product or service. And of course, I always try to determine if the product or service is truly something customers cannot live without.
3. Follow the funding.
Leverage the resources at your fingertips to maintain a well-rounded view of where capital is currently being invested. A great place to look is industry and M&A activity reports provided by Internet Deal Book because they aggregate all investments by total deal size, number of details, categories and more. From here, it’s easier to discover emerging industry trends and new ideas that are primed for investment, while also considering when it might be time to divest.
4. The state of the industry matters.
As an investor, I really enjoy looking for opportunities hiding in an industry that’s ripe for disruption. These types of investments can be very rewarding. It’s a good idea to take a step back and consider which industries interest you and identify their biggest pain points. Established industries that have been around for a while can often be slower to adopt new technologies.
Look for clues from external pressures as well, such as increasing prices, service issues or an inability to satisfy demand, which could create the perfect environment for change. Personal transportation and space travel are great examples of sectors undergoing radical transformation after spending the last few decades complacent.
For decades we didn’t dream of seriously advancing space exploration and travel. Then along came companies like SpaceX and World View that are capitalizing on new technologies that will bring space travel to the masses within the next decade. Similarly, the energy industry is undergoing a revolution as we battle the clock to save our planet and find additional renewable energy sources.
5. Back yourself in when you know the industry.
There are gems in almost every industry. Aside from the monopolies, some will go unnoticed, some will barely survive and a few will reach their true potential. When you take the time to deeply understand your niche and bring a sound investment strategy, you may eventually strike gold. Industry expertise gives you confidence to back the star performers and uncover hidden opportunities that other investors might pass over.
Building your personal investment strategy becomes easier when you stick to what you know. Let’s just say in my case, I did an unbelievable amount of research on shark antibodies after signing my first investment check. Investing in your area of expertise allows you to ask better questions and make more informed decisions.
Many investors focus on the primary goal of making smart investment decisions that yield abnormal returns. But, it’s also important to recognize the value of giving back as an advisor that makes an impact helping a company grow and scale. After founding five tech companies over the past two decades, I’ve learned just how big of an influence savvy investors and advisors can have on your success. Regardless of which side of the fence you’re on, the best success stories are always built upon successful long-term partnerships.