How do you spot “Best investment” opportunities early on?

Looking back, are there any patterns that are common among successful founders and companies? What would be the key factors?

You may have heard many times from some successful Angels & VCs that investing in early stage companies is more Art than Science. I was puzzled by this answer back in a day when I just got started on my own investment journey.

I believe the reason is that there are many factors at play, their combinations and the lack thereof. Humans are amazing pattern-recognition machines and with time & practice we are able to recognize many different types of patterns and then transform these patterns into actionable steps. Given enough time, persistent and in this particular case capital, you’ll be able to see a pattern among successful founders & companies.

I analyzed some of my best investments as well as learned various patterns from successful investors in the VC world. There are at least two distinct approaches to identify opportunities. One camp of investors is predominantly focused on the markets & another one (which arguably the biggest) is focused on people. I think the truth is somewhere in between and it’s the relationship between Markets, People & Tech which makes this more Art than Science. Not for long though, given recent advances in Big data & AI. We are certain to see a transformation of the VC investment industry in the near future. This would be another article of its own, so going back to the Art part.

So here they are, the key factors that are common among successful founders and companies.

Market

  • There is an emerging market where there are many products. The expansion of the emerging market amplifies the growth of the opportunity.

Team

  • Able to execute relentlessly
  • Able to learn from mistakes (optimised for learning)
  • Domain expertise (founder-market fit)
  • Formidability/Leadership/Courage
  • Strong self motivation (monetary compensation is not a primary driver)
  • Integrity

Tech

  • There are recent tech advances that are good enough to solve the problem. (ex. Smartphones & UBER, Broadband & Netflix, )
  • It solves a big problem in a unique way that challenges the status quo and creates a natural scepticism among number of people.

In addition, I think it’s equally if not more important to look back and analyse the things you’ve actually done when you invested in the best opportunities.

  • Reach out. You have to proactively reach out to founders. Most of my best deals came via outbound and few via referrals. Great founders are busy, generally I don’t expect to meet them at the conference or find their deck in my inbox via inbound.
  • Be helpful. If you want to receive a reply please solve their problem first, not yours. Best deals are usually competitive and founders get to choose who they want to partner with. You need to prove that you’d be helpful down the road, especially if you don’t have a brand power yet. So make sure you can provide help when needed.
  • Be excited. I was generally excited about the Best opportunity at the time of investment so I had to tell everyone around about it.
  • Act quickly. In most cases I invested relatively quickly usually within a week or so. Successful founders subconsciously understand that time is the most precious resource and spend the most of it building & iterating the product. You most likely won’t be able to go through the series of calls and do the traditional Due Diligence in order to evaluate the opportunity. Who has time for that? Be prepared to be under pressure to make an investment decision quickly. Remember, capital is a commodity.
  • Embrace the risk & uncertainty. You won’t know who are your “winners” until they actually are, especially at the time of investment. Therefore, embrace the unpredictability.
  • Be patient. You have to be patient & curious in order to “Be in the right place at the right time”. You won’t find these investments as part of the “party rounds”.
  • Invest in many. I can’t stress this enough to have a portfolio approach investing at early stages. Due to the nature of power law, most of the returns are going to come from selected few.

Well, there you have it. Remember, you won’t be able to get 100% on every item in the pattern listed above, but it gives you an idea where to start.

Feel free to share your investment approaches & patterns based on your experience.