In our new ‘Guide to Investing’ blog series, we’re taking you through seven steps of startup investing. In this sixth blog, find out how to pick a startup to invest in.
The prepared startup
It’s well known that investors like passionate founders. You can figure out if someone is passionate by the way they talk and move. There are all sorts of psychological tools you can use to analyse someone’s behaviour. But you will easily get an informal sense for it during Q&A, after a pitch. You can also simply sit with the startup in their office for a while. You will get a sense.
One sign that someone has a deep passion is that they appear well prepared, they have in-depth knowledge of their business, market, opportunities and risks. They give more coherent and in-depth answers. That’s because they are passionate: they live and breathe their business and build up deep knowledge over time.
Why is it seen as a red flag if a founder doesn’t know his numbers? Because a founder with a deep passion remembers his numbers the way he remembers his birthday. Startup environments are very unpredictable, so no one has all the answers … but deep knowledge is an excellent indicator of deep belief in the business.
A passionate entrepreneur needs to be challenged
Sometimes startups are blind. They’re too passionate and find it difficult to pace themselves. For this reason, it can be very valuable for a founder to keep talking to external investors about their decisions and plans. The investor can add much value here, simply by challenging the entrepreneur to reveal and clear up their thinking.
Leapfunder’s Round Table Sessions are a great opportunity for investors to meet founders in a casual, informal setting. Investors can ask questions and offer advice. The best founders can develop answers about their business and the market, together with the investors. This is also a good time to see if the investor feels he can add value to the business through this interaction. If you feel you are adding value as an investor, you will likely find this company a much better addition to your portfolio.
Gut feel
When you meet someone who is really passionate about a good idea, you might feel it in your gut that you should invest as early as possible. But be careful at this point! Emotions can be contagious, and maybe you are just taking over the entrepreneurs’ enthusiasm.
It’s when you start drilling into the thinking of the entrepreneur, and you discover deep knowledge and insight, that your gut feeling may often change again. Generally, it’s best if a positive gut feeling doesn’t come from just an elegant pitch, but from a successful Q&A session with you, as a smart investor.
A good way to challenge your own gut feel is to have at least one night’s sleep. Also: you will often benefit from seeing the entrepreneur interact with your investor friends. It may sound strange, but it quite common for informal investors to ask their spouse to talk to the entrepreneur. That kind of second check can prove very valuable over time.
To learn more about startup investing, stay tuned for more knowledge.
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