#4 How to invest in startups in a bit more detail by Petr Sima

Ok. Now we know that we can invest directly or through funds. But how to make the best deals?

Every investor needs to find his way to succeed in

1.      Deal sourcing

2.      Picking the right deals

3.      Accessing the selected deals

It has the same principles for angel investors, VCs, and LPs. Just a bit different target investee company.

Sourcing startups is the main business of all investors. How and where to find good startups is always the first problem of angel investors. You can easily put on your profile that you are an angel investor. And you will be bombed with messages and pitches, mostly irrelevant to your criteria. Angel investing is a collective sport. So, if you want to find good startups, join other investors. The better (or recognized) investors, the better the deal flow quality. Look for an angel network, club, or syndicate. Create a relationship with other investors first. You will need to join different startup events. But don’t expect to find your startups there. Start understanding the ecosystem, talk to all the different players, and find your way. You need to prove that you mean it seriously, to your fellow investors and founders as well. Many claim to be investors, but only a few invest.

If you have your strategy and ticket size and you are consistent, you will slowly get into the circle. Co-investors will start sharing deals and founders will start coming to you. It might take several years. Be patient. You need to enjoy the process. If you come across a promising startup, do not hesitate to share it with the investors whom you trust and value.

I would like to emphasize once again the significance of choosing the correct investor group to join. Professionally managed organization. Founders like to talk to somebody structured. An occasional investor is not the best partner for them. Angel funds, angel syndicates, or professionally managed groups of investors are more attractive to them. I talk from my experience. Quite often, we have good founders who are happy to pitch to our angel fund, but they hesitate to be just listed in the network.

LPs have a surprisingly similar problem. Where to find the best funds? Again, it is about going to conferences and going through many decks. The clearer your focus and strategy and the better you communicate it, the less time you spend talking to VCs that has no fit. Believe me, VCs don’t want to waste time pitching to an LP who is not interested in their strategy.

Picking the best startups is a science. Or art. It takes you just a minute to tell something is nonsense. But in certain moments, you will see tens or hundreds of pitches that all seem great. But you can invest only in one. How to choose?

Again, it is a long learning. And again, the best solution is to join other, experienced investors. Join angel funds and syndicates. Learn from others. Otherwise, you will learn from your own mistakes. And this is costly. Most investors don’t regret that they invested in the wrong startup. They regret they didn’t invest in the best startup. It is something you will remember forever. Being able to tell early enough that the startup is promising is extremely difficult. Everybody wants to invest in obvious success stories. But it is mostly too late. When you invest in the early stage, you sure need to have criteria. Besides that, you need gut feeling. And gut feeling must be trained by experience. You invest in people, the founder, and the team.

LPs can apply more structured criteria to VC selection. They need to learn to ask the right questions. Understand the GP motivation and alignment. But, especially with emerging managers, there must be the right feeling again. The GP/LP relationship is longer than the founder/VC relationship. There must be a lot of trust.

Even if we have an investor’s market now, the best founders select their investors carefully. So, if you find a great startup and recognize its bright future, you might be unable to invest. You need to create your reputation. Be trusted by co-investors and founders.

Surprisingly LPs struggle probably even more. Everybody wants to invest in top funds. They are oversubscribed and don’t accept new investors. LPs can invest if they were the early backers or bring additional value. New LPs need to focus on emerging managers and select those that will become top funds in the future. Easy to say, I know.

This short format doesn’t allow to give you a detailed how-to manual. It is rather a beginner’s guide. If you want to know more, there are lots of information sources. Let me list just a few:

EBAN for European angel investors

EUVC for angels and emerging VCs

Angel by Jason Calacanis

Mountside Ventures for everybody

Superclusters for new LPs

Allocate for LPs and VCs



Petr Sima, Founder and Partner @ DEPO Ventures | EBAN board member

LinkedIn
Petr.Sima@Depoventures.Cz

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