​Want to Invest in a Startup? Here’s How to Make the Right Choice

Joe Gardner  |

I’ve been interested in starting businesses for as long as I can remember. In high school, I started a pseudo-company with a few friends. We pooled a little money to create and sell school paraphernalia. Lo and behold, we had a great market with eager buyers!

For a few weeks, we had a blast running our operation ... until the administrators shut us down. Still, watching our project pay off — to the tune of a few thousand dollars, a small fortune at the time — was enough to deem the short-lived operation a success.

That experience taught me three things. First, I learned rules usually aren’t fun, but it’s important to understand them before starting a business. Second, I decided I loved the thrill of taking a risk with my investment. And third, I realized the experience was even more enjoyable because I was doing it as part of a team of friends.

The latter two points are likely what drove me to build my own companies later in life and subsequently look to invest in others. While experience has certainly shaped my strategy over time, I’m happy to know that the lessons I learned in high school still apply.

My Start in Investments

My first real-world investment was into a startup I co-founded, called Modasphere. Being a co-founder made the prospect less risky than others because I knew I would be heavily involved. I believed in the concept and myself enough to take the chance.

At the time, I didn’t really know anything about investing in startups or building a business, so as you might expect, I made every mistake in the book. It was a struggle and very painful at times, but through hard work and determination, we underwent a successful acquisition after five years.

While that story had a happy ending, it was actually the tough times that taught the biggest lessons — ones I won’t soon forget. From these experiences, I’ve identified the five criteria I care most about when deciding which investment opportunities to pursue.

In all my earliest investments, I had a close connection to the founders in some way. They either already had strong teams in place, or I trusted them to build a quality group. I knew from firsthand experience that a startup leader needs a team with diverse skill sets to create a foundation that will last through the painful moments.

On the other hand, a lesson I brought from my high-school days is that no matter how capable a team is, it’s nearly impossible to build a startup without a good product-market fit. For all that we did wrong, we knew we had strong market demand, and it helped us sell merchandise easily. Ensuring that a company has proven market validation remains core to my decision-making process.

Similarly, a startup I invest in also needs a compelling concept that I understand. Just because I’m not drawn to an idea doesn’t mean the company can’t be successful, but with the number of investment opportunities available, it doesn’t make sense to pursue ideas that don’t excite me or that I can’t fully grasp.

I’ve also learned that when a startup enters the market, chances are good that it either has or soon will have competitors with more experience and better funding. So opportunities I pursue must have a unique advantage. That could mean it’s a first mover or that its founders have valuable industry expertise or sales and marketing connections that others do not. Either way, the advantage should demonstrate why the company will beat out its competitors.

Above all, I always look for ways I can add value to my investments beyond capital. My entrepreneurial experiences have taught me that building a business is much more complex than simply funding a good idea. I want to be able to offer founders advice and connect them to people in my network who can make meaningful impacts on the company.

Ready to Invest?

Determining the quality of an investment opportunity isn’t always as straightforward as just identifying ideal characteristics, though. To make it a little easier to find the right investments, follow these steps:

1. Build out your network.

Your network should include entrepreneurs, other investors, and operators. When you tell people you invest in companies, you’ll likely see opportunities start to roll in quickly. Your entire job is to separate the good ones from the bad, and having a network of people you trust who can help you vet options will save you time. Talk to seasoned investors with good track records about what they look for in ideal investment opportunities. Take note of their successes, and avoid repeating their mistakes.

2. Focus on your strengths.

Start out in an industry you’re familiar with, especially if you’re new to investing. If you spent your career in commercial real estate, for example, you would be in the perfect position to judge startups hoping to find a niche in that space. You may also be able to add more than just capital to a startup in an industry you understand. You could pass along valuable advice or leverage your network to help its founders succeed, which should help make you feel more comfortable when you’re just getting started.

3. Do your homework.

The main goal of a founder’s pitch is to get you to invest in his or her venture. Though the founder might be truthful, he might also spin things in a way that makes you excited about the opportunity. Unfortunately, not all companies will become “unicorns,” and that’s OK, but it’s critical to do your own due diligence when looking into a startup. Conducting your own research helps you get a better sense of the company’s true potential as well as whether you’re comfortable getting involved.

When you approach it the right way, investing can be a rewarding endeavor. But rushing blindly into investment opportunities will put you on the fast track out of the business. If you look for opportunities that fulfill the qualities I’ve outlined and stick to the strategies above, you’ll be on your way to finding the most promising prospects without wasting time and money on doomed ventures.

Joe Gardner is a multi-time entrepreneur with eight years of experience founding, funding, growing, and selling technology companies. Joe’s experience as an investor, successful founder, and business operator has led him to create a prolific network of entrepreneurs, investors, and operators in the SoCal, Silicon Valley, and Northeast ecosystems. He is currently the CEO of venture development firm VentureDevs.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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