Key Startup Investing Question: Is the deal Credible?

Happy Friday, TGIFers!

Hope everyone had a great week!

Whether you're a seasoned investor or just starting out, our goal is to provide valuable insights in Venture that help you make informed decisions and achieve outsized returns.

We’re sending this newsletter from Bitcoin 2024 happening in Nashville, TN, through tomorrow (7/27). We hope to share some of the insights next week!

For now, let’s get into this week’s venture investing lesson:

What you’re seeking in a potential startup investment: Credibility

By: Gerry Hays

For the past several weeks, we’ve discussed the three pillars of successful venture investing: 1) A Fertile mindset; 2) A Sound Strategy; and 3) Disciplined Execution.

During the discussion on execution, it was mentioned that, as startup investors, we must set aside our personal biases and focus on a single question: Is the deal credible?

A few years back, AngelList and the Kauffman Foundation released the results of a study of startup investments, concluding that if you miss the best-performing seed investment, you will eventually be outperformed by someone who blindly invests in every credible deal. After the release, I had an opportunity to speak with AngelList’s lead Data Scientist, Abe Othman, about the study to better understand the underlying data set and logic that was utilized. In fact, we incorporated their findings into our Fantasy Startup® App, which remains the world’s #1 training tool for emerging startup investors. The simulation teaches how to overcome personal biases and develop the discipline necessary to win as a startup investor via indexing.

The reason why indexing into multiple credible deals works is because, in the words of the study, none of us has a crystal ball, and, as mentioned above, our biases become our enemy, not our friend. There are numerous stories of revered investors passing on companies such as eBay, Starbucks, and Uber (i.e., how can Beanie Babies, coffee, or ride-hailing become big?). The answer is that there were no guarantees they would get big, but each of these deals was credible at the time they were raising funds.

Thus, if you’re in agreement with our approach, your focus during the execution phase of building your portfolio will be on assessing credibility to determine whether you’re in a deal (or not). In our QAI Venture Investing Masterclass, we teach a framework to help you determine whether a startup investment opportunity qualifies as 'credible.' Specifically, we concentrate on five broad areas:

1. Business Model

2. Team

3. Competitive Advantage

4. Market

5. Alignment

Of course, depending on the stage (i.e., pre-seed, seed, Series A), the criteria becomes more advanced, and the metrics and expectations will be higher as the startup matures. Therefore, it’s crucial to understand what to look for at each stage.

Next week, we’ll tackle how to evaluate the business model at various stages. And, if you have questions you’d like for us to answer, feel free to email them to [email protected] 

DVC Deal Review:

For DVC Premium Members, we’ll be reviewing Sweater currently raising on Start Engine

DVC Portfolio Updates:

HelpTexts (Deal #68) - HelpTexts, a service that provides comforting words and support during moments of intense grief, announced that Purdue University will use their platform to provide grief support for students.

Have a great weekend everyone!

Sincerely, Team Doriot