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One Question to Think About When Evaluating Startups
From someone who has invested in 400 startups
Before we dive into our 4th edition of Angel Insights, the weekly newsletter from our team at VITALIZE Venture Capital, we’ve got a quick reminder.
Applications for our first cohort for VITALIZE Angels close TOMORROW!
We launched VITALIZE Angels in September of 2021 and have always had applications open on a rolling basis, but we’re switching to a cohort model to make the experience even better for new members. We’re so excited to finally open the first cohort and have you join us!
You just had a meeting with a founder.
They pitched their company, you asked some great questions, and now you’re trying to evaluate if this is a company worth investing in.
How do you proceed?
Every investor has their own way of doing this.
For angel investors, this may be anything from I just like them to they’ve checked 17 of my 21 boxes so I’ll invest.
In every situation, there are reasons to pass.
At the earliest stages, when the company is little more than an idea, there are even more uncertainties.
What you’re looking for is a reason to say “yes.”
And in this great talk from Sam Altman, who has personally invested in 400 companies, was previously President at Y Combinator, and is currently the CEO of OpenAI, he shares this gem on how he thinks about it:
The first question that I try to ask myself when I meet a startup is not why is it going to fail, it's not what could go wrong. The first question is how big could this be if it works?
Can I imagine this founder, this idea, this market supporting a massive, massive company? Then, I think about all of the things that could go wrong.
But, I found that if I thought about what could go wrong first, I filtered out the companies that could be giant. The companies that could be giant are at this intersection of sounds like a bad idea is a good idea and, because that's a very narrow intersection, because they sound like a bad idea the best investments are the ones that are easiest to talk yourself out of if you start off thinking about why they could go wrong.
It’s a great way to think about it.
After all, we’re talking about startup investing, an asset class inherently riskier than others, but that comes with the potential for much higher returns.
We’ll go more into startup diligence in a future edition of Angel Insights, but thanks for taking the time to read today’s edition!
If you’re new to Angel Insights, you can check out the first three editions below:
Take care,
Justin