My Criteria for Investing in Startups

Whether I like it or not I’m an angel investor, even though I prefer a different label. I don’t want to picture myself as a has-been who doesn’t have the fire to build another company. A lucky bastard who plays Fantasy Football with money that other people would use to educate their kids, buy a car, pay debt. While that may be true, I invest in startups because I need to feel useful. If I were a fulltime money manager, or a VC with a responsibility to LPs, I would have a duty to find investments with the best possible rate of return from a strictly financial standpoint. I would not want to be in that position. I invest in some startups because I genuinely enjoy it. I don’t plan to allocate more than 5% of my portfolio to startups. Losing it all would not be a catastrophe. On the other hand, I get an immediate psychological payoff from the investments I make. I thought about how to maximize the “personal return” I’d like to get from my investments, and I ended up with a few rules (somewhat flexible, subject to change). Here they are:

1) I strongly prefer investing in companies located in San Francisco (city proper, not the Bay Area).

Why? I live in San Francisco, and I enjoy driving on Bay Area freeways as much as having a root canal done by a drunken dentist who hates my family. I like to be able to take public transportation and have meetings with founders, sometimes spontaneously. I may find myself having an IM conversation with a founder, and think it would be best to just grab coffee and scribble on a whiteboard. One of my portfolio companies is about eight blocks from where I live, and another one is fifteen minutes away by Muni. If I believe those meetings could be helpful to the companies, that makes me feel useful. That’s a positive return to me. If I had to drive to Palo Alto or Mountain View, I’d have to subtract two hours of soul-destroying driving from that return.

It turns out that San Francisco is one of the best cities in the world for certain kinds of startups, and there are plenty of them to choose from. If I lived in Chicago, Berlin, or Madrid, I might not invest in startups at all.

2) I invest in companies that I believe are trying to improve the world.

Notice that this is a very subjective statement. Someone might think Facebook or Twitter are improving the world; I don’t. I avoid the entertainment industry, and anything where the revenue stream is based on advertising. I prefer investing in health, transportation, education, and (under some very specific circumstances) finance. Don’t get me wrong, I’m still trying to make money with my investments. This is not charity, and I’m not Bill Gates (although I’m a huge fan of his current work). There are tons of profitable businesses that I believe can improve the world: better and cheaper medical technology, cleaner / less risky transportation, applications to help people avoid financial suicide, etc. My vision of a better world may not coincide with yours. I may be wrong or misguided, who knows. What matters to me is believing that the potential contributions of these companies to the world outweigh their negative externalities.

3) Hey, why didn’t I start that company?

As an electrical engineer and software developer with decades of experience building internet infrastructure, there are certain areas where I believe I could contribute much more than the puny sums that I can invest. If I see a company that I would have wanted to start, I’d like a chance to contribute to its success. I’ve been around Silicon Valley for a while so I’m connected to many engineers and investors whom I deeply respect. Some lawyers, even. Thirty years after writing my first program in Basic I still code for fun, and I doubt I’ll ever stop. I like to analyze data, find relations between variables, extract insights that are sometimes far from obvious or even counterintuitive.

My skills make me useful to a relatively small subset of all startups out there. I recently attended a Demo Day for a well-known incubator. I had the impression that 95% of the startups who presented could not benefit from my investment any more than they would by taking money from a random stranger. For the others, I would be excited to be involved in some form. I’m not looking to become an employee of a company, and I like having the option (but not the obligation) to contribute work. When I make an investment that’s financially meaningful to me (probably more than to the startup), my brain automatically starts paying attention to its market, competitors, technology, introductions I could make, plugins or applications I would write, etc.

I wrote this post because I felt like it, but hopefully I did a decent job at selling myself as a potential investor. If your seed-stage company fits the criteria above, please contact me.

By the way, don’t follow me on Twitter 🙂

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