6 rules I use to quickly decide whether to invest in a company

How I make relatively small investments in relatively big deals

Mandatory credibility bio: I’ve raised funding for two companies, exited two companies, worked as an m&a iBanker, seeded tech companies, invested in real estate funds and syndicates, etc etc. Above all: I like to learn and codify for the benefit of myself and others. Also: I hate credibility bios.

Over the last few years, I’ve invested in other people’s ventures, PE/hedge funds, and real estate deals. I hope my learnings can benefit others making alternative investments for their personal portfolio. It can also help operators deciding how to manage potential non-institutional investors.

Things I’ve learned while deploying capital:

• Nobody cares about your money as much as you do (e.g., wealth managers are not helpful for diligence)

• You say “no” a lot, and it can be uncomfortable saying “no” to friends. Consider that a VC sees 100+ pitch decks for any one company they invest in

• Unless you are leading a round with a sizable 7+ figure check, you don’t dictate terms and you don’t get access to thorough diligence (e.g., no time to interview employees, clients, no access to financial records, etc.)

That last point is especially important. You need to quickly make your investment decision while being your own best fiduciary. Here’s my 6-point checklist:

My 6-Point Checklist for Decisively Diligencing Opportunities

1) Focus on the tide rather than the boat

The macro industry climate has more of a role in the success of a company than the company itself. If you were a saas healthcare company or remote work company or ecomm company that happened to be around in 2020, then you had the best year ever and your valuation skyrocketed. Full stop. Doesn't matter how shitty your team was. 

Rule: The company I invest in must be riding a recent macro trend. Heading into 2023, my list includes ai/ml, healthtech, infra tech, climate solutions, food and agra-tech, and aging population care

2) Focus on the jockey more than the horse

Apologies for the continued idioms, but saddle up. The leadership team matters more than the current strategy. Get to know the operators on a personal level. It helps to do something outside of the office to see how they interact with the world. If this is starting to sound like I’m giving advice for going on a first date, you’re not wrong. Values are important!

Are they screwballs or professionals? What makes them tick? Can a shared connection vouch for their values? What are they proud of when they share war stories? Do they gloat about screwing over their old employer or of developing a killer product?

Green flags: Operators who faced adversity earlier in life or survived a gauntlet at a major institution; these add fuel to a founder’s drive and work ethic to their execution.

Red flags: Jerks who colt themselves as shrewd leaders that screw over anyone who gets in their way — except — one day they will screw you. I’ve seen this firsthand: tens of millions of investor funds burned by a CEO who prided himself on duping clients and acquirers. There are enough sharp and hungry people with good values that you don’t need to swing for the fences with an asshole.

Rule: The founders I invest in exemplify hunger, industry expertise, and ethics.

3) KISS: Keep it simple, stupid

Financial engineering works to favor those who engineer it, not those who get taken along for the ride. There's a reason why "standard" structures exist: they are tried and true. Natural selection kept them going amongst a sea of variants. Unless you are a hedge fund who has expertise in structuring, you should stay away from anything with tranches or mezzanine positions.

Rule: The companies I invest in must have a standard and simple to understand capital structure; no complex fee/carry structures; no slicing up the cap table into multiple ownership types where some investors get x while others get y.

4) Clear value proposition

If I cannot understand and distill the concept clearly, then I don't know what I’m buying. You might feel some allure investing in a buzzword filled, neural network-based, biotech technology company that is above your cognition. CEOs are notoriously good at throwing buzzwords around to get stakeholders pumped. But, if you cannot articulate the technology, the product, and the go-to-market strategy to a 12 year old, then you don’t get it. You should pass. 

Rule: The companies I invest in have a value proposition that I can write in 100 words.

5) Trust a specialist

I am not savvy in every industry niche. I can’t be. Every industry has standards (e.g., fees in real estate deals) and specific bellwethers (e.g., cohort LTV/CAC analyses for consumer subscription businesses). It helps to have validation from a more sophisticated specialist investor for a project before I invest my own capital.

When I invested in a VC fund, I followed a VC friend who who put his own personal funds alongside mine. When I chose a hedge fund, I called a friend who runs his own long/short strategy to get the 411. Same for real estate, where I brought mentors in to co-invest with me. Basically, you trade allocation for expertise.

Bonus: you learn from watching them do their diligence. Double bonus: the more smart capital you bring to the table, the more attention you get. Triple bonus: it’s way more fun to invest alongside friends. If things go poorly, you’ll laugh about it together; if things go well, you’ll pop champagne together.

Rule: I invite industry experts in my network to participate in my deals.

6) Build relationships over long time horizons

My goal is not to deploy capital into private deals as quickly as possible. I’m in my 30s. I have time. My goal is to identify reliable, hardworking operators and double down on them as they grow. Imagine if someone invested in me in Sparkology, and then got to invest in Budsies, and now would get to invest in my next venture. That would be a a better bet than if they only invested everything in Sparkology. Similarly, I will focus on the long game. Deploying capital intelligently over 2-5 years is better than deploying it within a few months.

Rule: I aim to invest $25K-$75K into any one operator. Then, build relationship, monitor performance, and double, triple, or 5x down 6-36 months later. ($ figures for seed stage tech; different asset classes have different risk profiles)

7) Earn more time with the operator

I promised only six items. But, if you’ve read this far, I hope you’re finding enough value in my writing to at least skim my #7. Similarly, if you want more time with the operator, you need to earn their attention through your expertise.

Offer to do a working session to assist them with their growth, their product strategy, their talent strategy, or their fundraising. When I invested in a fintech infrastructure company earlier this year, I rented out a WeWork room where the founder and I problem-solved his talent questions. Not only could I observe how quickly his brain worked, but I got more visibility into his vision for the company. Working alongside him gave me the confidence to ask for a higher allocation.

I’ve never regretted spending quality time with savvy operators. Whether I’m working with them as a friend, an advisor, or an investor: only good things come out of the experience.

Rule: I give value to savvy operators, and I’m grateful for the time we spend together.

Are you investing or fundraising?

If you come across an investment opportunity, I’d be honored to join you and we can make an investment together.

If you’re a founder raising a round and the above mentality resonates, I’d be honored to support your company and bring in more strategic capital.

If you’re an LP and want to join me to invest in great companies, DM me with your area of expertise.

p.s. Much thanks to Katie LaFleur for her help reviewing and editing my post. She’s a savvy social impact investor and Parter at FullCycle, and she’s the perfect person to challenge and append my writing on this topic. See #5 above :)

Shout out also to my good friend and fantastic writer Tal Raviv, who pushed me to add brevity.