5 Insider Tips From Some Of The Most Successful Startup Investors

Tanya Prive Contributor
culled from:http://www.forbes.com
The gargantuan startup acquisitions that have occurred over the past couple of years have certainly contributed to the increasing appetite for startup investing. With wins like WhatsApp being acquired for $19 billion by Facebook, Tumblr acquired by Yahoo YHOO -0.36%! for over $1 billion or the Israeli navigation startup Waze that Google GOOGL +0.61% Maps acquired for over $950 million and Nest Labs (which had no significant revenue and only two products) acquired by Google for over $3 billion, it’s no wonder that investors, rightfully so, have their curiosity piqued.

Apart from the startup founders and early employees benefiting, a large chunk of the proceeds from a company’s sale goes to investors who were keen to get in early. Startup investing, as shown in the examples above, can be an extremely rewarding asset class, offering an attractive alternative to the public market. Not only does it give investors the opportunity to get in early and experience huge returns, but it also gives a front-row seat on the thrilling roller-coaster of a startup’s growth trajectory. Without neglecting the fact that there is a high likelihood you may loose your entire investment, let’s face it, typically the major growth startups experience happens well before its IPO, therefore, by getting in early its likelier to provide favorable return on your investment.
Although investing in startups as an asset class tends to be a highly illiquid and risky proposition, in my opinion, aside from the regulations which have, to date, prevented the general public from partaking in these types of investments (mostly available for accredited investors only), a major factor why investors fear entering this investment arena is the lack of know how, which is something my team and I work very hard to address at Onevest, a leading startup investing platform, by doing educational webinars such as Startup Investing 101.
In an effort to surface insights from some of the most well-respected venture capitalists and angel investors, I asked several experts to share their secret sauce on how their startup investments are guided.

1. Aydin Senkut
Founder at Felicis Ventures
Successful Exit: Meraki acquired by Cisco for $1.2 Billion producing a 73.8x return on investment.
“In our mission to back iconic companies, we look for founders who are product visionaries, people that have an acute sense of what makes (or will make) their product or solution truly awesome. Then we follow up by asking them how they visualize or define success which is telling.”

2. Mike Walsh
General Partner at Structure VC and known angel investor
Successful Exit: Salesforce, which did an IPO producing a 50x return on investment.

“In all cases, including this investment, I have 10 or so filters. Most important are whether it seems to be a large enough market to return a minimum of 10-100x, whether I believe the founders will “never give up”, whether I think I can introduce the company to 1,000 users if a consumer product or 100 companies if it’s an enterprise product, whether I want to hang out with the founders and whether I think the founders will give back if/when they hit it big. There are many more filters but those provide a quick gut check for me. I’ve made 65 investments in the last 14 months and every one of them runs through these filters. Every now and then I’ll make an exception to the filters for reasons that might not be obvious, but that’s doesn’t happen often.”

3. Matt Ocko
Co-Managing Partner and Co-Founder of Data Collection
Successful Exit: FlashSoft, Inc. acquired by Sandisk producing a 42x return on investment.
“This isn’t actually our biggest return, but it’s a recent one that exemplifies our ‘secret’ – we look for strong (but not necessarily glamorous) teams with a deep and proven tech advantage addressing a huge problem that takes a fairly contrarian view to understand. In the absence of frenzied competition and over-investment typical of a ‘popular’ sector, these companies can enjoy either quiet but very strong growth, or be attractive acquisition targets, or both. We’ve had many similarly ‘quiet’ companies enjoy cash on cash returns between roughly 20x and 70x.”

4. Devdutt Yellurkar

General Partner at Charles River Venture
Successful Exit: Zendesk, which just did an IPO producing a 30x return on investment.

“We seek to invest in exceptional and passionate entrepreneurs who have specific and non-obvious insights about their industry and how technology will disrupt those industries.”

5. Fabrice Grinda
Angel Investor
Successful Exit: MillesMercis did an IPO and producing a 20x return on investment.
“We have been following a rigorous investment criteria and try to stick to it as much as we can. We’ve made mistakes in the past because we fell in love with ideas and didn’t analyze them with the right perspective. Having a well defined thesis, helps you understand what you look for and get better at it. Our thesis works because we know the types of companies we like and understand how the business works to the smallest detail.”
As we share with our investor community, the best way to approach startup investing is threefold:

1. Invest in startups that operate in verticals you understand

2. Create an investment thesis in which you leverage various filters to help identify winners

3. Make sure it’s discretionary funds.