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What do investors look for in a startup before investing?
Read time 2.1 minutes.
Let’s try a new content format today by analyzing what top investors like Mac Andreessen, Sam Altman, and Gary Tan have to say when asked What do you look for in a startup before investing?
Marc Andreessen (Co-founder of Andreessen Horowitz and Netscape)
Quote: "Market is the most important factor in a startup's success or failure."
Analysis: Marc believes three possible answers exist: team, product, or market. He believes that the market is most important because no matter how great the team or the product, they can’t succeed without a market. If you have a market then even with a poor product or team the market can pull you towards product/market fit and growth.
Source: Marc Andreeseen’s blog “The only thing that matters”.
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Sam Altman (Former president of Y Combinator and the co-chairman of OpenAI)
Quote: "Great founders are the key to great startups. One way to do really well as a startup investor is to get good at predicting who is going to be great before they are—the market rewards finding great but inexperienced people."
Analysis: Sam places a strong emphasis on the founding team's capabilities. The founders' ability to execute on their vision and communicate their ideas is paramount to a startup's success, and by extension, an investor's ROI.
Source: Sam Altman's blog “How to Invest in Startups”.
Gary Tan (Co-founder of Initialized Capital and President of YC)
Quote: "It goes back to the founders; if they are really smart and really great engineers who can build anything, that’s the most important thing. "
Analysis: Gary values “grit around iteration.” It makes sense then that he would back founders with the skillset to iterate quickly, release products to market, and iterate based on customer feedback.
Source: Gary Tan’s interview on Joma Tech, “What Investors Look For In Startup Founders From Former YC Partner”
My Take…
Based on my experience: Fundamentally, from observing thousands of deals, investors are always balancing the potential and the risk. What founders have working for them is that at most, the investor can only lose what they are investing, but at most, they can make a near-infinite return on that money (realistically, it could be a 1000x return for early-stage investing). What founders need to do is show that there is the potential for that outsized return then work to mitigate the risk by showing how they can execute or how they have already gotten an advantage over any other team that came up with the same idea.
Based on my research: While the specifics can vary among investors, some common threads are clear. A sizable, growing market opportunity, a strong, capable team, and a genuine mission or passion driving the startup are essential. The synergy of these factors often determines the attractiveness of an investment opportunity.
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