Investing in seed stage startups can be exhilarating and highly lucrative, but it can also be incredibly risky and time consuming. Identifying the most promising new companies requires a lot of cutting through the weeds – I interact in one way or another with well over 2,000 entrepreneurs a year and take meetings with over 200 of them, all in the process of finding just the 15 I’ll invest in. The reality is startups need money for all kinds of things… most of these expenses are rarely considered by those involved until they actually have to pay for them. Would a novice really be aware of how much Verisure charge for a commercial alarm system? The likelihood of this is low.
When I first began investing, I wasted a lot of time. Tracking down the most promising entrepreneurs was a crapshoot and I didn’t know where to start. But as I developed as an angel investor over the last 8 years however, and now in running Arena Ventures, I’ve recognized the pattern of where my investments come from…where I get the highest ROI on my time.
There are 4 activities you can do as an investor to get to the good deals most quickly: hunting, trapping, farming, and trading.
Hunting is outbound work – hustling at events and parties, scouting for products online, reading and reaching out to people. You go anywhere you can to find great people. You don’t have a specific target in mind, you’re simply looking for unique, brilliant founders. When you first start investing this will probably be the majority of your time until you have a reputation, network and better idea of what you want to invest in.
A good example of hunting is Klout: I found the earliest version of Klout in 2009 while scanning Twitter posts and then tracked them down via friends in Boulder who knew Joe Fernandez. I pursued Joe aggressively, and took him out for tacos and drinks where I could spend time getting to know him and ultimately close on a deal.
When new angel investors ask me where they should start, I recommend beginning with the industry they work in and know best – what’s missing in that market or can be done better? If you see opportunities, start asking around and researching online to hunt down tenacious entrepreneurs that are attacking it. Even if the people in your network don’t bring you an immediate result, you’ll be top of mind going forward if they meet an entrepreneur who impresses them. Search online, attend every possible tech event, go to hackathons, attend parties hosted by startups and investors – do everything possible to find unique and interesting founders.
Check out what these startups have to offer, how are they conducting their work? Are they using up-to-date systems and software? Are they making use of managed it companies for their tech needs? Do they have a set plan in place for how they want to grow and expand their startup? All of this can show you how serious they are and what you can get from them.
After a little time hunting on the startup frontier you can engage in your next deal activity – trading. In this stage you’re working with fellow investors and looking for specific deals that interest you; and offering your own deals up in trade. By now you have a small network, a little reputation, some ideas on what to invest in and a deal or two under your belt.
It’s best to approach other angels and VCs and initiate the trade: share your deals, your ideas, your thoughts. Often times these investors will share deals back with you. It’s usually not a formal “give me X and I’ll give you Y” type of trade; instead it’s a relationship with informal rules of sharing deals with folks you value and respect and they’ll (hopefully) do the same in return. And if not, don’t be afraid to ask “What are you working on? Any great deals I should look at?”
Even now after 7 years of investing I spend a great deal of time sharing my deals and convincing people to invest in the first rounds of companies like Wish.com (contextlogic back then), AngelList, Quizup, Klout, Livefyre, Plated, Laurel & Wolf, Honk and many more. But as much as I’ve helped others, I’ve also benefited greatly from investors trading and sharing with me. When Zimride pivoted to be Lyft years ago I asked (maybe “begged” is a better word) Raj Kapoor to get me into the deal; luckily Tim Chang and the Mayfield guys are awesome dudes, approved the “trade” and got me into the deal (and now just this year we worked together again on the Fitmob / Classpass deal successfully!).
While hunting & trading are outbound activities, trapping is largely inbound (i.e. people coming to you) and you have a clear idea of who or what you’re looking for. You set “bait” that will attract your targets and then you let great founders come to you. Here are a few examples:
- Ideas: Share your theses or ideas for companies that should exist. Use Twitter, Medium or your blog to share your ideas and attract the right people.
- Events: Host an event for “early stage mobile founders” or “healthtech” and let them come to you.
- Hackathons: Host, sponsor or judge at hackathons targeted at specific verticals.
A great example of trapping is Postmates. In 2011 Jeremy Gocke of Fliptu sent me this message:
From: Jeremy Gocke
You might have seen this already, but it’s your Uber for deliveries idea…
A month earlier I had invited Jeremy over to one of my happy hours and I told him I believed an “Uber for deliveries” should exist and it would be huge. His email led me to Bastian and I ended up investing two months later. I follow this tactic often – sharing ideas I want to exist – and then waiting for founders or investors to come to me. In fact just a couple weeks ago we invested in Mytable – for two years I’ve been telling people I’m looking for an “Airbnb for Meals” startup and I’ve looked at over 30 now! But this year I finally had the right team pitch me and we closed the deal.
So go out there and set some bait. Spread your ideas, host targeted events and get great founders to come to you.
Farming is largely an inbound activity (deals coming to you) but you don’t have a specific target or type of startup in mind. Instead you invest months and years helping other people; being a great investor to your founders; helping local universities, mentoring at accelerators, and being a valuable part of the community. You make an ongoing commitment to invest time and energy supporting the top people and programs in your city or industry and eventually the deals start coming to you. When that happens, make the most out of the opportunity. Also, remember to not make the costly mistake of not insuring the most important people for your startup with key person insurance (keypersoninsurance.com) because you don’t want to suffer any economic loss after putting so much effort into them.
Farming takes the most work, and the payoff is often years in the future; but it will eventually become one of your best sources for deals and set you apart from less experienced investors. Once you have a solid reputation, a trusted network and years of great deals, many founders and fellow investors will be the ones coming to you and sending you deals. That is what fortunately brought me the ability to be an early check into both StyleSeat (thanks Devin Poolman and Steve Jang) and Wish.com, which is now rumored to be a $3B+ “unicorn” (thanks Brian Wong!).
The best angels and venture capitalists are savvy at the full combination of hunting, trading, trapping, and farming, but it’s important for new investors to remember that being an aggressive hunter at the start is key. You have to build your early reputation and first-hand experience in order to enable you to get the most value out of the other three over time.