There’s a plethora of information out there about leveraging technology to raise money for your startup. You can read about hacking AngelList or launching a newsletter or running an augmented sales funnel to raise funding.
But what about using tech to increase the rate of returns on your angel or early-stage investments?
How can you use technology be a full-stack early-stage investor? Today I’ll give you an overview of the tools you can use to source, screen, and vet very early stage startups, meaning those that are often pre-revenue, pre-traction and often pre-product. I believe you can have a very significant competitive advantage using these tools at the team and market-opportunity level.
Before we get into the nitty gritty of it let’s address the elephant in the room:
Unless you are one of the top couple hundred angels or super early seed fund investors in the U.S. the most promising startups run by the strongest teams will not come to you. You will suffer from adverse selection. Capital is far more readily available (even when we head into Startup Winter) than opportunities to invest in good startups.
It is much tougher for most angel investors to get into a great startup then it is for a great startup to get an angel investor. If you listen to some of the most prolific guys out there, like Gary Vaynerchuk (150+ investments) or Jason Calacanis you’ll hear over and over that they work very hard to be in a position to be able to invest in startups.
If you’d like to dig a bit deeper into this check out my post on the most important question angel investors should be asking themselves.
As the startup world continues to grow, we’re noticing a lot of inefficiencies in the way investors source startup investments. You have an opportunity to invest in process-driven startups that do things that don’t require a charismatic CEO who can sell snow to the eskimos. So in a world where some of the best startup founders out there are not the best PowerPoint presenters, you need to use the right tool for the job. Analytics over gut feel.
And as more and more funds with significant infrastructure and resources get into the early-stage space, non-professional investors need competitive advantages and those can be attained with technology.
I’m going to focus on really early stage investing where I believe angel investors as well as the new entrants (everyday investors as they’re called) will have a competitive advantage. I will therefore skip technology review tools, revenue estimation tools and usage statistics because you’ll be investing much earlier than that.
So let’s try and assemble a tech stack.
1. You need deal flow.
You can have two types of deal flow: inbound and outbound.
Inbound deal flow is best, but quality inbound deal flow is extremely rare and very hard to get.
To get inbound deal flow you need to build a brand in the marketplace as a high-quality investor who knows what she or he is doing and the best way to do that is by putting out content (of course before you’re able to show returns). You can use Medium for blogging, Quora to answer questions, Slack to showcase you’re an expert and Slideshare to tell stories. If you need some additional content to round off your blog you can use tools like BlogMutt to improve the SEO around your original posts and of course your own website and newsletter. You can use Wordpress or Squarespace and MailChimp to run that part of your content strategy.
If you are really serious about proprietary deal flow, consider starting a Meetup around the niches and technologies you are interested in. You’ll meet founders and other like-minded investors to work with.
As an angel investor you also need to recognize your role in the company’s funding lifecycle. You are a stepping stone on the road to building a big business so it’s important that you showcase who you know and who you influence. An angel investor who has the ear of the top-tier super angels and VCs, will be recognized as much more of a value to the startup than just someone with a large bank account. Twitter and Facebook followings and engagement are all great ways to showcase that.
Remember, however, that this is the long-term approach — It will take you a couple years to build your position in the marketplace as an expert. In the meantime, you might want to first focus on outbound deal flow. In order to go out and find the best companies out there you can use Product Hunt, Angel List, Crunchbase and Betalist. If you’re feeling even more proactive you can use tools like Growbots for targeted and direct email outreach to companies that meet a specific set of criteria. In short, to start, it’s you going out and connecting with startups, not the other way around.
2. You need a place to organize everything.
Once you have deal flow, you need to organize everything and use some sort of workflow or platform to keep it everything tidy. You can, of course, use Microsoft’s Excel spreadsheets or Google Apps, but Gust or Seraf work even better as they are platforms dedicated specifically to organizing angel investment deal flow. Venture 360 and Proseeder also work well.
Zendesk is also a great way to organize things. Although Zendesk is customer-service software, investors use it to run their whole investment deal flow and treat every inbound referral as a customer service ticket.
Streak is another great way to handle deal flow. It’s a Gmail-based CRM tool that organizes deal flow very well.
Choose a tool you are comfortable working in every day to organize all the moving bits and pieces that come with tracking early stage startup investments.
3. You need lots of data points.
The more data the better.
Visible is a great tool that startups use to report crucial figures.
Some of these are pricey, but most offer free trials.
LinkedIn can also provide you with plenty of data points about a startup, including the year in which it was established and the number of employees.
Smart investors look for lines, not dots, and the only way to get there is with extensive, high-quality data.
4. You need to understand the market.
It’s important to understand the market so that you can check the health and well being of your startup’s target market and the sales cycles. For example, if the founders tell you they’ll secure multiple deals with enterprise customers in 3 months you might have to ask yourself if they really understand how to sell to that group (as it usually takes well over a year to get a customer in that segment)? If we’re heading into a tough couple of years as far as startup funding goes, it might be worthwhile to see if your whole customer base isn’t comprised of small pre-A round startups.
Gartner, Forrester Research and IDC are all great sources, if not a little expensive, to understand the market environment for the customers you are looking to target. However, to start out, you should probably be sticking to markets that you are familiar with first, before pursuing more “exotic” ventures in less understood (by you) markets.
5. Marketing stack and mentions.
I would invest in a B+ product with an A+ marketing stack over a A+ product with a C- marketing stack any day of the weak.
Make sure you ask to see their Mailchimp accounts and HubSpot accounts.
Use search.Twitter.com for mentions and social media montitoring tools like Brand24 for understanding app reviews (if your potential investment has an app).
6. You need to do hard DD.
Some things you just have to check.
You can do a hard background check with Checkr.
If the startup claims to be at revenue you may want to physically see their Braintree, Paypal or Stripe payment logs because you need to verify revenue and see what their customer mix is like (check point 4).
A boolean search on Google (but also Duck Duck Go and Bing) using the startup’s name and the names of the folks on the founding team and then +scam, +fraud, +arrested works well and has unearthed some red flags in the past.
You ALWAYS have to do you own due diligence or if someone else is doing it you need to see the whole process, all of the documents and make sure everything is there. Do not rely on a syndicate lead, the head of your angel investment group or anyone else to do this. Make sure you check all of their work.
7. You need to understand the people and what makes them tick.
This is probably the most important section of the whole post. What tools can you use to understand what motivates the founders? How can you find out what their values are?
You can use a specialized company like RoundPegg which does team and employee-fit evaluations. You can also devise a survey and deploy it on Survey Monkey to ask the team some key questions. Charlie is also a nice tool that works with your calendar to give insights about the person you’re meeting with.
There are lots of other ways to use technology to increase your chances of investment success and there are some very specialized tools we use in our vetting and DD practice. I’ve highlighted some of the better known and more useful tools here, but I would love to know what other gems are out there that folks (like yourself, I presume) are using to make better investment decisions.