There’s a simple test I like to use before making an investment. I try to explain why I’m investing in the company to the best VC’s in the world.
The identities of those people don’t matter. It will change from person to person based on whose investment approach and track record you respect the most. For me, it’s a group of people who together have invested in Apple, Google, Facebook, and Twitter.
Presenting to multiple people is better than presenting to a single person because your perspective of their characters and the different attributes which they look for in an investment will help you poke holes at your argument from multiple angles.
What matters is how you feel when you’re explaining why you’re investing in the specific company to them. If you find that you feel uncomfortable because there are holes in your argument, that’s a pretty strong signal that you should do more research. If you feel that you have all the information you need but still lack conviction when explaining why you’re investing, that’s probably because there’s something about the team, product, market, or terms that raises a red flag.
I have yet to come across an investment without any red flags. You just need to be clear about which red flags represent risks you’re willing to take and which ones are deal breakers. This will always be a work in progress. This is because the more investments you make, the more data you’ll have to identify patterns among those hunches you should follow and those you should ignore.
If I feel comfortable about the amount and quality of information with which I’m making an investment decision, and can explain why I’m investing with conviction to the best VC’s in the world, I make the investment.
Note that this doesn’t mean that these VC’s would also make the same investment. We’re targeting different markets and investment stages, and have different financial, informational, and experiential resources. In other words we have different opportunity sets. The key question is whether they would make the investment faced with the same opportunity set.
Also published on Medium.