I have a checklist of rules that I review before making an investment.
The checklist has three categories of rules. These include rules about the founders, product-market fit, and the investment terms. There are about 50 rules in total and the number is growing with time.
However, in each of our great investments (the jury is still out on their ultimate cash return because they have yet to achieve exits, however these are the ones that have a combination of the highest paper returns and subjective future promise), we broke at least one if not several of the rules on the checklist.
There are cases where the the founder wasn’t working full-time on the business, a CEO had single digit percentage equity, there wasn’t a technical co-founder, I couldn’t justify the company’s valuation no matter how I looked at it, and there was a clear weakness in the business model. But we invested anyways. And the results so far look good.
You have to know the rules. But sometimes you also need to have the conviction to break them.