How To Invest In Startups - Sam Altman

Source: How To Invest In Startups - Sam Altman

This is a particularly hard time to invest in startups — it’s easier right now to be a capital-taker than a capital-giver. It seems that more people want to be investors than founders, and that there’s an apparent never-ending flow of capital looking for access to startups.

To do well as an investor, I need to do three things:

  1. get access to good investment opportunities
  2. make good decisions about what to invest in
  3. get the companies I want to invest in to choose me as an investor

Access

Getting access to investment opportunities is the easiest of the three categories: I can just work hard.

Putting a lot of energy into networking actually works. If I can actually figure out how to help other investors I respect, and to really help good founders, then good investment opportunities will come my way.

Instead of just asking my contacts to tell me about investment opportunities, ask them if I can spend a day per week helping their best company. In general, early-stage investors can help a lot with

  • closing candidates
  • future fundraising
  • customer introductions
  • generic advice

A brand is the other way to get access. One way to build a brand is by writing long-form content.

Decisions

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.

So how do I identify future greatness?

It’s easiest if I get to meet people in person, several times. The rate of improvement is often more important than the current absolute ability (in particular, younger founders can sometimes improve extremely quickly).

The main question I ask myself when I meet a founder is if I’d work for that person. The second question I ask myself is if I can imagine them taking over their industry.

Look for founders who are

  • scrappy and formidable at the same time (a rarer combination than it sounds)
  • mission-oriented
  • obsessed with their companies
  • relentless
  • determined
  • extremely smart (necessary but certainly not sufficient)
  • decisive
  • fast-moving
  • willful
  • courageous
  • high-conviction
  • willing to be misunderstood
  • strong communicators
  • infectious evangelists
  • capable of becoming tough and ambitious

Being a fast mover is a big thing. Successful founders believe they are eventually certain to be successful.

Be at least okay at predicting what markets will be good.

Startups do particularly well in industries with rapid technological change, because their fundamental advantages over large competitors are speed and focus. A higher rate of change gives startups more opportunities to be right and the large competitor more opportunities to stumble.

Care about is the growth rate and eventual size of a market (say, it’s size in 10 years).

The best companies tend to have the courage to lead the market by a couple of years, but they know the secret for telling the difference between a real trend and a fake trend. For a real trend, even if there aren’t many users, they use the new platform a lot and love it. The very best companies tend to ride the wave of a new, important, and rapidly growing platform.

The best companies have most of the following common characteristics:

  • compelling founders
  • a mission that attracts talented people into the startup’s orbit
  • a product so good that people spontaneously tell their friends about it
  • a rapidly growing market
  • a network effect and low marginal costs
  • the ability to grow fast
  • a product that is either fundamentally new or 10x better than existing options

Try to limit myself to opportunities that could be $10 billion companies if they work (which means they have, at least, a fast-growing market and some sort of pricing power).

The data are clear—the failures don’t matter much, the small successes don’t matter much, and the giant returns are where everything happens.

I can and should scale up things that are working. The power of scale, and the emergent behavior that sometimes comes from it, is tremendous. Think about the potential energy of future scale for every investment I make.

Look for Good founder + Good Idea.

Close rate

The better the investment opportunity is (i.e., expected value relative to valuation), the harder it usually is to get the company to choose me as an investor.

Spend a lot of time with the founder, explain what I’m willing to do to help them, ask founders I’ve worked with in the past to call them, etc.

A reputation for being above-and-beyond helpful and accessible is worth a lot here, and rare among all but the best investors. A reputation for being founder-friendly helps too. What helps most of all is other founders I’ve previously invested in saying “that person was my best investor by far”.

A strong brand also helps close them.

Decisiveness also helps—everyone wants to be wanted, and most investors wait for someone else to act first. If I decide quickly, and especially if I decide before others do, founders tend to appreciate that. The two most recent significant investments I (Sam Altman) made were

  1. telling people I’d previously backed and had huge conviction in that I would do their Series A before they finished telling me what their idea was, and
  2. offering to do the seed round of founders I’d never met before at the end of a one hour meeting. Not recommended to do very often, but when my conviction is strong, let it show.

Treat founders like peers.

Help them

  1. The most important way to help founders is to get them to be more ambitious—to think bigger and to have more self-belief. Help them set ambitious but achievable goals. Momentum is important and self-reinforcing — most people set goals that they expect to be just out of reach, which is usually demotivating. It’s better to continuously set goals that I can just barely hit.
  2. Give them specific, tactical advice (instead of general strategy) about how to achieve their goals. Good tactical advice is something like “it seems like you’ve figured out yourself how to do sales for this company, so here is where to look and what to look for in your first sales hire, and here is the sales tool you should use”.
  3. There are a lot of specific things I can do to help
    • make introductions
    • help them hire
    • help them find other investors
    • help them find an office, etc.
    • but generally wait to do these until asked
  4. Exceptions:
    • Proactively let them know when I have very high conviction that they’re about to make a big mistake, especially once things are working and they aren’t setting themselves up to scale.
    • Helping founders come up with good new ideas. Most great investors are usually still bad at telling founders what to work on. It’s worth trying to be self-aware.
  5. Most of the time when founders call asking for vague help, what they are really asking for is emotional support from a friend. Invite them over to your house, make them tea or pour them a drink, and start listening to their struggles.