What I Look For When Investing In Startups

What I Look For When Investing In Startups

Updated Jan 23rd: Please don’t email me your pitch. I’m not looking for new investments outside my personal network. If you’d like you can follow me on Angel List to get notified of my new investments. Thank you.

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I’ve always found “angel investing” to be such a funny term. It almost comes across as being some kind of religious business saviour when it’s really just people who’d rather take risk and make a bet on a person who’s got the audacity to change the world.

Regardless, that is what we’re called and I personally wish there were more.

I am hoping this blog will inspire others to invest and get involved helping amazing entrepreneurs in your community.

Exclusive Training: Download an in-depth training webinar that goes over my complete step-by-step fundraising process.

My “Why” For Investing

I don’t know if you know my story, but I grew up in a pretty challenging environment and got into a lot of trouble as a kid.

In my later teenage years I met people who really showed me the way… who set me on a different path and really believed in me.

I wouldn’t even be in business if it weren’t for them.

Most people thought that I would have ended up dead in a ditch, locked up in jail for the rest of my life or found in a loony bin…

So I really feel blessed and amazed with all of the success I have had in business.

I have started 5 companies (even though the first 2 were complete failures!), I’ve gone on to raise money twice now, built and sold three companies and have been an angel investor in 33 companies and counting!

I don’t say this to brag, but to let you know that no matter where you are at – whether you are starting out as an investor or you are trying to raise money as an entrepreneur – I have been there!

I’ve had all the same self-doubt thoughts that keep us from doing more, but I was fortunate to have been surrounded with amazing people who helped me get through them.

That why I share and invest in others.

In a small way, it’s my way of giving back and honouring all the amazing people that have helped me along the way.

My Filters For Investing

Here are the three criteria that I use for myself when looking to invest in an entrepreneur:

1. Am I Inspired By The Founders Story?

Have they taught me things? Would I want to spend time with them? Do I like them? Would I want to sit down and have a drink with them?

I can’t tell you how many times I meet entrepreneurs and they are super aggressive in their approach or they come off as a little too cocky (and hey, I totally get cocky… let’s be honest here!), but they just don’t realize that it’s about building a relationship with somebody and getting to know them first, not about getting right into the pitch.

Ask me questions.

Talk to me about my experience.

It’s about building relationships… just like in business development, it’s all about getting the customer to know, like and trust you – then they will buy. And for me, investing is no different.

I need to know, like and trust you first – before I will even consider parting with my money.

For me, investing is very personal, I don’t do it for the financial rewards (although I have been fortunate to have some success in investing). I really do it because I look at it as a way for me to learn and to be around people who inspire me.

2. Do I Have The Experience To Be Helpful?

It’s not just about investing. Can I create value for them outside of the money? Is their industry something that I know about? Are there people or contacts that I have, that if I made an introduction to them, would be super valuable for them? That’s really important to me… Can I create value for that entrepreneur? Can I be helpful over an extended period of time? Is it something I know about?

3. Have I Had The Problem?

Simple said: would I be a customer? Do I understand the problem? Have I felt this problem? For me, this is one of the most important criteria. If I’ve never felt the problem, then I’m not emotionally connected to the solution and therefore I am not emotionally connected to the startup.

So if you come to me with a biomedical device or some financial algorithm, there’s a high likelihood that I wouldn’t even be able to help, because I don’t understand it. I wouldn’t be a customer of the product. It’s not knocking the opportunity and the amazingness of your team, it’s just who I am as an investor. I really need to feel like it’s something where I can be a customer and that I have felt the problem.

The Best Way To Find Deals (IMHO)

Any time I have a problem – and it occurs to me that there should be a product for this problem – I will google it or go on AngeList and search to see if there is a company already trying to solve this problem. It’s actually through this process that I discover a lot of opportunities that I end up investing in.

I prefer to source deals because its more inline with my 3rd filter of experiencing the problem.

For example, I’m still looking for a service where I can order a haircut (a la Uber) at my office. Simple idea but still haven’t found a startup to make it work.

When they do, I’ll be their first customer.

The Right Way To Approach Investors

This is a bit off topic, but it needs to be mentioned to all the entrepreneurs reading this.

Recently I was talking to a friend, and he was cold-emailing investors (reaching out to them directly), and I thought, “That’s the most ridiculous approach!” Well, it’s not the way I would raise money.

I did a webinar recently on “raising capital like a pro” and in it, I said that investors don’t want to meet you – they want to be introduced to you.

If you dissect that sentence, don’t cold-email or cold-call somebody, but actually find somebody that they know, like and trust and get an introduction. For me, I suggest that people go after the entrepreneurs.

I wanted to share my criteria to invest with the world, so that if anybody is thinking about reaching out to me, they understand the context of how I invest.

Inspiring Others To Invest

For those of you thinking of investing in entrepreneurs, I hope you find value in my beliefs and principles and use these as filters to find great investments.

If you have the means, I’d suggest investing (supporting) another entrepreneurs vs. buying a new car.

It really comes down to people that I would want to spend time with, who inspire me and teach me things; if I can be helpful to them in moving and growing their business forward and if I feel like I would be a customer of the product or have felt the problem and love the solution.

Regardless if you’ve made investments in the past, or if you’re raising (or have raised) money for your company – the core message is that we all need to share our lessons learned to help the next generation get better at it.

I hope you found this post useful and that you have an amazing rest of the week!

Are you planning on raising money for your startup? Then watch this FREE webinar I created on Raising Capital Like a Pro. I go over the 3 phases of fundraising, a 7 week process for starting & closing your round, and 5 slides for telling your products story, plus much much more. Watch it now.

  • Andrew Draper

    Awesome post and pretty much spot on my experience with you as investor.

    I don’t think I’ve ever said it but my growth as an individual over the last few years, and being able to previously raise a seed round for my company all started from your advice of what to do and a few key intros. In fact, I’m sitting in San Francisco once again about to raise for my new company, using the exact same process, confident that with a lot of hard work we’ll be able to pull this off again.

    I’m incredibly grateful to of had you as an investor and to now call you a friend — Keep doing what you do!

    • http://www.quantifire.net/blog Will

      Really awesome how all this is coming full circle. Didn’t know you left Hootsuite! Good luck on the next venture, Andrew!

      • Andrew Draper

        Thanks! I’d been keeping it a little quiet, things will start to get loud very soon 🙂

    • http://twitter.com/danmartell Dan Martell

      <3 you Andrew 🙂

      Thx.

  • http://joshuadance.com/ Joshua Dance

    I love the idea “Do I Have The Experience To Be Helpful?”. Investing is more than just giving someone a check, it is a relationship. Great article. Thanks.

    • http://twitter.com/danmartell Dan Martell

      100% … also it’s more fun. For me it’s not about the returns (as a first principle) its about having fun… and if I can’t be helpful then I’m not having fun.

      DM

  • Chris Pyper

    Great Article.

    I have also been thinking about a haircut uber for a long time myself too. My good friends have a lot of awards in the hair industry, own salons, and have a lot of remote experience(film, tv, fashion shows, etc.) and I am a software dev with start-up experience and too much hair knowledge from hanging out with them. Maybe it is time I put 2 and 2 together 🙂

    Just out of curiosity to anyone reading this, what would you think a fair price for a men’s haircut delivered to you would be? Ladies, what would you pay for a similiar service with light trim and blow-out(no shampoo/cond/dye/treatment because of logistics). Would you be willing to pay more if demand(Fri/Sat night, convention in town, etc.) went up?

    • http://twitter.com/danmartell Dan Martell

      I’d pay up to $50-60 per haircut if I didn’t have to leave my house.

      DM

  • http://startupnorth.ca Jevon

    Check out http://gopriv.com/ next time you are in NY. Haircuts wherever and whenever you need them! (I can intro you to the founder)

    • http://twitter.com/danmartell Dan Martell

      I had the founder reach out / thanks.

  • Gregg

    Shit had no idea you were an angel investor. You were the guy that picked up the phone when I called Clarity. That says enough…

    Best,

    Gregg M. Kennelly

    PS check it out https://m.youtube.com/watch?v=weDXvvaWgRI&autoplay=1

    • http://twitter.com/danmartell Dan Martell

      As a product guy doing support calls is how I learn about our customers 🙂

      DM

  • Dian Xiao

    I have seen a mobile vehicle called Onsite Haircuts. Seems targeted at an entire workplace.

    http://www.onsitehaircuts.com

    • http://twitter.com/danmartell Dan Martell

      Cool. Never heard of them.

      Will check em’ out.

      Thx Dian.

      DM

  • http://twitter.com/joecardillo Joe Cardillo

    I really like that last part, I think it emphasizes the give before you get thing that Brad Feld and others have talked about. Curious, for the referrals have you written on using that approach for other things? Or any favorite reads on how other people do it? Watched webinar a couple weeks ago and been thinking about it since.

    • http://twitter.com/danmartell Dan Martell

      I haven’t written about it or read anyone who’s broken it down with to much specificity… but may do so in the future.

      When I work with founders I actually share my email templates with them.. but way to detailed for a blog post 🙂

      • http://twitter.com/joecardillo Joe Cardillo

        Ah, ok cool. I’ll keep an eye out…I was curious about how you get referrals to journos, so your post the other day partly answered approach anyway. Thank you sir!

  • http://kaigradert.com/ Kai Gradert

    Very solid advice.

    • http://twitter.com/danmartell Dan Martell

      Thanks Kai!

  • david peguero

    Awesome read Dan! thank you very much for sharing your thoughts and experiences, could you come to our city and teach that to our investors???? 😛 , have a good week!

    • http://twitter.com/danmartell Dan Martell

      You could always run Facebook ads to this post or the video to only investors in your city / that would solve that 🙂

      • david peguero

        I did not think of that hehe, thanks! I will do that for sure and maybe we can have you here for a conference or so one day 😉 Thanks man!

  • Jeremy Howat

    A great post, I would like to ask if someone could share some advice.
    I want to start up my own company online, but I only know how to run the business side of it. Can someone recommend a way to find people to do my website, accounts, SEO?

    • http://twitter.com/danmartell Dan Martell

      I would recommend learning it yourself. Everything you need is on YouTube, Udemy (disclosure: I’m an investor) or on Google.

      Marketing is a critical role for entrepreneurs.

      Best to invest the time to learn it.

      • Jeremy Howat

        Yeah, I guess it would be best to start off knowing as much as possible. Is there a way to get some sort of a crash course into running all aspects of a start-up?

        • http://twitter.com/danmartell Dan Martell

          That’s like asking if you can learn to surf by reading books.

          There is no crash course outside of doing it.

          DM

    • David DeSantis

      Jeremy,
      Learning all the facets of your business is invaluable. Down the road, you don’t want to have any blind components that you don’t have some basic knowledge of, and have it entrusted to someone else. You’d be putting the person into a potentially power position, because of your lack of knowledge of that department. There’s ton’s of education content online about every part of your business. Put the time in to learn it, and you’ll be thankful down the road when it’s time to hire someone to do that position.

  • Joe Vosters

    Great post- does it make a difference if the product can change people’s lives? Have an interesting challenge with my “Friendly Beds”- getting the product known to the elderly/disabled that need them.

    • http://twitter.com/danmartell Dan Martell

      It’s one of 100 things that matter… the more of the 100 that you have, the higher the likely hood you’ll raise money and in less time.

      That’s the way I think about the various things you need to get right to raise. It doesn’t guarantee anything, just makes it easier/better.

      DM

  • David DeSantis

    Wow, great stuff Dan, and very timely for me. I checked out the blog, “Don’t want to meet you”, also great timing as this is my first time seeking outside investment. I was able to reach out to my connections, and receive an introduction. I have a phone call scheduled the beginning of next month with the CEO of a company that went public last year. My objective is to have an introduction to one of the VC companies he used, however with his company being in similar space and his experience. I’m really seeking his guidance and advice, again I’ve never done this before in securing funding. Who knows, maybe he’s interested in his business having some involvement? Either way, again, the timing of your blog couldn’t be better for me. This blog, and the other I referred to provided me with some clarity going into this phone call. Thank you for sharing your knowledge and experience.

    • http://twitter.com/danmartell Dan Martell

      David, be sure to watch this replay … it’s a framework I created to help entrepreneurs raise venture money.
      http://lp.danmartell.com/fundraising

      All the best.

      DM

      • David DeSantis

        Thank You Dan, I took a lot of notes, and it was exactly what I was looking for to learn, especially going into this phone call. Been watching the YouTube videos of your presentation/advice. Just finishing the Toronto MARS presentation. Awesome story about your brother’s business. I’m wondering if you have any content on what happens after you’ve negotiated an investment? A couple months ago, I went to speak to a SBA counselor about it, and when I asked him. His response was that what I’m asking is an entire college course. He admitted that he’s never counseled an Internet based business before. Shows like Shark Tank, and Dragon’s Den make it all sound simple and easy, however I’m wondering more specifically what happens after the deal is made? Again, thank you for your content, and time.

  • Douglas Kelly

    Numbers 1, 2, and 3; especially number 3: “If I’ve never felt the problem, then I’m not emotionally connected to the solution and therefore I am not emotionally connected to the startup. ” is the reason start-ups cannot use a bank for capital. Banks have no understanding of business, and don’t seem to care to learn. It’s impossible to build an emotional relationship with these people. Of course, later when everything is going well, and profit margins are shown, then they want all the business they can get. They operate in a different paradigm.

    • http://twitter.com/danmartell Dan Martell

      Banks don’t take risk. It’s not in their business model to do so.

      That being said, many companies have been started using lines of credits opened while gainfully employed and credit card debt.

      It’s just a different type of risk capital.

      Important to know when & how to raise money imho.

      All money can be good if used properly.

      DM

      • Douglas Kelly

        You’re right, Thanks for the answer. I’ve found capital in many other places, including credit cards for the short term, lately due to their high interest rates.

        My experience with banks for the last forty years of being in business is to stay away from them for anything but short term cash flow needs where one must collateralize one’s A/R.. But for the most part, I’ve never met a banker who could make it on the street in any other business. They just don’t seem to get it.

  • Colin McAllister

    Thanks for the authentic ‘mentoring’ session – it is valuable – I appreciate the piece on ‘connecting’ with entrepreneur. As a new investor I am taking quite a bit from what you have shared .. specifically about connection to the business.

    Fortunately my neighbor cuts men’s hair – $20 – it’s a steal 🙂

    • http://twitter.com/danmartell Dan Martell

      Jealous. 🙂

  • Vika Kanar

    Thanks Dan, this is very much to the point. I’m just puzzled about the “don’t cold-contact” approach, which can been especially tricky if you don’t sit in the valley or another similar hub and know the same people. Are investors really such outstanding species, which need special treatment?

    • http://twitter.com/danmartell Dan Martell

      It’s not that investors are outstanding species – which says so much about your own psychology and your challenges in life – it’s just that they’re inundated with a 10+ opportunities a day to invest and will only make 1 out of 300 they look at per month.

      So if you want to stand out, cold emailing isn’t the way to do that.

      DM

      • Vika

        fair enough – but will you even recommend to reach out to such investors overwhelmed with potential opportunities. My point is to try fair game on both sides – even you decided to update your post, asking not to be contacted right now. That’s a clear and helpful message, which I hope most entrepreneurs will follow

        • http://twitter.com/danmartell Dan Martell

          I never said they didn’t want to hear from you – I said they want to be introduced to you.

          Requires a bit more work but it’s the right approach.

          Exactly what I wrote above… I only look at deals that come from my personal network.

          DM

          • Vika

            Thanks Dan – we’d be thrilled to host you in Israel sometime soon..

  • http://www.joshuamaher.com/ Josh Maher

    Great post, many of your thoughts align with many of the thoughts I’ve collected from other angel investors for my book profiling angels. Sounds like you are very much an investor in the idea/team vs. economics of the deal. I’ve found there seems to be a line between investors who focus on the idea and the people executing the idea and investors who focus on the business economics and the people responsible for those economics.

    Would be great to chat more about how you think about those ideas and manage risks and an ever-changing world.

  • climineda

    Awesome video that will be helpful for me because i want to be a good investor . Thank you

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