How To Invest In Startups


Like the S&P, Moody’s rating systems, or Morningstar formula for ranking public companies, we built our own proprietary, private market investing formula and ranking of the next billion dollar startups.  Until now, we have never released our proprietary formula; we’re sharing this for the first time because you deserve to know how venture capitalists think, and moreover, how you too can make money investing in the right startups.  We score every startup we meet on a scale from 0 to 100 using the following investment formula.  

** Over and above this scale, startups will be grouped by stage of development: 

·      Pre–revenue

·      Break–even

·      Profitable

I.   People 

a.     Integrity

b.    Organic net worth vs. age

c.     Wealthy family

d.    Education 

e.     Experience

f.      Credit & background checks 

II. Product 

a.     Is the product innovative and how established?

i.     Is the product an improvement on an existing solution?

ii.     Does the product provide a solution for a problem that people haven’t yet realized?

iii.     Is it a minimum viable product, where it still needs several iterations before it can be sold to the market?

iv.     Is it an established product in the market with a customer following?

b.    Bonus: Does the product reinvent the wheel and present something revolutionary?

c.     Adoption Rate & Traction: calculate the startup’s success against its future goals by using vanity metrics, units sold, or units sold at profit.

d.    Company vs. Total Addressable Market (TAM)

i.     What is the size of the total market for the product?

ii.     How much more can the total market grow?

 iii.     How much of the total market can the product take from competitors?

e.     Customer Base

i.     Concentration: what percentage of customers are businesses vs. consumers?

ii.     Do customers come back to purchase more products (LTV)?

f.      Economics of single sale

i.     What is the amount per unit sold? What are your acquisition costs?  What are your margins? 

g.    Perception/Hype Factor

 i.     Is the current hype around startup (e.g., press) proportionate, or is consensus missing something, for better or for worse? 

III. Execution/Timing

a.     Advertising ROI – How much are your customer acquisition costs through advertising?  How many of those consumers converted to paying customers?

b.    Efficiency of product distribution mechanism

 i.     How well have you managed your sales staff?

c.     Scalability of model

i.     How exhausted are possible sales channels?

ii.     Evidence of or potential for partnership opportunities.

d.    Three– to five–Year Plan/Roadmap

 i.     What does the growth trajectory look like?  How much funding is necessary to achieve that growth?

 ii.     How comfortable is management with a given exit plan (sale or IPO)?

e.     Stumbling blocks to date – Have there been any botched product launches or failed financing? 

IV. Financials

a.     Cash Flow

b.    Return on Invested Capital

 i.     Current monthly burn–rate versus sales

c.     Valuation

 i.     Pre–investment vs. post–money valuation 

d.    Capital structure composition and restrictions around future money, as relates to dilution

e.     Funding Sources to Dates and Needs

 i.     Founders and Friends/Family funding to date

ii.     How necessary is next raise

f.      Incremental Intellectual Property (IP) Value

Weight: Each item below will either enhance or detract from our weighting from the scale above, driving our overall adjusted score.

I.        Industry “Factor”: growth of overall industry

II.      Risk “Factor”

a.     Litigation around product

b.    Likelihood of patent infringement and years of ensuing litigation

c.     Competition

d.    Other  

* * *

There’s also another part of the decision making process above that’s not mentioned: it’s called your gut feeling or better known as “intuition.”  Whether you’re a card player, investor, doctor, lawyer, or any other profession, you often rely on your intuition in cases where things don’t add up quite right or you don’t have enough information to make an informed decision.   In fact, when you’re investing in startups, you won’t have the same publicly released information as you would investing in a company listed on the NASDAQ or NYSE; thus, you have to be more logical and patient in your investment strategy.   You need to use your intuition less often in startup investing before writing a check.  After all, for every startup success story you’ve heard where someone invested in a “billion dollar” idea because of a purported gut feeling, there are thousands more who lost their money because their gut was dead wrong. 

This is why the Angel Kings’ investment formula is important for startup investors and venture capitalists; it makes important decisions more reliant on facts than intuition.  Use as much of the formula as you can, ask the questions in the following chapters, but if there’s a missing piece that doesn’t add up to our 90 score… you’ve got to be willing to say “no.”  In the startup world, it’s about saying “no” more than saying “yes” that will lead you to higher returns on investment.     

As in law, your burden of proof for investing in startups is beyond a reasonable doubt.  And thus, our formula too is geared towards investing in companies that score a 90+ or more before we would ever say yes to invest.


·      Each of these four categories combine to make a 0 to 100 score. 

·      We invest when a startup reaches a total of 90+ points or more. 

·      Most startups (98.5%) that have pitched Angel Kings have scored 90 points or less.

Here’s a fact: the typical venture capital firm (VC firm) assumes it can beat you investing in startups and amass greater returns than you.   VC firms often return up to 25% per year annualized, often beating the average S&P investor by 10% to 20% or more per year.

Now, here’s a myth: the old boy networks of VC firms and private equity (“PE”) funds are running the show and preventing you from getting in on startups.    With platforms like and crowdfunding sites growing under the JOBS Act, you now have the ability to make smart, calculated investments in the next billion dollar startups.