Founders must be all-in.
Never invest in a founder or founding team, unless every person is all-in with the venture. If anyone is “part-time” or consulting on the side, stay away. You must make sure that they’ve already taken risks – and believe – in the company. If they haven’t, they don’t trust their plan, and likewise, you shouldn’t trust putting your money in that team.
Play the people; read the players.
In poker, you win or lose by having meaningful information about your opponent. Gain an information advantage by taking notes, as I did, about a person’s habits, movements and even physical appearance. Using our startup investing formula, you should probe into every facet of your founders’ lives: their background, financial history, education and their work experience. After all, an LLC and Corporation (C-Corp) are both fictional entities backed by human beings, and you are, at its core, investing in people. So know your founders well before handing over a check.
The Law of Large Numbers is always true.
When you play poker for an extended time period rather than a quick session, you depend less on luck and utilize more skills (information gathering & reading opponents). Assuming the card deck is shuffled properly, you have the same probability of being dealt pocket Aces as anyone at the table. But you have to be able to “grind.”
Likewise, with startup investing, you’ll receive an equal amount of bad pitches from companies that stand zero chance of becoming billion-dollar company, aka, “The next Royal Flushes.” In order to mitigate your risk profile, you need to be more patient; say “No” to more startups and “Yes” to fewer hands. Venture Capital isn’t a get-rich quick industry. Startup investing is a long-term investment philosophy that requires your patience. But you can, and will succeed.
Raise or fold.
Never just call a bet. If you’re playing poker and someone bets before you, it’s imperative that you either raise or fold. Why? If you just call a bet, you won’t know if your hand is better, worse, or if that player is bluffing. Likewise, when investing in startups, you should be all-in or not in the hand. You cannot be perfunctory. Ask tough questions, follow our formula, and don’t do anything half-ass. Raise the stakes when you believe the startup is strong by investing more than the crowd, but walk away if the startup doesn’t meet all of our criteria.
Never play scared.
Never show up to the poker table with less than the minimum buy-in. If the minimum is a $1,000, bring that amount. I’ve seen way too many people lose their chips (money) at a poker table because they came with less than the minimum, played like scared little fish and made bad decisions. You must sit at that table like that shark ready to crush your opponents. Scared money never makes real money. In venture capital and startup investing, you should be able to lose on an investment and still be financially sound. If you start investing in startups without the requisite bank account, you won’t be willing to execute and make sound decisions.
The House always wins.
Invest in startups where they are the main supply chain, the wholesaler, and the indispensable source of a customer’s needs. If a startup relies on one distributor, is vulnerable to supply issues, or in the software world is “just another app” built on someone’s platform, you shouldn’t invest. Just like Standard Oil and Trust in the 19th century, you should invest in a startup that maintains control of every process and could eventually become the monopoly. The house always wins. Find the startups that want to be the house where every customer goes to eat.
Last position is best.
In poker, the last person to act has the information advantage at the table. This person can see what other bets have been made and can decide whether his or her cards are suitable to play. Example: someone’s holding pocket Aces ahead of you and decides to raise pre-flop. If you’re holding Kings, and re-raise the bettor, and then they instantly call you, there’s little doubt they are bluffing. Similarly, you want to look for startups that are entering industries later. The first mover advantage doesn’t equal success. If a startup is pitching you, but has not shown how their product sells relative to peers, you won’t have enough information to know whether it’ll be a roaring success or a disappointing flop. A company can still create something revolutionary that hasn’t been done before, but they must be able to point to competitors who are emulating them or give you sales numbers that justify need.