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Julian Shapiro
+ Your AuthorsArchive @Julian I deconstruct how things work—like storytelling and critical thinking—and share learnings along the way. Writing: Investing: Oct. 23, 2021 4 min read

If you're a founder raising venture capital, here's how I decide if I'll invest in your startup:

My investing process at a high level:

1. Check for required factors.

2. Check for optional factors that boost conviction. The more of these that exist to a higher degree, the more it pushes me toward a yes—and with a bigger check.

3. Decide yes/no.

4. Determine check size.

Let's start with the factors I require from a startup.

#1. A founder with the potential to be very formidable.

In a founder, I look for sparks of:

• Bias toward action
• Resourcefulness
• Insight
• EQ

1. Bias toward action

• When the correct answer is clear, they pursue it—and don’t needlessly defer.

• They premeditate decisions and come strategically prepared to gather information. Do they show up to calls with no agenda? Not a good sign.

2. Resourcefulness and ambition

• Has the founder's career trajectory showed proactive hustle?

• Example: Alex MacCaw left the UK at 17, joined Stripe, and became an O’Reilly author in order to hustle for a Green Card. Then he started a startup. (It's now worth $400M+.)

• They have a history that substantiates why they want to pursue this particular mission. Otherwise, they may give up early when a very low acquisition offer comes in or when times get tough.

3. Insight

• Clarity of thought. And clarity of communication.

• They enjoy thinking in frameworks and being strategic instead of winging decisions.

(Maybe ask founders for prior investor updates to assess how they communicate and prioritize key information.)

4. Are they good at the skills needed for making this idea succeed?

• If they’re B2C, they might need strong product and user experience sensibilities.

• If they’re B2B, they might need to hustle through sales. Or product-led growth.

(These are just examples.)

5. EQ

• They're likeable. You want to spend time with them.
• They’re adaptable and amenable to feedback.

By the way:

I'm not saying a founder needs to hit it out of the park on all of those factors.

I don’t get caught up in small problems. Founders grow over time.

Onto the next required factor for me to invest.

Factor #2: Growth potential

1. The startup has customer acquisition paths that are clear + believable; a scalable wedge for getting users.

2. A large, stable market or a nascent, fast-growing one that I expect to be large.

3. A path to a large return multiple within several years.

Required factor #3: Market dynamics

1. A market landscape that won’t crush them.

For example, if they’re a commodity play, e.g. Hims, they have a compounding advantage that lets them stay at the top.

I also think through whether a competitor is a line-extension away from doing what this startup does—without loss in fidelity of the experience.

Or, does this startup have enough unique product/culture/team DNA that others can't replicate it without merely being a weak copy?

Ultimately, I'm checking for (1) sufficient green flags and (2) zero big red flags.

But I don’t get caught up in small obstacles. You're often betting on the founders' adaptability.

Now onto the optional factors that boost conviction and my check size:

• They’re a second-time founder. This often means they have less patience for BS and make decisions more strategically to avoid wasting their time again.

• Their customers automatically become strong, vocal advocates.

• The path to $5B+ is as clear as the path to $1B.

• They’re tied to a disruptive change; as in, their idea is only recently possible.

• There’s significant traction—or a high-affinity audience of leads waiting to be tapped.

• Not too many unique hurdles need to be sequentially overcome for the idea to succeed.

• They’re building a platform. An ecosystem forms.

• They make money on a recurring (subscription) basis.

• They have a sustainable unfair advantage.

• They've been iterating at a rapid pace.

There are many more considerations, but I'll stop there.

Finally, I make a yes/no decision:

1. If the required factors are present and if this is in the top % of deals I’ve diligenced within the last 6 months, I’ll likely invest.

2. I size the check using an anchoring approach:

I ask myself, “To date, what are my best-ever deals?”

I’ll then ask:

“How much conviction do I have in this new deal relative to my conviction in my best deal at the time of investment?”

Do I have nearly as much conviction as I had in that best deal?

Then I’ll do up to my max size. The startup's return multiple potential factors in too.

Do I have much less conviction? I’ll go as low as my minimum. Or I won't invest at all.

2 notes:

• I may go above my anchored size if the startup has extensive traction.

• As time goes on, my ability to perform this process improves as I have more data points.

Throughout this entire process, a major principle guides me:

Reason by analogy, not only by data.

Monitor for signs of high NPS, fervent customer demand, and a pathway to owning part of a huge market. Even if there's little traction data.

This is an always-evolving process. I haven't covered everything in this thread. And I'm not suggesting this is the best approach. It's just mine.

These learnings come from me being as strategic and as self-reflective as I can while running my own startup fund.

You can invest in my fund here: 

I send my investors breakdowns like these once per quarter. I cover startup growth too.

This is the last thread I'll be writing on startup investing.

Now back to tweets on writing well and creativity 😂

You can follow @Julian.


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