How to invest in tech startups

Angel investors offer tips on how to make smart investments in new technology companies

Investing in startups can be like a game of roulette, says SYD Ventures founder Andrey Shirben.

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Smart startup investors do their due diligence and focus on team chemistry, according to Australian angel investors who spoke at AngelEd in Sydney.

Here are five tips they offered on how to make the right investments and protect against losses that are inevitable.

Do due diligence
“The more due diligence time you spend on something, generally the better returns,” said Blackbird Ventures managing director, Bill Bartee.

“It’s because you get to the know the people better, you get to know the opportunity better, the market better and you’re making a more informed decision.”

Doing at least 40 hours of due diligence on a deal on average yield six-times better returns, said Luke Carruthers, general partner of 25fifteen. Since most investors have day jobs, that can take two to three months, he said.

“The reality is, if you don’t do all that due diligence, you’re very, very likely to miss something.”

Focus on the people
“The biggest determinant of success in terms of execution is the team,” said Netus CEO Alison Deans. “If there’s one place where I spend the most [due diligence] up front, it’s all about the team.”

Having chemistry with the team is key, she added. “You’re going to be working five to seven years with these people.”

The startup team should have a passion and an “authentic connection” to what they’re planning to sell, said Bartee.

“They should have a really deep understanding of the industry and have experienced the problem themselves that they’re trying to solve.”

The team is the main reason that SYD Ventures founder Andrey Shirben chooses to invest in a startup about “99.9 per cent” of the time, Shirben said.

Invest where you have expertise
If you are an expert in a particular area, it pays to focus on investments in that area, said Bartee. “Try to stick to the areas you know really well, because then you can make an informed judgment.”

“If you’re not an expert ... then what you should do is syndicate or co-invest with experts.”

Having industry experience can lead to two-times better return, and having experience with startups is also valuable, said Carruthers.

“If you’ve got some expertise in doing startup stuff ... and in the vertical within which the startup is operating, then that’s the jackpot.”

Don’t worry about the valuation
The valuation of the startup is the “least important” part of the decision to make an investment, said Shirben. “None of the traditional methods work” for measuring value, he said.

“While it’s important, it’s not that important, at least in the real early stages,” said Bartee.

“Invest in the passion, the team [and] the vision. As long as the deal structure is within general normal parameters ... I wouldn’t worry about it.”

Don’t put all your eggs in one basket
“A portfolio approach is absolutely essential,” said Carruthers, adding that about two-thirds of investments are write offs in the end.

Bartee also noted the limited success rate for startup investments. “Many die, some survive and few thrive.”

Shirben compared investing in startups to betting on a roulette. Putting all of one’s money into a single startup is the quickest way to lose that money, he said.

“Spread it across at least 10 investments, maybe even 20, and that will be your best protection even if you don’t understand anything about any company you have invested in.”