Most investors will point to "the team" or "the market" when asked how they select a startup for investment. At best, they are ambiguous indicators. At worst, they're nothing more than truisms that serve to make the investors feel like they know what they're doing. The fact of the matter is that picking winners is extremely hard, especially when the companies are early.
There are three primary ways to invest in companies, including early stage startups:
1. On fundamentals. The investor has some overlapping expertise with the target market enabling them to detect warning signs, areas of opportunities and early growth indicators.
2. With speed. The investor recognizes that the earliest companies are hard to predict so she makes a large number of small investments, often in the $5K-$25K range.
3. Joining momentum. The investor may not want to deal with the hassle of filtering too many founding teams so they make the conscious decision to simply follow others.
There isn't a "best" strategy, but I believe that the most successful investors are honest with themselves: investment decision-making isn't a process that leads to a black/white-style decision. While most "no's" are easy to spot, the "yes" or "maybe" decisions are very hard to distinguish.
When I invest, I tend to focus on speed and momentum for the earliest companies. I believe that you can't invest on fundamentals until the company has 6-9 months (or more) of operating metrics under their belt.
If you're currently an investor in early stage companies, how do you make investment decisions?
If there are specific companies you'd like my opinion on, just send me the AngelList profile and I'll try my best to get back to you within a few days.