What is your startup investment formula?
A lot of venture funds try to optimize for returns. They run complex ratio economic models to determine what their diluted value will be at the end of the life cycle of the optimal and non-optimal case of every given company.
I don't do that. I just try to fund the best and brightest.
I love working with the smartest and brightest people in the world on some of the hardest challenges. And oftentimes I make a return as a result of that. I weigh investments based on return and happiness.
The primary litmus I put on any investment is on behalf of my LPs. Will the capital have a potential of 6-10x returns in 5, 8, 10 years? If not, it's not going to be worth our time and money. But it's not the only factor. If we're happy doing the work that we're doing on behalf of this company and relatively confident that we can return for our LPs, it's an investment worth making. It seems counterintuitive, but it actually works - our first fund is showing 8-9x returns.
I've had the experience where I've lost all my money. But more often than not, I've had the other experience.
Know what you don't know
It's really easy to box yourself out of really great companies by having mathematical guard rails that don't necessarily hold up over time. At the time of investment, it can be difficult to anticipate the future products that end up being the largest revenue drivers.
If you had the insight to know that the value that they were returning to customers was great enough that eventually they would find a way to monetize it, you would have invested in Facebook.
But if you're operating on a purely mathematical model, you might not have been able to do that. I remember sitting down with one of my mentors around eight years ago.
He listed ten companies on a white board and said "rank for me from top to bottom which company you think is the most valuable. Now rank for me from top to bottom which company has the most revenue." I had a mix of ones, fives and sevens; whether I thought they were going up or down the list on both sides.
