Dear SaaStr: What are some common mistakes that investors make when evaluating potential startup investments (such as Seed or Series A)?

 A few I’ve made and watched others around me make:

  • Investing in a startup with good traction with a pretty good but not great CEO.  Or CTO. A so-so CEO with good traction usually … ends up not scaling to something all that big.  The market changes, competition changes, etc., and the good-but-not-great CEO can’t keep up.  And that good growth slows to … not so good growth.  I’ve only made one investment where this didn’t happen, and the startup had incredible product-market fit … and still ended up going through 4 CEOs.  See also, a not great CTO.  Sometimes, they can build a 1.0 that does something differentiated.  But as the market gets more crowded, the demands more intense, the product more nuanced … a Not Great CTO usually can’t keep up.
  • Investing when you aren’t sure but someone else really successful is investing. You gotta do your own homework.
  • Investing when it’s something you don’t quite know. I haven’t been that successful in investing outside of SaaS, even in founders I knew were good. Others can make this work, but not me.
  • Investing when growth is strong but the burn rate is too high. Yes, a large VC fund can make this work sometimes, but for me, if the burn rate is too high, I find they tend to run out of money as they scale to $5m-$10m ARR.

  • Investing when the CEO wasn’t super, super hungry to build something huge. If the founders aren’t 100% all-in, just pass.
  • Investing when there is founder disalignment or conflict. It can be hard to see as an investor at first, but if it’s there, it’s just so much harder to build something big.
  • Investing when you aren’t sure. If you don’t really, really, really want to do the deal … don’t do it.
  • Investing in mediocre growth.  Sometimes, you love the founders and want to believe time will make the startup grow faster.  It just doesn’t usually work that way, unfortunately.  Everyone has a tough quarter, even a Year of Hell.  But in the early days, if growth is mediocre from the beginning … it usually stays mediocre.
  • Investing in pseudo-SaaS.  Things that seem to have recurring revenue, but aren’t truly SaaS.  It’s just not me.  I have a much harder time picking early here.
  • Investing when the CEO was a bit of a bullsh*t artist, and/or when you know more about some of the space than the founder does.  I know this can work out sometimes, but it hasn’t for me.
  • Not investing just because it seems a bit expensive. It won’t matter if it’s huge.
  • Not investing when the early idea isn’t quite perfect. The best founders will iterate.

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