I was reading The Checklist Manifesto by Atul Gawande which shows the efficacy of checklists in complex situations. It resonated with me, because Jose & I use a checklist as part of our angel investing strategy. The checklist does not lead to an invest / don’t invest answer, but it helps us make sure we cover all the bases and keeps us grounded. It’s especially useful when we encounter very eloquent founders or products we love, which tempt us to be less disciplined.
I alluded to the checklist in my last angel investing blog post, And then there were a 100…, but here it is more explicitly:
- Is the product live?
- Are the unit economics attractive?
- Do we like the market?
- Do we like the team?
- Do we like the deal terms?
The thinking behind the heuristics
You might argue that as early stage seed investors we should be willing to invest in pre-product companies. However, it’s so inexpensive and easy to launch a site these days, that if someone can’t get the site out of the door with $50-100k of love money, it speaks negatively of their ability to execute leanly and convince others to join them. It also makes us question their ability to raise money if they can’t even get love money from fools, friends and family.
With regards to unit economics, we don’t expect the business to be large and successful. They would not need angel money otherwise. $10k / month in revenues are enough. We don’t expect the business to cover its fixed costs, but we want to make sure the business is profitable on a unit economic level. We typically invest in a company if the net contribution margin per customer over a 12 month period is 2x greater than the customer acquisition cost. We also want to see that the customer acquisition channel can scale. For instance we want to see that there is enough volume in the keywords the company buys such that it can increase its marketing budget from $1k / month to $30k / month without needing to increase the CPCs.
There are counter examples of massive businesses that did not have business models or unit economics for a long time and figured it out later when they got to scale. Google, Facebook and Twitter notably come to mind, Read More →