Say No more than Yes

Hey there!
While preparing today's post, I had to continuously remind myself of a quote that my grandpa told me every time I asked for a new toy as a kid: "Sparsh, everything that glitters is not gold.”

New cool startups and technologies will try to seduce ambitious investors within us. That’s when you must depend on the “boring” basics to make rational decisions and remind yourself “Listen, everything that glitters is not gold” ⚱️⚜️👑

I asked ChatGPT to suggest an India-related subject line for my newsletter, and this is what it gave me. 😂

"From Accreditation to Exit: Angel Investing in India is Sabka Saath, Sabka Vikas!"

- ChatGPT

#IFKYK. I found this a little funny, a little tongue-in-cheek. Anyway, let’s carry on to the important stuff.

Be a No (and know) Person.

90% of startups fail, meaning a pro-investor should say No way more than Yes.

  • New investors are excited about taking action and seeing returns. This can be a highway to massive losses.

  • Take action - but, to build your expertise in an industry and learn as much as you can about the companies you are interested in.

Be a short-term pessimist, long-term optimist.

Common Investment Mistakes

  1. Putting all eggs in one basket.

    [Fix: Invest in 10 companies in the next 2 years]

  2. Too much allocation of your total portfolio in angel investing.

    [Fix: For beginners, keep your total allocation in angel investments less than 10%]

  3. Investing outside your competence. Investing in fads.

    [Fix: Repeat after me - everything that glitters is not gold]

If I had 8 hrs to chop down a tree, I would spend the first 6 sharpening my axe.

Have a Forte Syndicate

  1. Build your forte - your expertise in an industry and your ability to be extremely good at at least one key skill of an angel investor.

  2. Have instant access to experts, your “forte syndicate.” This is where the Rustic Flute community can be immensely valuable. We cannot be great at everything alone, but we can be great at everything together!

Focus on the founders and the team

When it comes to evaluating a business, there are many different factors to consider. However, the most crucial ones are the founders and the team. Here are a few things to asses:

Founders

  1. Skillset and perseverance to ruthlessly execute.

  2. Passion/Hunger.

  3. Past experience and references.

  4. Network.

Team

  1. Reaction to critical feedback.

  2. Willingness to pivot.

Moat, Monetization, Merit

Ask the following questions about the company you are assessing:

  1. Does the company have a clear moat?

  2. Is the path to monetization extremely clear?

  3. Will the business model stay relevant in the near term?

  4. What’s the founder’s goal - acquisition or IPO?

  5. Who might be interested in acquiring this company?

Valuation and Competitors

Valuation
  1. Understanding a company's valuation is one thing, but understanding how that valuation is calculated is a completely different game.

  2. Grasp the underlying math and evaluate how willing the founders are to share that information.

  3. Check if an independent entity has verified the valuation.

Competition
  1. Are there any successful competitors? This signifies market need. And allows you to assess if there’s a sufficient moat in the new startup.

  2. Are there any failed companies that had the same idea? This helps you assess if the idea was flawed or the execution. And see if the new startup has what it takes to succeed.

Take statistics as guidelines and not dogma. The lesson here is that there needs to be demand and accurate estimation of it. There can be rare exceptions (e.g. personal computers) where demand comes after the product. The art of investing is about having an eye for these differences.

- Sparsh

Alright! You made it till the end! Congratulations! This post was longer than what I want most of my posts to be, but it is important to cover the basics thoroughly. Hope you find it useful!

It would mean a lot if you could share this newsletter with your friends! The bigger the community, the more effective will be our “forte syndicate”

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