After three years of experience in this type of investment, I made a list of criteria to use. Venture capital is must be flexible by nature, so the criteria are broad, but there are some components that must be present:
- Simplicity: Straightforward, valuable product.
- Consistent Action: People are doing hard work necessary to make the product with consistency and discipline.
- Frugality: Money is utilized exclusively toward value creation.
- Moral: Does overall good for the world. Not morally opposed to the product / company.
- Communication and Reporting = teamwork, team building. A business is its systems and people working together effectively. Communication is critical to developing a business.
- Common stock only. One and only one type of stock means everybody is on the same team. Companies are complex enough without having multiple types of equity. One type of stock streamlines the decision-making process. If “preferred shares” are introduced, there should be a good reason and the terms need to be understood by all stockholders.
- Investor must use money he can afford to lose.
- As investor, should meet the other investors, and at least one of them should be a successful institutional investor that has significant clout.
- What is the end-game? How are you going to get paid one day?