When I first got started in angel investing, I made a lot of deals based on my gut alone.

Gut instincts are important. Sometimes, they even work.

But angel investing isn’t a craps shoot. The more investments I’ve made, the more I’ve realized that strategy is just as important as intuition.

Some of those early leaps of faith did turn out to be winners – but switching to a more logic-based system has greatly benefited my bottom line.

Now, I only invest in and recommend startups that meet every one of my criteria. I’m not here to throw money away – and neither are you.

I hear pitches from a lot of people. Now that you’ve started, it won’t be long before you know what I’m talking about. There is no shortage of ideas out there – in fact, more than 100 million startups are launched worldwide each year.

That’s about 3 new businesses per second! It can be overwhelming, especially when every founder is maxed out on passion. Here are some of the ways that I narrow down my search.

1) My cardinal rule is probably the simplest: I only invest in startups with a big Total Addressable Market (TAM).

Think about it.

Say you’re looking at a moonshot startup producing Widget ABC. It’s a niche product that only addresses a small market, but it does big things for that market. Maybe it’s the first of its kind and solves a huge problem.

So, a groundbreaking device in, say a, $100 million market.

And because this widget dominates, it takes 100% of that market.

So, $100 million in the bank for this small startup. Not too shabby.

Now consider if the TAM is really big – hundreds of billions of dollars – like the e-commerce market, which is projected to hit $735 billion in just a few years.

Odds are small that a tiny startup will dominate that massive market overnight.

But, say they solve a small problem in that market. Like software that identifies and removes fake product reviews.

In solving that small problem, our startup has now harnessed a tiny 1% of the market.

Well, a small piece of a huge market is still a huge piece.

Because 1% of that massive market means $7,350,000,000 straight into our startup’s bottom line.

2) Another thing I like to see is revenue in the bank.

As I see it, there’s no good reason that companies shouldn’t have some kind of revenue by the time they go seeking investors.

A business that hasn’t made any money yet is basically a shot in the dark. How can you possibly determine the company’s growth rate, valuation, or profitability without a single measurable transaction?

I don’t care if it’s $500 or $50,000 – revenue in the bank tells me that there are customers out there willing to pay for the product. And there is a huge difference between being willing to use a product, and being willing to purchase it.

If a startup hasn’t managed to pull in a single cent, why should I believe that customers will flock to it later?

Here’s the thing about the modern marketplace: it’s pretty crowded. Customers have more options than ever before when it comes to choosing products and services.

These days, it’s not so much about deciding whether you want to spend money – it’s deciding what product to spend it on today. Which means competition for each dollar in the consumer wallet is fierce.

3) That’s why I look for startups that solve a specific problem.

In Silicon Valley, you’ll hear people refer to startups as candy, vitamins, or painkillers.

Candy is just for fun – nobody needs candy, but we all buy it every so often. We get some momentary pleasure out of candy, but it doesn’t make it into the weekly meal plan. Smartphone games are good examples of candy.

Vitamins go one step further. They improve peoples’ lives, but it’s still pretty subtle. Taking your vitamins might make you feel a little better in the long run, but you don’t wake up craving them. Grocery delivery services and instant messengers are a bit like vitamins.

A painkiller, though, is something you suffer without. Uber is a painkiller, because life without it means paying twice as much to ride in a smelly, outdated cab.

Painkillers solve urgent problems… and good ones keep people hooked for life.

When I first started building websites, it drove me crazy that there was no good way to track how visitors interacted with my pages. That was an acute pain for me, and it led me to co-found Crazy Egg.

As it turned out, Crazy Egg was a painkiller for a lot of people, and it’s done very well as a result.

A product that solves a real problem is generally on a path to success. Even better if customers find they can’t live without it. Creating a painkiller is a guarantee of sustained revenue growth.

Speaking of growth, let’s talk about scalability.

4) My ideal investment prospect is a product that can scale without taking on proportionate expenses.

Let me explain.

Say that you run a tutoring company. You’re using a proprietary method that is super successful. Customer referrals are through the roof, and you have the opportunity to expand.

That sounds great… at first. The problem is that, for every new set of customers you take on, you’ll need to hire more tutors. Your profit margin never really grows. Yes, you’re making more money, but not at a faster rate.

Now consider a subscription box service, like BarkBox. For a flat rate, you mail out a monthly box filled with treats and toys to dog owners. This is a highly automated service; most of it takes place in a factory or warehouse.

When you go from 10 to 1,000 subscribers, you won’t need a hundred times the staff to fulfill orders. Sure, some expenses will go up – you’ll be spending more on dog treats and toys – but the factory can handle a higher level of output without needing many upgrades. That’s a business model that scales well.

My last rule is one that I’m a little more lenient about than the others.

Bonus: I like to invest in businesses that I understand. I haven’t always stuck to this rule, but when I do, I tend to get better returns.

That’s because it’s easier for me to spot a good idea in a landscape I recognize. I’m much better equipped to know what will work in the tech world than, say, the food and beverage industry.

As a bonus, I can lend my own experience to the project and help guide founders towards good business decisions. Sure, the founders may not take my advice, but it never hurts to give it.

Remember that this isn’t like investing in the stock market or a mutual fund. You’re not just dumping cash into a machine you have no control over, hoping that more cash comes out at the end. Startup growth is a highly dynamic process that you, as an investor, have some power to influence. Use your standing to steer the ship towards success.

Aside from the big rules, never skimp on due diligence. It’s a good idea to research any regulations, competitors, or industry trends that could help or hurt a startup’s success.

Of course, the entrepreneurial team is key – after all, they’re the ones responsible for executing their vision profitably. Next, we’ll get into the surefire ways to identify founders who have what it takes.

Until next time,

Neil Patel


Comments

55 responses to “Your Four Deal-Making Dogmas”

  1. I am looking for a investor, partner or a investor that will invest $5000.
    and possible another $5000. working capital to start a air BNB busines in Calgary and expand with more properties and other properties in mind.
    This could be a one time investment and expect the property to generate a profit by the 2nd month.
    My education in the business will come from a successful air BNB person.

  2. This is new to me I don’t know what their all to know about stock market, I never had.and lot try reading. You can’t learn this in a day. Its take s yrs, to know what all Oops alot,ttttt,, reading.. know what doing. And what involves,

  3. Your information is fairly common sense. I appreciate that fact. But lets talk real stuff. People that know the things your talking about want tips. They know which sectors, and what to look for but Tips are the whole Market. Do we get good info on companies in the sectors we like?. We can look at revenue and growth patterns?. But what about news that the wealthy people get? Why do they have news well ahead of the average trader? Id like a few tips. Hmm this company may be bought out by so, and so or this company is in good shape to merge etc.. Splits coming over here. reverse splits good news bad news. Money can be made by buying stocks or selling stocks one never owned. Those are tips and only 2. Do you have any way to get news on for stocks in certain growing sectors? I would like news like I got toward the end of the 90s when the internet was new. I worked with a company that sent out daily letters just full of news. The first thing the man that owned the letter did was teach traders or investors valuations. And he used Diamonds to do that (Investment grade compared to Jewelry). I have never looked at stones the same nor my wife. as if its worthless why use it for Jewelry? its big business filler fodder so they can buy the investment grade stuff and put it away to sell at later date when Values are up. That is the type news letter I’m looking for. Show me your pics and put out news. Ill pay the 100. bucks a month for good news. (thats just a figure) and growing stocks. Or falling stock information also info on hedge funds. teach people how to buy or sell the market in whole. But for those of us that understand a good amount I would like a great letter daily or even weekly. I chose you to write this message to because well it isnt like the ones that advertise daily are going to change. Cannabis Investor You know and the foolish company who BTW are not to bad but news is limited. So is price though. They just dont do what I’m looking for. Can you guide me to a source or are you a good source. Thank you

  4. This is all very new to me. But i would like to learn anything that is going to improve my and my family life .

  5. Most Investor Advisors tell about the people or organizations they have worked for. After a big percent of your time is consumed, They tell about investments in the past that have brought great returns. Everytime I read and investor’s report, I see at least 10 examples of great investments. The problem, I have seen the same examples in previous investors reports. This whole investers reports syndrome gets quite boring and I find myself scanning past their BS to see what they are recommending. It usually ends with a propisition to buy one of their programs. When You buy, they hit you with another proposition to get it cheaper. Then they hit you with an unbelieveable proposition that will cost you a whole lot more money than the original proposition. I hope a lot of people get a chance to read this!!!!!!!!!!!!!

    • Yes, that’s what you learn when you are selling products that you have made and promoting. Always give a little taste and have them wanting more and afraid if you don’t purchase that you will miss out on getting all of the benefits of the offer.

  6. I was under the impression that you were going to supply a list of companies to invest in. I have done all the reading here from every email you sent me. But have not found one investment to even think about. I realize that I am an elderly disabled lady who as never invested, and I want to start very small and learn before I bet the farm so to speak. So could you please keep your part of the bargain for my few invested dollars and show me where you have the investments for startups listed. I need to start somewhere. I do not have the ability to drive and attend summits etc. Just me and your web site are all I will be able to do. Thank you so much.

  7. i am standing behind the words of Betty and Daniel.
    we get too much talk and “Bla Bla ”
    i was expecting to get a few good leads to investments and if this is not going to gappen i will be sorry to leave you to go your way.
    your offer to extend my commitment to 2 years or life time / VIP has first to be backed with some real leads that prove you can help us make some money!!
    thanks

    Rafi

  8. I do appreciate yiur four Dogmas assessments because they increased the opportunity of my selection choosing the better start up. This is why- The 4 Instruction Information. Now I know I must be ahead of the news and abreast of the time, gain a lot of knowledge of current events in the business world and local. Next, talk to people who know or listen other people’s ideas and conversations at work or functions, malls, trains and buses how the talk about products they have, how would like to make it better. When you understand a certain business it is easier to connect the dots while you evaluate it. People who do good business always have money. The target their customers with what the need, a must sell product and keep their liabilities low. So company, area of business, money the have, be a step ahead, satisfy a need and incur the less expenses.

  9. I would like more on what to invest and how and who your money goes to with out paying up front or behind charges .

  10. As a 76 year old looking for some excitement for my $50 I must agree with Betty and Co.. I have been lectured on what to do, when I have found “it”, but not an ounce of info on where to find “it”.
    From the comments above , the gloss is already coming off this sales pitch?
    Perhaps I can do a startup! An investment web site that offers a list of possible targets every month for a few bucks. Anyone want to fund me?.

    • I was also under impression there would be more info on more than just a couple startups…and doesnt even seem like you guys invest in ther ones you show is necessarily. I could find this info given so far free off other websites and just common sense. I signed up for lifetime..so I’m in for long haul but now that ive found where to find start ups it makes this “membership” seem pretty foolish. Kinda bummed.

  11. I have to agree with what most of your subscribers are asking. Where’s the beef?So far a lot of hype but no substance. Are you just selling memberships?If you had been upfront about the three tier membership levels most of us would not have joined. Don’t be another disappointment for us.

  12. Also. You and Robert talk about including the common small investor in on pre-ipo information and then turn right around to sell privillaged memberships. Isn’t that what you were against? I can’t help but feel we have been had!

  13. I agree with Peter C. and what all the above subscribers are saying. I feel we’ve been scammed. I keep reading and reading and reading, but get NO usable investment information. All hype, no substance. It DOES appear to me that you are “just selling memberships” (Elite & VIP). Agree with Peter C. again, “if you’d have been up front about the three (3) tier membership levels in the beginning, I know I and most everyone else would NOT have joined”. This is a scam to put “money in your pockets” and we benefit from nothing. I asked a question earlier regarding “liability” and “liability insurance” and have NEVER seen an answer. Where is the pre-IPO information we were promised and where is the new startups list we were promised? Oh, I guess you have to “buy a $ 500 Elite Membership or a $ 1300 VIP membership” to get that information. Oh well, disappointment you are and I’ll be gone by Monday, 07/15. Bye-Bye

  14. Hello Everyone,

    I found out you have to open an account here to see some of the startup companies, check it out.
    They should tell this to people when they sign up, so they know where to start.

    https://republic.co/

    I signed up, it is free and already invested in 2 startups, one was for $ 60 and one was for $ 50 ~ I did a lot of research on them, they both look good to me. Please let me know if you need any more information about them.
    They should tell this to people when they sign up, so they know where to start.
    I found out by accident somehow, so here it is, hopefully, it will help some of you.

    Julianna

  15. Where is the beef. I think I need to cancel my subscription. I don’t want to invest in someone starting a personal air bnb. I thought we were going to be presented with real deals. So far, you’ve just waisted a bunch of my time.

    • Hi Steve,
      Here at The Startup Investor, we focus more on strategy and education. Think of it as a starter course to help guide you through the basics of angel investing.
      All the actual deals are posted on our network website, angelsandentrepreneurs.com. Neil has presented a number of investment options to subscribers on that website, and more deals are coming soon.
      Best,
      Blair S.
      The Startup Investor

  16. I have to agree with my peers. I am somewhat disappointed. I don’t like the bait and switch tactic. You seemed so sincere. I read and read and read some more in hopes that I finally get some information I thought I paid for. Where is the info promised in the early stages of this journey. Put your money where your mouth is….so I can make some money where your mouth is!

    • Hi Karen,
      Here at The Startup Investor, we focus more on strategy and education. Think of it as a starter course to help guide you through the basics of angel investing.
      All the actual deals are posted on our network website, angelsandentrepreneurs.com. Neil has presented a number of investment options to subscribers on that website, and more deals are coming soon.
      Best,
      Blair S.
      The Startup Investor

  17. I find Neil’s tips and strategies insightful and appreciate that he is sharing his experiences to help me hedge against some mistakes that he has made and maybe avoid others all together. I will be cautious getting in and hopefully pick a few good ones to go with the ones that don’t work out so well . I get it, I’m going to bump my head.
    Good luck to everyone🤓

  18. Im a little taking back by the up grades,typical marketing 101 ip sale. Hell I,d invest in The Start-up Investor. But the information is good and weve hot 60 days to b check it out.

  19. I do thank Neil for giving us the incites but as a novice, I have no clue how or where to sign up if I believe in one of those deals. Shouldn’t someone at least give us an idea where to go to indicate an interest?

  20. This is very new to me. I’m looking to make a better life for my grandkids. My husband will never do this, so I’m taking some small steps and hope I don’t trip along the way.

  21. Everybody has to be patient. Neil is really teaching us not to make the mistakes he has made , which will save us money in the long run ( by investing in the right place ) .Please don’t think this is get rich quick plan. You could put $100 in today and not see any results for 1-2 -3 or more years . These Startups have to grow to give us profits . There is a lot to learn (suck it up ) This is not a scam–Hang in there —invester just like you .

  22. I totally agree. I’m new at this as well. I just invested in CHRGR And Mealthy and I believe that they will do well. I’m following your advice and will be buying some stock in GSVC and HTGC within the next few days. I appreciate his insight and wisdom on Angle Investing. Looking forward in learning more.

  23. Neil do you know anything about the 5G technology and will we be able to invest in this opportunity through A&E and also with pot stock investments

  24. I just joined and am completely lost. Of all the comments only one person seems to have invested in two companies. How? I need more active information. I can do due diligence, but on what, and what is the next steps?

  25. I beleive we need to be patiant. Learn how not to make mistakes, and find the right places to invest. I am as new as it gets to investing. I joined Angels because i finaly found names i think i can trust. Neil and Robert!! Alot of bashing going on, when i beleive we should be sucking up the tried and true strategies. Im going to learn all i can and take baby steps. Hopfuly this approach will pay off. Patiants. Patiants!! Thanks A & G for providing a platform to learn and eventualy earn!!

  26. I am interested in the impending 5G implosion as well as pre IPO in the emerging marijuana markets. Domestic or International.

  27. Everyone is complaining about no “beef” but did you actually log in to the website? Did you see the deals that are offered there?
    https://angelsandentrepreneurs.com
    Sign up to this site and click the “deal flow”.
    Each deal has a full explanation on what it is and how to invest in it.
    I’ve invested in 3 companies now and I’m excited to learn more (and see where my investments will go).
    Hope this helps

  28. I’m very new to all of this and have very little money to invest. I think this entire program from what I’ve seen and read is nothing but a scam. I have yet to see you show any company that you “think” might be a good investment for an old man with limited money to invest in. You only want people to send you more money to upgrade to another level. If it hadn’t been for Robert I would never falled for this scam. Shame on you.

  29. Looking at all the comments here, I’m wondering if the folks that are complaining have even signed up for a membership and have log in information. Also, if you are looking to make fast money, this is probably not for you. I signed up last week and am taking my time, reading through everything and listening to different video recordings. The Facebook group also seems very active and engaging and people are investing and starting hubs in their communities. I truly believe your mindset is the first step, you get out of it what you are willing to put in in research and due diligence as well as a more positive mindset. It should be fun, not stressful. At the very least if it doesn’t work the way you’d hope, you can cancel and you haven’t lost a lot. I think instant gratification and wanting easy answers is a part of the negativity here.

  30. I’ve been reading all of your comments and I see both sides of peoples issues. I’ve been scammed so many times over the years by different things myself but knowing Robert and Neil (trusted names in investing) are behind this relieves my mind that this certainly is no scam. Granted I was skeptical but like they said do your due diligence. Read read read. What you don’t understand take to someone who does or a lawyer. It’s taken me a week to dig into just one company. And I’m still not done asking questions of them. This is not a overnight money making scheme. So be patient. Investing Is like driving cross country. It takes awhile to get there, there will be bumps along the way and the car may break down and you may never make it. But that’s the risk you take. But if you’re patient, go slowly and pay attention to what you’re doing there’s a good chance you’ll get there eventually. Just don’t expect overnight results

  31. HI: I have an area wehre there is pain and I truly believe I can solve it and have the knowledge and team to do it. The pain is in electric automotive batteries. It is that they are not fully safe and that they don’t give a cost effective mileage distance between recharges or cost per kWh which $175 and needs to be $125. I am an accomplished polymer formulating chemist with 56 years of experience with access to one of the best polymer mixing operations in America now owned by Daikin Chemical to whom I sold it to in 2005. The answer to the pain is solid-state polymer electrolytes which I conceptually know how to make. I am looking for advice on how to get $1.5 million in financiing so I can go forward with the process of accomplishing this. I know the requirements and I know who the customers are and have experience in successful start-ups. Dick Mastromatteo

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