It’s probably on every venture capitalist’s bucket list to see him or herself on the Forbes’ Midas List, an annual ranking of the best VCs in high-tech and life science venture capital. Top VCs of 2016 include Chris Sacca of Twitter and Douglas Leone of FireEye; according to the list, these two entrepreneurs have a net worth of 1.21 billion and 2.8 billion, respectfully.
Sacca made early bets on Twitter and Uber before both companies became wildly successful. Leone, who has appeared on the Midas List eleven times, made early tech investments in LinkedIn and YouTube. So you’re probably wondering, how did they find and invest in the businesses that earned them their success today?
If you think you have what it takes to be a VC like Sacca or Leone, continue reading for tips to help you find a profitable business to invest in. Who knows? Maybe these tips will get you to the Midas Top 10.
Networking is a boon in all industries, and it’s no different for investors. You should always be on the lookout for opportunities to immerse yourself in the industry by connecting with other VCs. Join a professional organization such as the National Venture Capital Association (NVCA) and attend conferences such as the Southeast Venture Conference. This will give you a chance to talk with other professionals about their investing experiences.
Or become a mentor for SCORE, a nonprofit association dedicated to helping small businesses get off the ground through education and mentorship. Additionally, many communities have their own local business association chapters. You can network on a smaller scale by attending meetings and luncheons with your local business association chapter.
Utilize Your Rolodex
You’ve networked with professionals, and perhaps, early-stage entrepreneurs. It’s time to put your contacts to use. If there’s someone you deeply connected with, send them a message via LinkedIn or email to tell them how much you enjoyed your conversation. Ask for career advice if you networked with another VC. If you networked with someone from a start-up, this is your chance to get to know the individual and the company they work for. You may make an investment in their company down the road.
Over time, you will gradually make more connections with people involved in the business. When you’re ready to make an investment, ask your connections to see if they know of any small businesses seeking an investor.
Know the Signs of a Profitable Business
Research should be the foundation of your decision making. Besides networking and attending conferences, you should also subscribe to trade publications or newsletters to inform yourself on the industry. If you’re a member of the NVCA, you can subscribe to their daily SmartBrief newsletter. You can also subscribe to Entrepreneur.
In an article posted on Entrepreneur, Tim Ferriss, an angel investor, outlines a few rules of highly profitable companies. The following are questions to keep in mind while looking for a business that has potential:
- Is there a distribution plan, and is distribution limited to increase profit?
- Is the product safe?
- Are they targeting a niche market?
It’s Time to Get Serious
You’ve done your research and you have a few companies in mind that you would like to invest in. Set up interviews with potential business partners and ask questions including but not limited to the ones above. Additionally, ask them about their business plan and what makes them a credible and reliable business partner. If they have past experience and a clear plan, their business might be a good investment. But don’t forget about the most important thing in it for you – the profit. Ask about their plan to generate ROI and crunch the numbers to test its feasibility.
“The only sure way to avoid making mistakes is to have no new ideas.” – Albert Einstein
New ideas are the lifeblood of the investment industry. If there’s a new idea on the market and you believe in it, then go for it. If the business fails and you have a loss, that’s okay because everyone makes mistakes. It’s a proven statistic that nine out of 10 startups fail, so don’t think you’re the only one whose business did not succeed because you are far from alone. Use this time to re-evaluate yourself and your investments, then try again with a better arsenal of knowledge at your behest.
Learn When to Say No
It’s all part of the learning process. As mentioned above, keep a few things in mind when looking for a business to invest in. If there’s no distribution plan or clear business model, the product hasn’t been mass released or tested, or if the market is simply too large, the company is probably something you should pass on.
Continue to network, build relationships and research the field. It will be a cyclical process until you find a business that works for you – hopefully the payoffs will make you a successful VC.