Justin Kan is a successful founder and investor. He created Twitch, a game streaming company that was acquired by Amazon for $1 billion. He is also an active angel, and he has poured money into 100+ early stage startups.
Some of his investments, like scooter company Bird and self-driving tech startup Cruise (which was founded by Kan’s brother) have seen strong returns.
Kan reflected on his past eight years as an angel investor. Here’s his best advice when determining which ideas will take off.
Rule 1: Only invest in founders, not ideas.
It’s seductive to invest in pet ideas you want to see in the world. Sometimes, you justify investing in a bad founder by thinking the idea is so good it will carry them.
This never works.
It turns out even good ideas still need to be executed!
Rule 2: Investors need to differentiate themselves to land the best deals.
There are now tons of investors in tech. Everyone seems to have their own fund. As an investor, there are three ways to differentiate from others: brand, analysis, hustle.
Brand is setting up a unique platform or positioning in the market that gets to differentiated deal flow. The best example is Y Combinator, which wasn’t even really positioned as an investor at first. Instead, it was dubbed the “Harvard Business School of Silicon Valley.”
On the newer side, I like SaaStr Fund, where Jason Lemkin has set up an investor brand in a specific vertical (with a conference, online media, etc.) and positioned himself as the expert in this area. If you have a SaaS company, you want to talk to him.
Analysis is, “Do you actually think about how the world will look in the future and do you make good investment decisions based on that view?”
Weirdly, this is pretty underrated in early stage tech investing.
I don’t think there’s any magic bullets here. You just need to do the work to do research on companies, call customers, figure out market size, etc. Many early stage investors don’t do this.
Hustle is getting into deals. Many investors wait for founders to be raising and to come to them. This is lazy.
Instead, investors should figure out what companies they want to invest in, and convince those founders to take money (whether it’s during a fundraising cycle or not).
The best angels I know will just start being helpful and build a relationship with the founders, and then get allocation or even included in previous rounds.
Observation: most SV gains (probably including my own) are purely because we have been investing into massive bull market. Everyone who started angel investing 10 years ago looks like a genius (you would have looked the same just buying a basket of FAANG stocks). This will change.
Rule 3: Invest in your friends.
Lastly, always invest in your friends for FOMO protection. If you don’t, the FOMO when they sell for $1 billion two years later might literally kill you.
One good example of FOMO protection is the Slack IPO. Many Silicon Valley entrepreneurs made money by investing early in Stuart Butterfield, the CEO, before his idea took off.
“Years before the two [Slack] founders hit up powerhouse venture capital firms like SoftBank, they tapped influential friends, mostly tech founders: LinkedIn’s Jeff Weiner; Stripe’s Patrick and John Collison; Squarespace’s Anthony Casalena; Twitter’s Biz Stone; Yammer’s David Sacks; and Jeremy Stoppelman of Yelp. They all took stakes in seed or early rounds that were worth an estimated 16 to more than 1,600 times their original bet. ”
The reaction on Twitter
After publishing the initial thread, Kan received plenty of reaction on Twitter.
“Your willingness to share what you have been through and learned along the way is appreciated. We could all use more of this in the world these days,” one user wrote.
“There are tons of gems in the listed markets (with reduced risks compared to private illiquid deals). Go figure,” another follower wrote.
“Brilliant recitation of stories of gain and pain. You captured the letter and spirit of your journeys. Many of us are saying, ‘Been there. Done that. Feeling it!’ Thank you,” another user commented.
