Mailbag: Building Up Your Alternative Investments

Q: I’ve heard some venture capital investors claim that within five minutes of hearing an elevator pitch, they know whether the company is worth investing in. I find this both amazing and literally unbelievable. Can you do this?

A: I’ve heard that claim a couple of times. When I first heard it several years ago, I thought it was just empty boasting. But I’ve changed my mind since.

I review about 100 startups per week that are raising online. Spending an hour on each one is impractical. Even spending 30 minutes on each one isn’t doable.

But five minutes?

I’ve never really timed myself. But I’d say that’s about the average. The really bad ones… even less time.

But the better ones demand more time. The really good ones… 30 minutes. The ones I’m considering for a recommendation to members of our First Stage Investor service… a couple of hours.

And the ones I end up recommending take several additional hours.

How can I make these quick (and less quick) assessments? Years of experience helps. You need a good base of knowledge about the market the startup is addressing. And you need a very good idea of what constitutes an “investable” startup.

For one thing, I immediately eliminate a company whose product is too niche or whose market is too small. And if the product isn’t a huge step up from current offerings, I’m not interested. Another important consideration is traction. If sales are far off, there needs to be a good reason (like a medical product that needs FDA approval before it can be sold).

From there, I evaluate a couple dozen basic characteristics that I’ve internalized over the years, including customer acquisition, monetization strategies and scaling plans.

I’m not checking off boxes every few seconds in my head, though. Rather, I’ve developed an instinctive idea of what a good startup looks like. It’s like looking at a face. You don’t check off high cheekbones, sparkling eyes, strong jaw, etc. But you know a good-looking face when you see one.

If this sounds easy, it’s not! Anybody can look at a painting and make a quick judgment on whether they like it. But an informed quick judgment is something else entirely. It’s the difference between me liking a painting and my wife, who’s a painter, liking it. If you’re thinking of buying, you should trust her opinion, not mine.

Likewise, beginners who look at startups will develop their own opinions. But the opinion of experienced startup investors carries more weight, even if it’s made in the span of a few minutes.

+ Early Investing Co-Founder Andy Gordon

Q: What is Early Investing’s investment thesis?

A: We aim to find the best nontraditional investments in the world. Today, we’re focused on finding disruptive startups, great cannabis brands and the best cryptocurrency opportunities.

Early Investing isn’t meant to help members build the core of their portfolio. We are focused on the alternative section that should exist in every portfolio. This alternative part of your portfolio should probably represent no more than 15% of your overall investments.

We believe that owning alternative investments is more important than ever. We live in strange economic times, where the Federal Reserve often seems to dictate market direction. Threats of trade wars, budget crises and interest rate surprises are ever-present.

Most stocks are expensive and loaded with debt. Governments and people are loaded with debt too. Bonds have been on a mind-blowing 40-year bull run. The U.S. market has been on an absolute tear over the past 10 years. But how long can it continue?

I prefer to focus on areas that I believe will be growing strongly for the next few decades. Technology startups have never been more disruptive. The cannabis industry is poised to grow strongly for the next 20-plus years. And we believe cryptocurrency will play an increasingly important role in the global economy over the coming years.

I can’t imagine not having exposure to these investment areas in today’s economic environment. They all offer growth opportunities unlike anything else in the investment world.

+ Early Investing Co-Founder Adam Sharp