Shots on Goal: Excelling as a Startup Technology with Adequate Funding, by Mark Suster.

Investing in Startups: Finding the Winning Shots

To become a successful startup technology investor, several factors must come together. It involves not only having a strong insight into where technology markets are heading but also knowing the right team to back with the right market at the right time. In short, it requires a combination of market knowledge, perfect timing, and a bit of luck.

Building a Portfolio: Shots on Goal

When starting as an investor, one’s obsession is often about getting into great deals. Still, as one progresses, portfolio construction becomes crucial. At Upfront Ventures, the portfolio is built around shots on goal, which are Series Seed/Series A companies. The goal is to back 36-38 firms per fund build a diversified portfolio across various markets. This approach reveals how many opportunities an investor needs to generate significant winners.

Determining the Right Number of Deals

The right number of deals depends on one’s strategy. If you’re a seed fund with a 5-10% ownership stake without taking board seats, you might have 50-200 investments. In contrast, a later-stage fund that comes in when there’s less upside but lower loss ratio might have eight to 12 investments in a fund. Angel investors should figure out how much they can afford to lose and pace their money over a set period.

Concentrating on a Portfolio

At Upfront Ventures, the team takes board seats and considers themselves company-builders compared to stock pickers. Therefore, they seek larger ownership to build a more concentrated portfolio and limit the number of deals they participate in. There’s enough data to show that six or seven deals will drive 80%+ of the returns, and they never know which of the 36-38 investments will perform better.

The Importance of Extreme Winners

Early-stage venture capital is about finding extreme winners, and investments require the right number of shots on goal. Focusing on up to two deals that could return $300 million+ and another three to five that could return $300-500 million, with the remaining deals returning less than 20%, helps achieve the desired outcomes. Reserve planning is essential to know when to switch from one fund to another.

Final Thoughts

Becoming a successful investor in startups requires a combination of market knowledge, luck, and perfect timing. Building a diversified portfolio with the right number of shots on goal is essential, with the right number of deals depending on one’s strategy. Concentrating on a portfolio while focusing on extreme winners can lead to better outcomes in early-stage venture capital.