My Best Startup Investment: $25k into $750k

Click here to read this story on Medium.com

I’m a terrible investor, but when you invest early in private companies, it’s easier to get lucky.

Back in 2015 I was making a lot of trips to San Francisco, getting excited about Venture Capital, because that’s all anybody down there ever talks about. I was about to sell my company, Audiobooks.com, and VC was what I wanted to get into next.

Many of the primo tech startups in Silicon Valley go through training programs, often run by investment funds. These are called startup accelerators, and the most famous one is Y-Combinator.

You know Sam Altman, the guy who may or may not be the CEO of Open AI… he used to run Y-Combinator. It’s kind of a big deal.

Every few months, YC holds what’s known as a demo day. Over two days, 100 companies spend literally 3 minutes each presenting themselves, and afterwards you get to meet them in an adjacent conference room, shake hands and agree to fork over $25k to $1mm or more, at a ridiculously high valuation, to get a tiny piece of startup pie.

If the startup is particularly popular, the founders will tell you they’re not taking any new investments. You’re too late. You’re not important or good looking enough for them to take your money. It’s a Bizarro world.

The one time I went to this fantasyland, called Demo Day, I had to pull strings to get an invitation and I was told that if I didn’t make any investments I wouldn’t be invited back. So I mentally budgeted $200k for two investments at $100k each, got my lanyard, and entered the auditorium of 500 lucky investors.

Every company that presented was amazing. I don’t know if they learned how to run a company while attending YC, but they sure learned how to use Powerpoint and body language to beam FOMO into the standing-room-only crowd.

In the end I couldn’t settle on just two companies. I decided to make three $50k investments, and two more $25k investments.

Of the first four companies, two of them went out of business a few years later. One, a company promising to make X-box gambling possible on e-sports, raised so much damn money that seven years later they’re still floating along without having actually accomplished anything. The fourth is a medical hardware company that is in the middle of a millenia long process to get FDA approval.

Never invest in a medical hardware company. Never invest in any hardware company.

The very last investment I made was a boring little startup that was going to make credit card processing in India more reliable. I’ve been to India. Unreliable would be a massive upgrade. So I gave them my last $25k, which they happily took.

About a year later, I got an email from the CEO of the company, letting me know that I could sell my shares for 4x what I’d paid, about $100k. I said no.

Every six to eight months after that I would get an email from the company saying they had a buyer for my shares. At $200k. At $300k. At $500k.

Eventually, three years in, they offered me $750k, a 30x return, and I buckled. That money represented a profit on all my YC investments of course, and also made up for a bunch of silly other checks I wrote before I realized how to invest in startups.

That company, Razorpay, is still going strong. For all I know they would have kept on offering me increasing amounts if I hadn’t sold when I did, but I avoid seller’s remorse by not trying to find out.

I’ve invested in other accelerator companies, and my results have been great. One of them was Mejuri, you may have heard of it if you buy online jewelry. The shares have gone up 50x and I haven’t sold yet.

I attended that YC Demo Day seven years ago. A lot has changed in venture capital since then. During COVID everything went virtual and they realized they could pump gazillions of companies through every year by holding virtual demo days. I tried attending one, my brain melted.

The valuations at these demo days have gone up from $6–8 million in 2016 to $15–25 million now. They say it’s because of inflation, or AI, or crypto. Bullshit. It’s just greed. And it’s still nearly impossible to get an invitation to their sessions.

There are lots of other accelerators and lots of other demo days, many of which you can attend simply by asking, if you know who to ask. I’ve invested with 500 Startups and with Techstars, two of the best, and I’ve had great returns on all of my investments made in graduates of these programs (Mejuri came out of 500 Startups).

Remember that when you’re investing in startups, you have to spread your money around. My hit rate is only 20%, but the average return is quite a bit higher than 5x on the ones that work out.

It all makes sense if you’re able to make more than 10 investments total, and if you can stomach the length of time it takes to get a return, which can be more than 10 years. Overall it’s a great way to invest.

If you can get an invitation.

1. My terrible experience investing using AI.

2. How to actually invest in startups.

I write so I can connect with my readers. You can reach me by responding to this email, by commenting on my website, or by responding to the poll below.