How professional investors make decisions.

Something I learned when I used to sell cars: if you understand how someone makes money, you can better understand how they make decisions.

The business of investing is about deal selection, not deal sourcing. The best investors see 100x more deals than local angels, VCs and anyone else in-between. That’s why it’s easier to get coffee with a professional investor than your local angel group. If you’re a founder, you should skip the local investors first. If you’re an investor, look at deals outside your hometown first.

VCs are easier to understand than angels. VCs are investing other people’s money while angels are investing their own. When angels choose not to invest in your company, it could be for any reason at all (eg, they don’t like your shoes, they hate the weather outside, it’s a Tuesday…”). When a VC chooses not to invest in your company, it’s because they don’t believe that the financial return of your company aligns with the financial returns they promised their investors.

The goal is to make money. When anyone invests in companies, the goal is to return their principal and another three times on top of that. So, for example: if I’m investing $1M in companies this year, my goal is to spread that across X number of companies and hope that one or more of them returns enough money for me to make ~$4M back.

Angels usually earn a paycheck from their day job and keep all the profits when you exit. VCs earn their paycheck from the fund’s management fees and split the profits on your exit with their investors. This is why VCs are incentivized to raise larger and larger funds… and why they’re less and less likely to spend any time outside of Silicon Valley, NYC or other large cities. (More on that tomorrow…)

If you think you’re going to raise money for your company at some point, start by understanding how investors make money before you begin pulling your deck together. Better yet, get to $1,000/month first.

Also published on Medium.