The 11 Step Angel Investing Formula to Find Your Next Unicorn Investment

Both Naval Ravikant and Babal Nivi are co-founders of AngelList. Naval has made over 200 angel investments, with over 70 exits & 10 unicorns such as Uber and Twitter.

We analyzed their most prolific blog posts and broke down their 11-step angel investing framework for all their investment decisions:

1. If you can’t decide, the answer is no. If you can’t decide on an investment, the answer is no. There are an infinite number of investments out there, so pass. Your judgment will get better with time.

2. Proprietary dealfow means ‘they want you’. You never want to hear, “I will come to you if I don’t get money from Sequoia.” There’s no shortage of dealflow, the problem is getting your money into GOOD dealflow and startups.

If you miss out on the top deal, you’re going to miss out on most of your returns.

3. Investing takes years to learn, but improves for a lifetime. You want to invest in 30 companies at a minimum–that takes time so start investing now. Investing is a life-long learning process.

4. Valuation matters: you will have to pass on future greats. You will have to pass on great teams & future iconic tech companies because the valuation is too high. You can’t build a portfolio of pre-traction companies at $8–10M pre-money and expect to make a venture return.

On occasion, you can make an exception, but you can’t do all of your investments at this price.

You can’t negotiate valuation unless you’re investing 1/3 to 1/2 of the round. Or if you’re the first check in the company. Start the negotiation by saying, “I like you but I can’t make the valuation work, but I would invest if the valuation were X.”

5. Judgment is important but overrated. Some markets are bad and should be avoided. But judgment about markets is not so important since so much luck and randomness is involved. Companies can do hard pivots into new markets (Twitter, Slack & Insta)

Find the best scientists in the market and invest in them. They can help you with research on your next investment; this is an unfair advantage. Read research papers then call the grad students who wrote them. Don’t wait to learn from TechCrunch, by then it’s too late.

6. Back $0B companies. As Vinod Khosla said, invest in “$0B companies” that could be worth $1B tomorrow. Focus your attention only on companies with the potential for a 100–1000x return. Without these large exits, your portfolio will not achieve a venture return.

7. Invest only in technology. The best returns come from investing in technology companies. Avoid companies that don’t develop meaningful technology (either software or hardware).

8. Some of the best investors have no opinions. If you’re thinking about all the great things you could do if you were running the business, you’re going down the wrong path: you’re not running the business.

If you are telling the entrepreneur what to do, don’t invest. Thinking like an investor is different than thinking like an entrepreneur who is determined to make a business work.

9. Incentives make for bad investing advice. Incentives influence the advice you get from VCs, lawyers, incubators, and everybody else. Everyone serves their own interests first. The best source for angel investing advice is other angels and founders.

10. Play fantasy football. Build your instincts by looking at startups without investing. Track your fantasy portfolio and anti-portfolio. Write down what you like and dislike about each deal and see how your judgment develops over time.

11. Power beats contracts. If you’re the only seed investor in a round, you can get screwed. You will be pressured to renegotiate your investment by founders and VCs. Don’t be a herd animal when making an investment decision, but move with a pack when you do.

Read the full version of this framework on the Venture Hacks blog.

Read more about angel investing & startups on our blog at PIN.

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