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| By Chris Graebe |
Having the right mindset when starting a new home project, career or relationship can mean the difference between a huge flop or major success.
It’s particularly important for new, early-stage investors — or those of you considering becoming one (which I highly recommend, of course).
While it’s OK to dream big and keep your eye on the ultimate prize, investing in private equity requires more than a stack of cash.
Realistically, it takes a lot of work, time, due diligence and a mindset that keeps you motivated and confident.
That said, let’s dive into the three factors I think play a critical role in having the right mindset for this investment journey.
Factor No. 1: Understanding Your Relationship to Risk
Death, taxes and risk are three certainties in the life of startup investors.
We’re constantly looking for and betting on ideas that could flop, founders who could go rogue or sectors that could go from upside to downside with the swish of a legislative pen stroke.
It’s easy to get caught up in the potential negatives. But if we just looked at all the pitfalls and decided to sit on the sidelines, we’d be doing nothing at all.
What I mean is, if everyone just assumes startups are super risky and will most likely fail from the get-go, no one would ever invest in them.
And as a result, all this amazing innovation and technology that we have today — thanks to the now-giant companies that used to be tiny startups — wouldn’t be here. All those companies would not exist, either.
The point is, we’re supposed to take a reasonable amount of risk to see rewards.
Factor No. 2: Knowledge Is Power
Legendary investor Peter Lynch said, "Know what you own, and know why you own it."
As I’ve watched this space over the years, I’ve seen deals and startups get millions in funding that I personally believe never deserved it in the first place.
Often, when I see a startup skyrocket in funding and their rounds fill up quickly, it's usually because someone on the team is a good marketer.
Now, I'm not talking about the startups that are actually strong in both revenue and traction. Those firms are winning in their space and just need that $1 million to $5 million to scale to their next level of growth.
I’m talking about those deals that don’t have a strong leadership team, are pre-revenue, don’t have a solid plan and don’t even know if the market wants what they have.
Typically, their marketers know how to spin a good story, and the retail investors come running to fund something that either sounds too good to be true or pulls on the heartstrings.
Often, most of those investors haven’t done their research and don’t know much about the startup or even the sector it’s in.
In short, they don’t have the knowledge or information they should before turning over their hard-earned dollars.
At the end of the day, it’s always smart to gain as much information and knowledge as you can on a startup before you invest.
I know that sounds pretty obvious, but you’d be amazed at how often investors get distracted by the shiny lights a good marketer shows them.
Trust me, I know there are currently lots of AI-related startups performing dog-and-pony shows because I’ve done my due diligence on quite a few of them.
Factor No. 3: Embrace Trends as Friends
AI is where it’s happening!
Generative AI startups and other companies developing AI solutions raised almost $50 billion in 2023, according to Crunchbase. That included the likes of OpenAI, Anthropic and Inflection AI.
And this year began with 67,199 AI and machine learning companies on the market.
While not all will survive, current data suggest that the momentum will continue this year, with startups in the AI sector having the best shot at getting funded … and securing billion-dollar valuations.
For example, CB Insights reports that the median Series B valuation for AI companies is 59% higher than non-AI deals, and median valuations are 21% higher for AI companies at the seed stage.
Some of the key industries where AI startups capture investors’ interest and demonstrate practicality include insurance, healthcare, retail, marketing and others.
We’re beginning to see startups that have been quietly building behind the scenes start to take center stage, especially the startups that aren't building on the back of the ChatGPT/OpenAI technology.
What's clear to me is that the deepest pockets in the world are investing in and turning their attention toward AI.
And with stockpiles of cash and their willingness to take flyers on earlier-stage startups, I think we will see some wild acquisitions in the news this year. There will be overbuying and competitive bidding.
Once 2024 comes to a close, and we look back on the year’s biggest events in the startup world, I wouldn't be shocked if we get to reflect on multiple stories of wild AI acquisitions.
So, all that is to say, if a startup has their corner on the AI niche, they will definitely be one that I'm going to be looking at closely this year. However, as noted, I will still be conducting my deep due diligence process no matter what.
And my mindset is right where it needs to be. How about you?
Happy hunting,
Chris Graebe
P.S. AI is going to be such a big factor in investor success, both inside and outside of the startup space, we recently put together a special AI town hall presentation. Click here to check it out.
