Ayush Agarwal has a long history of nurturing startups — from evaluating new companies for the Madrona Venture Group to leading a multibillion-dollar business unit for Google based on maps and local search ads. A Techstars and Y Combinator mentor, he is also an angel investor for several firms, including the interactive home company Caspar, and the South Asian dating site Dil Mil, as well as FundersClub, an investment platform for angel investors.
Today, Agarwal is head of enterprise products at Facebook, where he leads the development of new enterprise software. At an April 4 talk at MIT Sloan he shared seven tips — “my own, not those of my employer” — for choosing a successful startup investment:
Assess the total addressable market
“If the addressable market is not in the tens of billions of dollars, I would not bother because the probabilities are already stacked against you,” he said, noting that it’s also critical to study market structure.
Evaluate the team
In addition to relevant experience and broad-based skills, look for startup leaders who have unexpected insights. “You should hear two to three things that don’t make sense to you at first glance,” Agarwal said, because unusual insights can provide a competitive advantage.
Beware of trends
Hot topics don’t all translate into business success. “If mobile is hot and all companies are going after it and so are you, that’s not interesting anymore,” Agarwal said. “You don’t want buzzwords to be the key selling points of a company. Dig in and find out if they even need to be using ‘machine learning’ or if simple heuristics would do the job.” That said, people always like products that make their lives easier. “Laziness has been a trend since the dawn of time,” he said.
Look for “anti-data” ideas
Going “anti-data” means making counterintuitive business choices, Agarwal said. For example, just when everyone else was working to preserve customers’ photos forever — such as via searchable online storage — Snapchat made it big with disappearing photos. Consider why a particular entrepreneur is going anti-data, because the tactic just might pay off, Agarwal said.
Insist on a simple pitch
“The idea should be very, very simple to pitch,” Agarwal said. Even if the company’s product is difficult to build, an entrepreneur should be able to describe its “kernel of value” to an investor quickly and clearly. Agarwal told potential investors to assess the pitch: “If you don't get it in 30 seconds, don’t bother.”
Forget “Zero to One”
In “Zero to One,” PayPal co-founder Peter Thiel argued that the best startups create entirely new markets, thereby taking a business from “zero to one.” Agarwal said he sees more opportunity in companies that focus on “one to 100”— taking on known problems in an existing market and meeting unmet needs. “Don't solve for a problem that people don’t already think they have,” Agarwal said.
Greed is good
“If a pitch doesn’t make you feel greedy, something is wrong,” Agarwal said. An investor should be so convinced that the business is going to make it big that he or she is willing to fight other investors to be a part of it. “You have to — as an entrepreneur — make me, as an investor, feel greed,” he said.
Agarwal’s talk was hosted by the MIT Sloan Venture Capital and Private Equity Club.