Even those unfamiliar with venture investing know that 90% of startups fail, with the failure rate in technology and e-commerce reaching up to 80%. Despite investing in these industries, I have only experienced 5 failed projects and 2 unsuccessful exits, compared to 10 successful ones that have already covered my entire portfolio. In 2023 alone, I earned $7.2 million. Overall, I have invested more than $25 million in 52 startups operating in the United States, Central Asia, and Europe. In this post, I want to share what helps me choose successful projects and minimize mistakes.

I avoid investing in industries I don’t fully understand

I’ve been in the technology business for over 30 years. My company, Astel, is one of the top five telecom operators in Kazakhstan. I also have other tech ventures, including an engineering company in the oil industry. Choosing to invest in technology was a natural decision for me.

I have a rule: I don’t invest in something I don’t fully understand. Without the right knowledge, I can't properly assess a team’s competence or the project’s prospects and risks. Once, I was presented with a promising DeepMed startup developing a new generation of medicines. Despite its potential, I chose not to invest because my background is too far removed from that field. Exceptions are rare, but they do happen. For instance, I invested in Higgsfield AI, a project related to AI. Their app, Diffuse, can convert text into video and is a competitor to OpenAI's Sora, but geared towards a mass audience. During my meeting with the Higgsfield AI founder, some terms were unfamiliar to me, but he left a strong impression, and his market recommendations were excellent. I decided to trust my instincts, and a year later, the startup secured $8M in pre-seed funding from Menlo Ventures and other funds. My gut feeling was right.

Before investing, I consider whether my expertise can help a startup succeed. Early in my venture career, I was approached by the founder of Chocofamily, an e-commerce project with an annual turnover of $12-14 million. The company was growing rapidly but struggling to keep up. They needed a smart money investor with experience in corporate governance. Within a year, we restructured the company, and I ultimately invested $1 million in Chocofamily. By 2019, their turnover had reached $220 million, growing tenfold. In 2023, I exited Choco with a 6X return.

To sharpen an investor's expertise, having a keen eye is invaluable. Each month, I review 20-30 startup applications from various sectors across different markets—a practice I've maintained for nine years. This experience allows me to quickly assess new projects, identify where similar solutions already exist, understand in which countries they failed and why, and evaluate their potential."

I don't invest in ideas

Emotion plays a role in any decision-making process, but when it comes to investing, I rely on metrics to evaluate a startup. I don't fund ideas—that's the realm of the 3Fs: family, friends, and fools.

First and foremost, I'm interested in how significant/real the market problem is, and whether the chosen business model is effective. Scaling an unvalidated model poses a significant risk for an investor. You can tell if the founder is addressing a genuine problem or creating a product with no demand by observing how the market reacts. That’s why I closely monitor traction, focusing on metrics like revenue growth, audience expansion, or conversion rates. The numbers may be small, but the dynamics matter. A pre-seed startup should ideally grow by 20-30%, or better yet, double each month.

When people back a project with their money, it signals a green flag for an investor. For instance, if retention exceeds 100%, it means not only is the product retaining all its users, but they're also increasing their spending.

Funding founders with deep industry expertise

A founder needs to have industry expertise to truly understand the challenges within the sector they aim to work in and provide effective solutions. Occasionally, skilled IT professionals may want to launch a project to automate processes in industries like the restaurant business, but they’ve never actually worked in that field—they just "know a couple of people in the industry.

Another key factor for success is the founder's entrepreneurial experience. If a founder lacks this experience, having co-founders can make a significant difference. Ideally, one co-founder should focus on business aspects while the other handles technical matters. Statistically, startups with two co-founders are more likely to succeed.

During the Product Market Fit search or validation phase, a team typically tests 2-4 hypotheses and may adjust the business model or pivot. Founders must remain flexible and responsive to changes, and they should openly acknowledge their mistakes. It's crucial not to blame market unpreparedness but rather to recognize when the Value Proposition was incorrect or the market pain was not adequately identified. A founder who can learn from these experiences will often grow rapidly, as failures provide valuable lessons that success alone cannot offer.

I experienced three deals where I lost money due to the teams' inability to handle force majeure situations. Two of these were impacted by the pandemic, and one by geopolitical issues. My analysis revealed that the startups failed not only because of external factors but also because they struggled to adapt swiftly to the challenging conditions. They clung to their established business model even when it needed to be revised. This underscores the importance of a team's ability to operate under stress and make effective decisions.

Performing thorough due diligence

Before making an investment, my team performs comprehensive due diligence, covering legal, accounting, technical, and team aspects. This process can take up to two months.

We evaluate the project's risks, the viability of the business model, and the accuracy of the financial information provided by the founder. We also verify that intellectual property protection and business registration documents meet industry standards, making corrections if necessary.

It's crucial for me to research the funders I plan to work with, including their credit history, any fines or legal issues they might have, and their involvement in criminal or administrative cases. I also examine the Cap Table to ensure it consists solely of individuals who pass compliance checks and offer more than just financial contributions.

Conclusion

These aren't the only criteria I consider, but they form the foundation for quickly filtering out high-risk offers. I hope these guidelines are helpful to anyone looking to embark on the exciting journey of venture capital investing.