What do you look for in a startup?

I liked his answer and transcribed/paraphrased it below:

(Video: Interview with Naval Ravikant.)

“There’s no silver bullet or magic answer but I actually do have a set of criteria I’ve come up with based on my own startups, after looking back on what worked.

“I look for two things that are paramount above all:

1. Great team. It’s obvious. It’s a tautology. Everybody says it. You have to be working with some of the best people in the industry you’re in.
2. Huge market. Niche markets just don’t work because the first idea never works. You always have to change the idea, so you need room to maneuver in a big market.

“There are three more factors that I look at. Not all three of them are required but I prefer a company to have at least two of them:

1. Difficult technology that is compounding over time.
2. A proprietary distribution channel. A clever viral marketing, or SEO, or partnership, or whatever strategy that gives them a leg up over competitors.
3. A direct monetization model. Something more than throwing up 10 cent banner ad CPMs.

“There’s a small number of companies that are very good and very qualified and they get an embarrassingly large number of offers. And there’s a large number of companies that miss on one or two of these dimensions and they pound the fund-raising pavement and don’t get anything.

“This makes sense when you think about it because this is a hit-driven business: a small number of companies account for all the returns. So when people recognize what they think is a winning company, they will pay almost anything and they will do almost anything to invest in that company. And when they look at what they think is a non-winning company, they just say “bye”.

“It’s very similar to Hollywood where there are a few blockbusters and a lot of indie films made. Everyone’s got a camera but odds are you have an indie film. So go back to these five criteria and think about your blockbuster.”

My criteria are a little different. Yes, you need a great team in a big market (preferably, the team has years of experience with their customer).

The only other thing I look for is an amazing product. What makes a product amazing? You know it when you see it. The founders must be chasing a big vision with a beautiful product that is going to make a dent in the universe.

A great product automatically satisifies the technology, distribution, and monetization criteria. Great products are always hard to build. Grafting distribution onto something that isn’t great is a band-aid and a waste of time. It might work, but who wants to spend their lives doing it? Finally, a great product in a big market will either make a lot of money or shrink the market.

Knowing these criteria is one thing. Applying them effectively is another; I hope to learn how someday. It takes practice, diversification, and an aesthetic sensibility.