complicated concepts

Investing in Similar Companies

Today's issue of Small Bets will focus on investing in companies within the same industry.

We'll cover:

  1. why you might want to invest into "competitors"
  2. how to get started with this strategy
  3. how to allocate your checks
  4. what to do after you invest
  5. how to manage your relationships with each startup

Let's dive in.

1. Why people invest heavily into an industry

There are two primary reasons people invest in multiple companies in the same industry:

1) they are passionate about the space and want to support companies who can solve the problem

2) they see a huge market opportunity, and want to increase their chances of betting on the winning horse.

2. How to get started

If you don't already have domain expertise in an industry, you may want to start by apprenticing to someone with loads of experience in the space.

This means finding an investor who has already spent time exploring the industry.

Step 1: Get to know them as a human and as an investor. No one is going to want you tagging along if they don't like you and trust you.

Step 2: Ask them lots of questions about their learnings. What are the pitfalls of this industry? Is it capital intensive? What do first-time founders in this industry need to know?

Step 3: Invest. Eventually you'll need to stop staring at the water and just dive in. Most of your learnings will come from observing the startups you invest in.

If you're lucky, you may be able to get access to your mentor's dealflow.

3a. Allocating your checks

When you're first starting out in a specific vertical, which method is best?

1) invest into a bunch of companies at the same time
2) start with one company and then slowly add others to your portfolio

I posed this question to Hustle Fund investor Elizabeth Yin.

She shared her thoughts based on her own experience investing into the food industry.

Here's what she said:

Invest very small checks into about 5 different companies at the same time.


Let's say you invest into a company in an industry you're still learning about. You won't know if the problems that company is dealing with is unique to them or unique to the industry.

Perhaps the founder is a bad planner or their supplier happened to be a bad partner.

But if you invest into 5 companies in the same industry, you'll spot patterns.

For example, Elizabeth discovered that nearly every single startup in the food industry faces challenges when it comes to supply chain and packaging.

3b. Check size

Keep in mind... at this point you're still in the learning phase.

So your checks don't have to be huge. In fact, you can offer as little as $1k to these founders.

If you do write small checks, Elizabeth recommends you recognize the reality of the situation by saying something like:

"Look, I'm dumb money. I'm passionate about the problem you're solving and I would like to support you, but I don't know anything about this topic. Here's what I can offer, and I promise to be your least annoying investor."

If you go the route of writing $1k checks in about 5 different companies, you'll end up spending around $5k to explore the industry.

That's not a terrible price for the learnings you'll get out of it.

4. After you invest

The first thing you'll want to do is collect learnings.

The least annoying way to do this is to get on your founders' investor update emails... and actually read them.

You'll quickly spot patterns, especially if the companies are at roughly the same stage.

For example, you may notice that most of the companies have a high burn rate, or trouble finding product/market fit.

You'll also see – and this is the important part – how the founders react to these problems.

Perhaps one founder is quick to plow through these challenges, while the others can't seem to make progress.

Or you may find that one founder is able to raise money quickly, or has a better grasp of their cash flow.

If you pay attention to these learnings, you'll likely identify which ones you want to invest further in. Or (curve ball!) you may find that this industry has big, hairy underlying issues. If that's the case, you may decide your money will be used better in other industries.

5. Managing your relationships

Here are some ways to build healthy relationships with each of of your new portfolio founders, despite the competition:

1. Hold off on taking a board seat → this will allow you to remain neutral across all your companies as they evolve.

2. Share advice to everyone → if you have a new learning about the industry, don't play favorites. Share it with all of the founders in this space.

3. Don't share privileged info → this feels obvious but is worth stating. If one of your portcos develops something new that is specific to their industry, don't share that with your other portcos. Any of them.

4. Making introductions → if you have a contact in the industry that could be beneficial for your founders, how do you decide who to introduce them to?

I asked Elizabeth this question. Here's her advice.

If you have a contact that could be a potential partner / customer / employee / advisor for this industry, don't play favorites.

Instead, tell your contact about all the companies you've invested in in this space, and let the contact decide who they want meet.

Phew, this was a long one! if you made it this far, go get a cookie. You've earned it.

– Kera