Pre-IPO Profits

The Importance of Co-Investors

The Importance of Co-Investors
By Adam Sharp
Date July 21, 2020

As online angel investors, there’s an easy metric we can use when judging possible investments. If we pay attention to who else is investing in a startup’s round (also known as co-investors), we can learn a lot about the quality of the deal. 

For example, if I see a deal where Sequoia or another top-tier VC firm is leading the round, I will often invest in it. At the very least, I take this as a signal that the deal is worth investigating deeply. You should also pay extra attention when a top-tier investor is doubling down on an investment — or when new top-tier investors join others in a round.

Accredited deals on sites like AngelList often don’t include detailed financial information. But you can be sure that well-known VC firms and other big investors DO have access to that information. By paying attention to the co-investors, small online investors like you and me can tap into that knowledge without ever seeing it.

If you’re not familiar with which VC firms are “top tier,” there are some easy ways to research them. To start, check if any of the firm’s partners are on the Forbes’ Midas List. The Midas list is an annual list of the best VC investors in the world. If you see that a co-investor is on the Midas list, it’s probably a very positive sign.

You can also do a Google search on the primary investors in the round. Go to their site(s) and research their portfolio companies. See if those companies have gone on to raise larger rounds of funding. You probably won’t be able to find their exact return numbers. But you should be able to get a general idea about how their funds have performed.

Some professional investors consider investing based on co-investors to be distasteful. But I disagree. As a small online investor, there’s really no better signal you can find. And if you’re new to startup investing, watching co-investors is a great way to learn. 

In the end, it’s still up to the individual investor to back a deal or not. But checking out the co-investors is a good first step in the due diligence process.

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