How To Invest Early In Startups

When investing in startups, the earlier you invest, the higher your potential return. That’s because investing earlier on in a company’s lifespan means your investment occurred at a lower valuation, which creates much more upside for your investment. But with this potentially much larger return comes much more risk. Luckily, there are some great investment strategies you can use to your advantage when navigating early opportunities. Today we’ll be exploring how to vet early-stage startup ideas using frameworks developed at Y Combinator - the country's leading startup incubator.

When investing in startups, the earlier you invest, the higher your potential return. That’s because investing earlier on in a company’s lifespan means your investment occurred at a lower valuation, which creates much more upside for your investment.

For example, let’s say you invest at a $20M valuation. In order for your investment to 10x (yay!), the company needs to reach a $200M valuation. But if you invested at the $200M valuation, the company would need to reach a whopping $2B valuation in order for you to 10x your money. 

But with this potentially much larger return comes much more risk.

Investments earlier in a company’s lifecycle are inherently riskier because the company may still be solidifying the product/service offering, tweaking their go-to-market strategy,  lacking meaningful market share, still developing competitive moats to fend off competition, or dozens of other reasons!

Luckily, there are some great investment strategies you can use to your advantage when navigating early opportunities.Today we’ll be exploring how to vet early-stage startup ideas using frameworks developed at Y Combinator - the country's leading startup incubator. 

Since its inception, YC has:

  • 🤯  put over 3,000 companies through its program
  • 💰  reached a combined value of $400B
  • 👨🏻‍💻  the top 100 YC companies have created 70,000 jobs
  • 🥇 160 YC companies are valued at $150M

Many of these companies are household names - Stripe (Market Cap: $95B), Airbnb (Market Cap: $98B), Cruise (Market Cap: $30B), DoorDash (Market Cap: $51B), Coinbase (Market Cap: $52B), Instacart (Market Cap: $39B), Dropbox (Market Cap: $9.56B). 

The best part, they invested in all  of these companies at the earliest stages, generating enormous returns. 

Today we’ll explore: 

  1.  ​​🚀 Startups = Growth: Startups are built to grow…fast
  2. 🧪 Developing a hypothesis: A startup idea is a hypothesis
  3. 🧰  The 3 part framework: Solve for a Problem, Solution, and Insight 

Let’s dig in! 


The definition of a startup is a company that is designed or created to grow very quickly. If it’s not designed to grow very quickly, it’s not a startup.

There is nothing wrong with businesses that aren’t hyper-growth startup businesses, but you shouldn’t be investing in them if you’re hoping to generate market-beating returns. 

This is why many startup investors focus on highly scalable and highly defensible businesses - usually developed with software or deep technical Intellectual Property (IP).  

Every company you invest in should have evidence that it can grow very quickly. 


An early startup idea is much like a science experiment and every science experiment should have a strong hypothesis. 

A strong startup hypothesis should consist of 3 things: 

  • Problem: How is the world broken and why does it need to be fixed? 
  • Solution: A way to efficiently solve this burning problem. 
  • Insight: Building a startup is extremely hard. What makes this team uniquely qualified to build this business? 


Startups are built to solve problems. With data from over 3,000 investments, Y Combinator has created a  framework to help them identify the best types of problems for startups to solve. 

Good startup problems should have at least 1 of the below characteristics. I’ll use Coinbase to help convey the importance of these characteristics.

  • Big problems: Startups should be solving big problems. This is why many investors focus on consumer problems as there are potentially millions of customers. Coinbase realized that it was incredibly difficult for the average consumer to purchase cryptocurrencies. They hit the nail on the head - as of 2021, there are over 300 million crypto users worldwide
  • Growing: “Rising tides lift all ships ⛵” - the idea behind this phrase is that secular megatrends create an opportunity for startups to grow on top of a wave of demand. Coinbase realized that demand for crypto was growing at a spectacular rate - because Coinbase was the market leader in a high growth market, they captured all of the upside. 
  • Urgent: The problem a startup is solving should be a “pain killer, not a vitamin”. The problem should be so painful that it needs to be solved immediately.  Coinbase realized that the process was so painful for crypto purchasers, that if they could solve it, they’d have a groundswell of demand. 
  • Expensive: The more expensive the problem is to solve, the more value you can create for potential customers. The more value created, the more you can capture some of it in the form of revenue. Coinbase charges a fee for each transaction made on its platform - a fee customers are willing to pay because Coinbase simplified such a complex process. 
  • Mandatory:  If a problem has to be solved, it creates an opportunity where consumers and businesses NEED to find a solution. While this didn’t exist for Coinbase, you often see this when regulation shifts - for example a lot of healthcare startups were built when the Affordable Care Act passed in the USA. 
  • Frequent: The more frequent the problem, the more opportunity the startup has to convert users to customers. In the case of Coinbase, users often make many transactions per year, providing them with the opportunity to generate meaningful revenues.

It’s a startup's job to create lasting solutions to solve these problems. 

Y Combinator has one rule for Solutions - “don’t start here”. What they mean by this is that you don’t want to invest in a solution in search of a problem (SISP).

This often happens when an engineer is excited by a new piece of technology (e.g Blockchain, VR, AI) and tries to force a problem for their solution.  It’s not impossible for startups to grow this way, but it is much more difficult and much less efficient. 

The best way for a startup to grow quickly is to identify a problem and do whatever is necessary to solve it. 


Before investing in a startup, you need to understand its unique insight. Every company NEEDS a unique insight. 

The insight needs to explain the reason why this solution is going to work. Why will this startup win vs everyone else? Why will it grow extremely quickly?

There are 5 different types of insights that create an unfair advantage - a unique ability for this company to dominate the market. Companies need at least 1, but the best startups have all 5. 

5 types of unfair advantages: 

  • Founders: Is this founder 1 of 10 experts in the world that can solve this problem? We’ll call them “a super expert”. These people are extremely rare. Someone may have a strong track record, like being a Product Manager at Google, but that does not make them a super expert, there are lots of Product Managers at Google. Super experts are unique and they know it. They may have been early employees at a startup building in a new market, encountering never before seen problems, or a researcher with deep expertise and a patent on a novel piece of technology. 
  • Market: A company will almost automatically grow if they choose the right market. Make sure the market is growing at 20% per year and that the founder has a path to become the market leader in that market. 
  • Product: Is the product 10X better than its competition? For this to be an unfair advantage, there needs to be an order of magnitude improvement  - 10x faster, 10x cheaper, 10x more efficient. 
  • Acquisition: Startups should find acquisition paths that cost $0. If paid acquisition is the only way to grow, investors should discount that path. Once competition comes in, the company will be in trouble as all their competition can use the same growth hack. Startups should do things that don’t scale and generate word-of-mouth growth. 
  • Monopoly: As the company grows, it gets more powerful. This is often seen in the form of network effects or Marketplaces. Take Airbnb for example, as more supply (homes for rent) came onto the Airbnb platform, there was an increased demand for their product. Airbnb became more powerful because it gave consumers more choice and locked up supply. 

These frameworks are developed by one of the best startup incubators in the world with an unbelievable track record. Having these frameworks at your disposal will help you identify top startups at their earliest stages, enabling you to better manage risk and capture more potential upside. 

Give it a try! Thanks all! ✌️