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One of the most frequent things I'm asked is about how to invest in startups at the earliest stage.
This is because early-stage investing offers the highest potential return on capital of any stage of investing. All things being equal, investing in a seed-stage company at a $5 million valuation can produce a return 20x larger than investing in the very same company once it's worth $100 million (Note: Dilution can decrease the former return by 20% to 25%).
In real dollars, that would mean the difference between $100,000 returned on a $1,000 investment vs. $2 million returned on the same $1,000 investment.
That being said, investing in startups at a very early stage has a very high level of difficulty. This is because at the earliest stages of a startup's history, you have the least amount of data from which to make a decision.
So how do you go about picking the best early-stage startups?
The short answer is that you can never know which early-stage startup will bring you the highest return, but there are certain signals that can help you increase your chances of success.