Trying to determine the valuation of early stage companies is not a science—there is no proven formula and there are no guarantees. Many seasoned investors rely on their instincts when it comes to investing. In some cases this pays off in dividends, and in other cases their intuition steers them astray.

In the first episode of the podcast StartUp, host Alex Blumberg shares a snippet of a coffee shop conversation he had with angel investor Chris Sacca. Famous for his investments in Twitter, Instagram, Kickstarter and Uber, Sacca’s net worth is publicly listed at over $1 billion—a testament to his investment prowess. He explains that many of his investments were made based on a belief that a company would succeed, but he also admits his intuition hasn’t always been correct.

In the interview, Sacca explains he was one of the first to see the AirBnB pitch, and his intuition told him the platform would put renters in too much danger for the platform to take off. Similarly, after seeing the DropBox pitch, he predicted Google would crush them and they wouldn’t succeed. These are now both $10 billion businesses, and Chris Sacca isn’t an investor in either. This goes to show that not even the most elite investors are always right.

So how does an investor choose which companies to invest in?

As we said, there’s no formula—experience and instinct play big roles in the art of investing. That said, there are a few common pieces that many investors evaluate. Typically, investors want to know about a business’s understanding of the current market’s problem, their solution to that problem, their unique advantage to implementing their solution, and how that solution will make money.

There are also some less tangible pieces that many experienced investors site as the “make or break” that sets off their intuition. Common threads among investors we’ve spoken with say it’s important to evaluate:

  • The team’s past experiences
  • Their belief in their own idea—and their ability to convey and sell it
  • Their tenacity, grit, focus and willpower
  • Their internal relationship dynamics

Ultimately, all investors have their own set of criteria when evaluating businesses for potential investment. And even the most seasoned investors’ criteria do not provide guarantees, as demonstrated by Chris Sacca’s coffee shop anecdote. But at the end of the day, nothing is more important than instinct and experience honed over time.

For those new to investing, begin honing your investment instinct by checking out the businesses listed in Prospect Lounge and Pitch Place, and try to evaluate these young companies from an investor perspective. You can also attend our investor events—subscribe to our newsletter to keep informed of upcoming dates.