Early Investing

The Best Startups ‘Cheat’

The Best Startups ‘Cheat’
By Andy Gordon
Date September 2, 2020

I love cheaters. In fact, I only invest in startups that “cheat.”

I don’t mean companies that are running scams or lying about their services. No, I mean the startups that redefine — that cheat — the game of risk and reward. Companies that can lower risk significantly more than you have any right to expect. Or that can enhance upside way beyond your own projections. Startups that can do that “cheat” a system that says you have to accept more risk to get more upside.

These startups break the mold. And make no mistake, the mold is very hard to break. The vast majority of companies offer investors high risk and high reward. Or they offer the safer alternative — low risk and low reward. 

It’s what I was talking to you about last week when I said that the traditional risk-reward trade-off doesn’t work for startup investing.

But the startups that manage to do it differently… Those are the ones I look for.

I love these cheating companies — and their cheating founders — for their sheer audacity. They dare to limit risk while not sacrificing upside. Or they take delight in amping upside while keeping risk in check.  And they do it legally! They’re not breaking laws. And they’re even not cutting corners. 

But the cheaters I love most of all? The ones that cheat on both risk and reward. It’s hard enough to do just one. Cheating both is a very rare trick. But it has been done! I know. I’ve recommended a few of these brilliant cheaters to First Stage Investor members

It’s why I recommended 20/20 GeneSystems (now raising on SeedInvest). 20/20 helps people detect various cancers at a very early stage. That’s key. It’s when their chances of fighting the cancer off is at its highest. 

20/20 doesn’t offer a cure. But it does offer the next best thing: A way to ameliorate the worst outcomes of cancer. Wouldn’t it be great if every patient could detect their cancer very early and start treatment when it’s most effective?  

20/20’s high upside doesn’t need to be amped. It’s clearly apparent. But 20/20 gives it an extra boost by making its tests surprisingly affordable. The price is low enough that insurance coverage isn’t even needed as a prerequisite for mass adoption.

But what about the tech risk? Cancer breakthroughs occur rarely because the technology often falls short. But 20/20 avoided technology risk by using tests that are already taken by hundreds of thousands of people per year in several Asian countries. They’re so popular because they work. And 20/20 made them work even better by adding AI. Again, that’s not technically cheating. But it sure feels like it. In a sector where tech risk sinks many startups, 20/20 cheated its way to a low risk — and extremely high upside — profile.  

Another cheating company that I couldn’t resist was HyperSciences. I recommended them in 2018. This company took hypervelocity technology that’s been around for decades. Then, HyperSciences simply repurposed it for drilling, mining, tunneling… and (how’s this for nerve?) for aerospace. It can launch payloads and reach near space (100 kilometers high) in seconds. It takes minutes for current rockets to do the same. Hypervelocity tech is established and thoroughly proven. The technology risk is low. The problems it’s solving are huge. The upside is considerable. Yet, HyperSciences made it even bigger by landing a powerful partner in Shell. It almost doesn’t seem fair. HyperSciences is a double-cheater. It has cheated on both its risk and upside. How could I not recommend it?

Here’s one last example: Illusio. It uses augmented reality (AR) to help patients visualize the results of plastic surgery before the surgery takes place. The technology is really cool. (You can check it out on its website.) And it dramatically improves patient satisfaction. 

In a huge and growing market, that’s enough to take away much of the early go-to-market risk. But this company has added two explosive drivers of sales. Surgeons using Illusio’s technology report that surgery booking conversions have nearly doubled… removing even more risk. And it has formed a partnership with a company that supplies products to 85% of surgeons in the U.S. and 50% of plastic surgeons worldwide. Its ability to capture significant market share increases an already high upside.

Double cheaters make the best investments. They’re my top startups. But they’re also few and far in-between. Close behind are the single cheaters — companies with already high upside that do an amazing job at shedding risk. Or those with low-risk profiles that find a way to raise upside to tantalizing levels. 

They make up a majority of my First Stage Investor portfolio. And many of those companies have already doubled and tripled in value. Some have gone up even more. 

I love cheaters. But my affection is not unconditional. I’ve seen cheaters outperform again and again. And that’s all I ask.

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