Unintended Consequences

frankpetersSounds like ace angel podcaster Frank Peters just lost one of his charter sponsors due to him releasing an interview with me about my recent change of angel investing strategy. Gust, nee AngelSoft, pulled their sponsorship of him.  I don’t know anyone who has been more supportive of both angel groups and Gust than Frank.

I explain in the podcast why so many entrepreneurs avoid going to angel groups–they are too damn slow. And I said that in the new wired world, many of the functions that traditionally have been provided by angel groups are now done better via the internet: better education, better access, and via syndicates, better filtering. What’s a better filter, agreeing to listen to someone, or listening and then putting money into a company? The former describes an angel group approach, the latter a syndicated approach. I then simply stated that Gust had based its business model on the old approach, linked to a pre-internet world of angel groups, rather than the current world where the most connected angels share deals outside of groups.

Before we went on, I told Frank I intended to take on the sacred cow, the raison d’etre for angel groups themselves, and by extension, that of his sponsor, Gust. Frank replied, “We’re journalists, say what you think.” I feel terrible that he’s now paying the price.

I haven’t spoken with Frank since the interview, but I think that it sucks that being open to airing non-traditional thoughts has cost him. Take a listen to the interview, but join me in doing the right thing and donating a few bucks to help keep his podcast going. It’s the only game in town for good audio interviews on angel investing.

So, Which Syndicates? How Much?

syndicate

I promised no more long pieces, but people wanted to know what syndicates I’m investing in specifically, and they don’t seem to know that you can look under my “Representative Angel Investments” page (see above) to see what I’m doing. Here’s the basic breakdown as it stands now. Seeing as there is an anticipated dealflow commitment of more than 100 deals (although roughly half of those are to FG Angels, for whom I’m doing a tiny amount per deal), I won’t be investing at my standard investment amount. But the overall amount committed annually should probably double in size from the average over the last few years. I also have a few other syndicates I’ve put in for, and others (Jeff Seibert, Jennifer Lum, Phil Beauregard, etc.) I’m trying to convince. I’ll update on the  Representative Angel Investment page if I get them, and probably once a quarter show what companies those investments have been in.  In some ways these are the prototypical angel investments–maximum name dropping/bragging rights for small commitments and uncertain outcomes.  Let’s see what happens…

Syndicate                   My Size     Fees      Expected #deals/yr     FundSize (11/28/13)

Naval Ravikant          xx             0/20       5                                $382,000    (AngelList)

Wayne Chang            xxx           0/5         5                                 $167,000    (Crashlytics)

Kevin Rose                 xx              0/5        5                               $2,612,500    (GV)

Salil Deshpande         xxx           0/5         6                                  $80,000    (Bain Capital)

Elad Gil                      x              0/25        4                                  $162,000    (xGoogler)

Thomas Korte             x              0/20       8                                    $97,000     (AngelPad)

Matt Mullenweg         x              0/20        10                                  $46,500    (Automattic)

FG Angels                   x              0/20        50                                $392,000 (Foundry)

Semil Shah                 x              0/20         10                                 $77,000  (blogger)

9 Syndicates                                                103 deals/yr anticipated,

Here’s an FAQ done by FG Angels. Will any of this work? I’m betting it does, but who knows? As the Foundry folks wrote: Are there AngelList specific dynamics which make an investment more/less attractive? We have no clue! That’s one of the reasons why we started FG Angel: to learn how this new channel of investing changes investing itself.

The same holds true for my new investing thesis. Happy Thanksgiving, and may few of your investments end up as turkeys.

Angel Heaven: Building the Ultimate Syndicate Vehicle

Continuing my recent onslaught on articles about angel syndicates. (Last one before I go back to hibernation.) Here is my dream wish list for the ultimate angel investing vehicle.

The Killer Angel Vehicle combines the best of institutional asset management with ease of shopping on Amazon. Let’s have an instrument that delivers filtering, scale, governance, diversification, benchmarking, standard documentation, access, and actionable low cost passive indices. Oh yeah, and make it easy. And easily transferable in a secondary market.

I think AngelList Syndicates has a shot at pulling off most if not all of this. I’m already committing to their v1.0, but here’s where I hope it goes.

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FILTERING:  My biggest problem is lack of time. So the last thing I want to do is try to kiss 1000 frogs trying to find a prince. One of the great things about going to a demo day at YCombinator or TechStars is knowing that they have already separated a lot of the chaff from the wheat, making my job as an early stage investor much easier. I found AngelList compelling back in 2010, when it essentially was a curated list of high quality startups filtered by Naval and Nivi. But their dream was always to democratize the whole financing process via the power of the interwebs, whereas I want strong filters. For me, it’s like the old Yogi Berra line about a popular restaurant: “Nobody goes there any more—it’s too crowded.” (But if you still want to comb through the individual deals on AngelList or are new to it, here’s how to best do it.)

What’s the best filter? People you respect who put their hard-earned bucks at risk. What do you take more seriously, a recommendation of a company from someone who doesn’t invest, or from someone who does? And the more tight that filter, the higher the likelihood, in my opinion, of a good outcome. To quote Ring Lardner, “The race is not always to the swift nor the battle to the strong – but that’s the way to bet.” I’m happy for syndicate leaders to do the filtering for me.  I’ve signed up for Salil Deshpande’s syndicate: he’s a partner at Bain Capital Ventures, and he is syndicating all of his deals. So first of all, there’s no anti-selection, where you keep your good deals to yourself and only syndicate the ones which can’t get filled otherwise. Two other angels who have pledged not to anti-select are Wayne Chang and Naval Ravikant, and I’m going to join in those syndicates as well.  What really makes Salil’s advocacy such a strong signal is the limiting fact that as a VC, he will be sitting on boards…and there is only so much of him to go around. Which makes for a doubly strong bet, and a really great filter.

FEES/INVESTMENT RATIO

Another good signal is if anyone will restrict their syndicate or lower their carry. Sorry, Jason Calacanis, I like your podcasts like this one with @naval on syndicates, and I respect your hustle and nose for opportunities, but as far as I can see, you are optimizing for YOUR gains, not mine. How are our values not aligned? Well, if you put up 100k, but charge 15% carry net of AngelLists’s 5%) on $1 million of follower money, your profit is 50% higher, with no risk, on other people’s money than your own. Same reason why I’m passing on Tim Ferris, or Scott and Cyan Bannister (30% fees!! Come on, I don’t care HOW good their connections are.) The highest expected value for such an investor is to make tons of bets, because their return is more tied to other people’s money. If we’re going to go with wildly popular syndicates, give me someone like Kevin Rose, or the other professional VCs like Wesley Chan (also of Google Ventures) or Salil Deshpande of Bain Capital Ventures, all of whom are waiving their share of fees as they look at the grand experiment. They know that having a syndicate can help put some friendly wood behind their portfolio companies, and that is incentive enough to do it.

graph-scale-up-sky-clouds

SCALE:  To make this truly scalable, a platform has to be able to handle a lot of volume. For someone my modest size of investments, this isn’t a problem, but as long as we’re dreaming, I’d like a platform wherein I can invest with the same or better efficiency and price as someone like a huge state pension fund. For me, investing via angel groups doesn’t scale—it takes too much time for due diligence, and not enough good deals come around.  I physically can’t join 20 angel groups, but I can commit to 20 syndicates with 2 mouse clicks each.  To make it to institutional strength, however, will need some serious infrastructure and tackle all of the following points like…

GOVERNANCE: As a former institutional investor as well as a trustee of two foundations, I’m well aware of the layers of protection that are necessary. That means independent boards, well-known counsel and accountants, regulatory supervision, the works. I’d love to see some people like former FDIC chair Sheila Bair, Mary Schapiro of the SEC or John Bogle of Vanguard on a board to make me feel safe. I know this is antithetical to the free spirits of Silicon Valley, but embrace audits—you KNOW there is going to be a great scam in crowdfunding, make sure that your funds are not caught up in it.

DIVERSIFICATION: I’d like this to be so easy to do that I can create my own fund of funds, but without the fees on fees. I’m a big believer in diversification, and as defined above this is not spray and pray, but rather reduce risk and increase expected returns. But it’s important for me to be able to know what the makeup of both the assumed portfolio of any syndicate as well as any actual one. I, for instance, used to invest about 40% of my angel funds in healthtech and medical devices. Going forward, I see that at no better than 10%. So, for any syndicate, I’d like to have some statistics of what the manager has invested in over, say the past 4 years, as well as what they believe they want to invest in going forward, since investing strategies can change. I’m not super strict about the concept of “Style Drift”, but I do want to know what people do. The amazing Manu Kumar of K9 Ventures makes it clear—he invests in a tight area around Palo Alto. Foundry Group has defined investment themes. (Their VC fund is way different than their to FG Angels syndicate, which may end up anywhere for as much as I can tell. I’m still backing FG Angels at the minimum amount for fun–it’s my money, I don’t have to always be internally consistent, so no needling, please.) But back to focus: please have the leaders of syndicate be as specific as possible in their writeups about what they want to invest in. I’m not necessarily disqualifying someone who says “whatever I feel like”, but the more definition they have, the more likely they are to appeal to me.

measuring+tape

BENCHMARKING: I mean two types: the intellectually rigorous kind, and the consumer comparison kind. Let’s start with what an institution needs. You know how it takes a few years to get organic certification, and then those foods command a higher price? Similarly, I happily will pay up to know that I’m getting a certified financial record. I believe that anyone who uses the platform should sign a pledge to have audited financial performance. This should be easy in the case of AngelList, in that their fees are expressed as a percentage of the carry, and to my knowledge, the investment vehicles will be some type of pooled vehicle. Hence, AL will know all the dollars in, all the dollars out, and can perform consistent IRR and Total Return calculations across all syndicates. It will take a few years, but this is what is necessary to get big institutional investors involved.

And while you’re taking a page out of the world of investment managers like Cambridge Associates, you can establish not just investment returns for individual managers, but also all activity through the system. None of this self-reported crap that groups like the Angel Capital Association, NACO, EBAN, the Kaufman Institute or academics have had to rely on. But cold hard numbers. With knowledge of the individual deals, you can not only rank managers, but geographies, returns based on pre-money valuations, sector, the works. Be the shining light of truth! (And if at the same time, AngelList, if you can provide a format for me to privately include and calculate the returns of my non-syndicate investments, incorporating those numbers into my personal return, that would be awesome.)

As for comparability, take a page out of all of the ecommerce websites: allow us to compare one syndicate to another, ranking not just by size, but by fees (it currently takes multiple clicks in AngelList, that needs to get friendlier), sector, etc. I don’t mean the Netflix “if you liked this movie, you’ll love this one”, but think easy tags and search.

STANDARD DOCUMENTATION: A pet peeve of any angel investor is that despite best efforts, docs are always different. At the very least, let’s have a consistent documentation for any syndicate, with a lookup table clearly defining wherever there are different parameters, such as fees.

doorman

ACCESS: This is where AngelList should shine, and one of the reasons I am jumping in with both feet. The standard angel group no longer has access to the best deals, because they are based on old pre-internet technology. An entrepreneur might have to wait a few weeks to be seen by an investment screening committee, then wait again for the next open monthly slot to present to the membership, then wait for those part-time angel members to organize to do due diligence, then re-circulate to see interest among all members, then work on a termsheet, then discuss syndication…it’s a nightmare for an entrepreneur, and the very reason why when I funded both of my companies, I never approached an angel group. (One exception—I asked one group head to give me the names of the angel investors in his group most familiar with fintech.) The only way an angel group can access a hot deal is if they have the ability to commit to a sizeable, fast check, and few groups can compete with “super-angels” in this regard. Who are going to be the most successful syndicate leaders? Those very superangels who don’t have to go through committees to make a decision.

ACTIONABLE, LOW COST, CUSTOMIZABLE INDICES:  The first “pool” I bought via AngelList was a participation in all of the TechStars Seattle 2013 class. (See “Filtering” above.  FWIW, I and others have been asking for this for years, as in this June 2011 blogpost on how to pick a commingled fund.) While the cheapest way to participate in a broad TechStars bet is as a Limited Partner, this is the next best thing. (Provided that all of the companies opt in or out at the beginning of the class, so there is no anti-selection of just getting the less popular companies who aren’t already oversubscribed.) Investing in TS Seattle 2013doesn’t just give me filtering and deal diversification, it also gives me geographic diversification, something I discussed 2 years ago on this Frank Peters podcast.

What else would I love? The ultimate would be to mix and match offerings identified by individual syndicates. For instance, my favorite focus is on companies that tap into the unique benefits of mobile phones: like CardMunch (acquired by LinkedIn,) LocalMind (acquired by AirBnB,) and UpNext (acquired by Amazon), each of which were on AngelList back in the glory days of 2010-2011 when the dealflow was better curated. What if I could designate a group of, say, 15-20 syndicate leaders I don’t otherwise invest in, with the ability to join their syndicates when they committed to a company doing mobile phone apps? To put it into portfolio terms, I have an “approved list” of the syndicate leaders, and give an order to fill me up with a diversified mobile app portfolio, say, $100k based on the first ten $10k investments available/originated from those groups? In that way, anyone could create their own specialized funds, and even benchmark it via the AngelList “mobile phone app” universe that would include all backed syndicate deals, not just those on my approved list. And that mobile phone index could also be compared to any other index. For those of us who believe it is easier to spot a trend than pick a company, this is just the ticket.

oneclick

EASE:  Believe it or not, this is probably the biggest reason I want to see syndicates succeed. Anything is an improvement on the hassle of angel paperwork. I just spent 40 minutes in my little Vermont bank waiting to get a wire approved for an angel investment. What is the iron test for ease of use: the ability to execute or confirm an angel trade in under a minute. Even the supposedly low-maintenance commingled funds I am in now have capital calls, which are a big PITA. 10 capital calls over the life of a deal seems to me like 9 too many. So make my life easy. I realize most angels probably don’t want to hand over all the money at once to a registered broker/dealer, so instead just copy the Amazon “1 Button” sale. I set up all my info in a master account once, including electronic signatures, SS#s, bank ACH instructions linked to my debit account or brokerage money market fund, links to my Vanguard or Mint accounts for communications, a preferred notification approach (text or email), and then notice that a deal is due. I have one centralized place to access all paperwork, and searchable pdfs of all deal documents get delivered into my secure account. When I get the notification, I have 3 days to hit the button to confirm or opt out, and if I don’t see the email, someone will track me down with a phone call. If I don’t respond, I’m not in, and you have every right to kick me out of future deals. (Hell, you have that anyway.)  And, I give you a total limit of amount I am willing to commit to any one syndicate and overall. When I get to that limit, I get an auto-notification to see if I want to do more, but it doesn’t automatically roll–it’s just a reminder for me to review my top-down allocations and revisit my assumptions.

Give me a reporting dashboard where I can see the total I’ve invested, some big picture overview, links to any messages sent to me by other investors or syndicate leaders, and a way to print out stuff to give to my accountant after each calendar year. And lastly, give me a way to list a transferable ownership interest in the syndicate pool and make it available to other accredited investors in the pool or outside of it. I’d be happy to pay a transfer fee of a few percent going in or out on a secondary trade.

That’s my dream. Please make it happen.

PS–Got any comments? Please leave them–I know you have something to say, Chris Douvos! (Who has the best top-down LP oriented blog around.)

It’s Wayne’s World! Party On, Excellent Syndicate!

angellist syndicates

Wayne is IN! And I’m thrilled to be along for the ride. Details below.

Let’s start with some non-controversial startup investment logic:

1)   Critical elements to successful startup investing are staying on top of technology trends and having access to good deals

2)   Smart entrepreneurs seek out as advisors/investors those successful role models who they can relate to (i.e., are the same age, travel same circles, have friends in common, etc.)

3)   I have a limited amount of connections and knowledge, so the best thing I can do is get great scouts who see things (in both the access and perspicacity sense) that I never will.

All of which make me want to hop on the coattails of great young entrepreneurs once they take some of their well-earned cash and start reinvesting in the ecosystem as angels. How to do this? Guys, start an AngelList Syndicate!

I’m not the only one thinking this. This tweet came out a little after the Twitter IPO.

Screen Shot 2013-11-24 at 10.42.25 AM

And I’m delighted to learn this morning that Wayne Chang, the co-founder of Crashlytics, has agreed to lead a syndicate on AngelList. And best of all, he’s agreed to syndicate everything he does, so there’s no anti-selection going on. Plus, as head of Twitter Boston, he is at the vortex of what’s going on.

Wayne

I remember asking Wayne to take a look at two deals I was looking at given his expertise. I expected perhaps a “I like it” or “Stay away”, but instead he produced two dense pages of really incisive industry trends, probable snags I hadn’t envisaged, as well as where he thought the real killer app would come from in the field.  I already knew Wayne was a fearless investor who didn’t rely on social proof(first check into Onswipe, for instance), but the level of investment blew me away, and I promised myself to follow Wayne however I could. And I was fortunate enough to have him let me into his own Crashlytics deal, for which I will be playing with house money for several years.

Jennifer-Lum

Who are the other investors I want to encourage to syndicate? How about this for a list: Jennifer Lum (co-founder of Adelphic Mobile, and a mobile ad expert with previous success at Quattro Wireless, with several angel investement wins via her vehicle Apricot Capital, including Crashlytics, Peekaboo Mobile, TribeHR…),

Phil and Matt

Phil Beauregard and Matt Grace (co-founders of Objective Logistics…who also invested in my company, BuysideFX; Phil already harangues me to invest in his favorite companies, ones I had never heard of, showing that young connected entrepreneurs have a lot of sourcing that us old angels never get),

seibert

Jeff Seibert (Wayne’s co-founder, former head of Box in Boston having previously sold another of his startups to Box, and like Jen, a bi-coastal presence giving him a wider perspective of what’s out there), and

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Bowei Gai (founder of Snapture and CardMunch—see my earlier article on Why I Invested in CardMunch), who is recharging his batteries on his great World Startup Report. You think 500 Startups is going global? That’s nothing compared to what Bowei is seeing on the road full-time. Bowei has a special meaning for me relative to AngelList—he was the first company I invested in via AngelList, and forever will hold the best IRR record for an investment. Even though it wasn’t a great absolute return, LinkedIn made the offer for them 1 day after I got in, meaning I just sent the check in and got an immediate bigger check back. I’ve got the feeling that Bowei may be ready to start his 3rd company when he gets back, but I’m hoping he shares his knowledge via syndicating.

I think there’s beauty in the idea of investing in a syndicate of someone who is still an entrepreneur. (What I would give, for example, to be able to have an angel portfolio like Dharmesh Shah!) First, for them to stick their head up and take notice of something, it must be something special. Second, they are putting their own money in—and you know that as a startup person you don’t take out much salary, so it’s not just bloviating about money, it’s using real chips. And lastly, there are undoubtedly fewer bets going out compared to full-time spray and pray angels (like I used to be before I got a real job again), creating essentially a “best ideas” portfolio.

So Jeff, Bowei, Jen, Phil, Wayne: as far as I can tell, the hassle is minimum: AngelList takes care of the paperwork and recruitment. You get more wood behind your investment, you leverage up your returns, and you only charge your fans fees on successful carry. (Keep it to <=20% including AL’s 5%, though, please.)

Win win win win win win win win win!   (PS: Naval, please connect up these other guys to start the bandwagon rolling.)

Why I’m Switching Over to @AngelList Syndicates

AList

As hinted in the previous post, I’m changing tactics, even though I haven’t changed startup investing philosophy.  I’m cutting down the pace of individual company investments at least by half and probably more, even though I’m increasing the overall total of the investments (courtesy of @Crashlytics and Twitter). The difference: I’m farming out the work.

Time Frame           Angel Companies/% Money        Commingled Funds/% Money

Last 4 years                      55 deals/85%                         3 funds (80 positions)/15%

Next few years                  5 a year/ 25%                         9-10 funds/75%

Yesterday I recommitted to two funds I’ve backed in the past: TechStars Boston 2014-2017, and Project 11 Fund II. So that’s an East Coast presence, along with almost all of my current angel investments. And I’ve committed to Angel List syndicates over on the other Coast with @naval, @kevinrose, FG Angels (Foundry Group), Salil Deshpande of Bain Capital Ventures,  Thomas Korte of AngelPad, Elad Gil, and as a wild card since I love his blog and he is getting deeply wired in, Semil Shah. And I’ve got requests into two other syndicates.

For those looking at syndicates in Boston, I’d like to recommend one just starting up from Semyon Dukach. I’ve got a ton of overlap with his investments (we counted 4 companies we’ve co-invested in that start with “C”), so we share the same taste in companies, but unlike me, he works his ass off with them. He’s also charging 0% for his personal carry–5% goes to AngelList for all of the admin. So it doesn’t get better than that for people looking to ride some intelligent, experienced and successful coattails.

From around a deal every 3 weeks for the last 4 years to probably a half dozen direct and the rest indirect. Now THAT is a big change of behavior, but it makes sense to me.

There are three reasons why I’m happy to pay the carry, even though I only invest my liquid money in no-load, minimum fee index funds from Vanguard and am otherwise cheap enough to still take soap from hotel rooms:

  1. I’m working again full-time in a startup and don’t have the time to for doing any meaningful diligence, but instead can only rely on instinct;
  2. I’m going more passive in my investments, and not add much sweat value, (although I’m always good to make an intro or give a response to a pitch deck or new demo); since there will be little value added by participation, any edge I bring is reduced, lowering expected value in those “non-party round” investments where now I will be MIA; and
  3. AngelList syndicates have solved how to best access the market without my involvement. as well as put together a coherent strategy via who I back and how much.

As I think this out on the fly (don’t have the luxury of time to spend time editing this stuff), I see a few posts I should lay out, before I go back to another 4 months of blog hibernation.

Why Syndication from AngelList is going to change the VC world forever 

My WishList for Naval and Nivi–My suggestions on improving AL Syndicates, and How to take on and win the institutional investing game. A few spoilers–make my life easier by registering as a b/d, so I don’t have to wire money everytime. Simple logins.  (Opt-out, not positive action to wire in). Investible Indices/themes. Verifiable Performance #s. And a capped amount “I’m in the next deals at $x a shot until I reach $XXXX” so I know exactly the top side of my commitments without having to monitor. Who actually knows the pace these syndicates will actually be cranking out at? But overall, nice dashboards, great execution to date.

Why I am Trying to Recruit New Baby VCs (yes, that’s you Wayne, Jeff, Jennifer, and Bowei), all great entrepreneurs, and why they should syndicate (I’ll commit on the spot!) and bring more investing dollars to follow their passions.

Maximizing my Signal to Noise both Inbound and Outbound, for more impact and more free time

How Life as an Endowment Trustee Changes My Thinking as an Angel  I’ve been a few times on the other side of the fence as a trustee picking asset managers, and how you have to think about blending a team that’s stronger than the individual parts. Harry Markowitz theory and all that.

One stray thought before I sign off: there are 3 probably good reasons to be an angel investor–1) making money; 2) having fun; and 3) giving back and finding meaning.  All are valid, and all 3 can possibly be done simultaneously. For me #1 goes without saying–investing is pure cold logic–but as I get sucked in deeper into my own startup, I find that what I can offer my portfolio companies is probably limited to a good data dump at the start of the relationship, and maybe once a year thereafter at best. Other than that, I’m just noise. As for Fun–well, however much fun angel investing is, it doesn’t come close to the fun of running a company. As Mark Suster says, if you can still shoot the three, you don’t retire to coach. So I’m more intent on focusing on doing, not the coaching/investing. As for #3–that sort of is a constant in your life that you can do with or without putting bucks up. But it’s natural I’ll have less time for the community, for this blog, for all the related activities that aren’t directly tied to BuysideFX. I expect to be back investing with a vengeance in a few years, either with a lot more cash, or a need for more should I crash and burn. So I’ll have some good posts maybe in a couple of years. Let’s hope they are victory lap stories and not post-mortems!

As for cataloguing this new round of thinking, I’ll try to bang out some of these articles this weekend, and otherwise finish them over the Thanksgiving or Christmas holidays. Wish me luck, because after that, I go back to the day job.

OK–Same Angel Strategy, but New Execution Style

Just a quick note that while I’m investing more than ever in early stage startups, I’m changing my style. I’m still big on diversification, aka, spray and pray, which is more necessary than ever since going from full-time angeling 3-4 years ago to perhaps being able to devote only a few hours a month to it due to my involvement growing my own company. Increasingly, I’m investing in the same way large institutional asset managers and pension plans do it: come up with target allocations, rebalance as appropriate, don’t pay active management fees for passive results, be happy to pay for top managers with records that have a unique skill set, and then “trust but verify” via performance reviews.

In a nutshell: less active involvement by me, more outside management via pools, no real participation in angel groups, and a big dollop of AngelList syndicates. Just came back from a week in San Francisco, and I’ll post my thoughts when I get them down this weekend.

New Angel Blogger: Yosko!

yosko

Ben Yoskovitz has cranked up his Instigator Blog, and you can tell it’s a hit by the people reading and commenting, like early stage investors Dharmesh Shah, Fred Destin of Atlas, Mark MacLeod of Real Ventures, and Helge Seetzen of Tandem Launch. This week Ben wrote a retrospective on his first 9 months as an angel investor, listing 14 observations. (Only 81 short of Martin Luther’s 95 Theses–perhaps Ben launches the Angel Reformation after his next 4 posts.)  Since I haven’t actually seen Ben in 8 months, and don’t get up to the Great White North often enough, so I thought I’d send this back as an open letter. Ben, this one is for you!

Ben’s points (copied in bold italics) are:

  1. Angel investing is fun.  You got that right. This reminds me a little of Woody Allen’s answer to the question “Is sex dirty?” (Answer: It is if you’re doing it right.)  1a Some parts of angel investing aren’t fun, namely reading legal documents and wiring money.  Amen. Which is why I always recommend that companies use standard term sheets, as discussed by Mark Suster here. Big negative points for those investors who insist on rewriting them. And since I see most of my companies in person, I have no problem writing a check. Take the extra $25 saved and take the entrepreneurs out for a beer.

  2. Saying “no” is hard. I disagree. Saying no is easy. It’s just business. Saying yes takes guts. Trust me, if word gets out that you’re investing, you’ll get used to saying no. Just as I commented in your most recent piece.  But whether you say yes or no, don’t dawdle. A fast no is much better than the slow no.

  3. I’ve done minimal due diligence. OK–I’ve got an inconsistent opinion here. I now do much less DD than I used to. Why? a)I generally make smaller investments now, and more of them, as I am more of a believer in the “spray and pray” philosophy of angel investing, based heavily on the team; b)I’m heavily biased to bet on repeat entrepreneurs, especially on repeat winning entrepreneurs–due diligence on them is pretty darn easy; c) confidence in pattern recognition, as you do this more; and d) age…I don’t do anything for a long time anymore, outside of peeing.  However, for brand new angels I recommend the opposite, i.e., taking lots of time before investing in your first few deals. Start by sitting in on angel groups, and volunteering to be on due diligence committees. (Even though angel groups do these agonizingly slowly.) You need to deeply work with other angels (almost all of whom are too slow) and learn to suck up their experience and/or watch their mistakes. Don’t have relevant experience or knowledge? Not the end of the world. I was lucky enough to have an early exit in an investment sourced through MassMedical Angels. They do EXHAUSTIVE due diligence, and I both trusted the process and the evaluators. Everyone has to outsource some expertise, so don’t feel bad about it if the other elements of the investment (such as valuation, team, and gut instinct) meet your requirements.  When I like those three elements, and the area is something I don’t know, then I will ask a trusted angel friend with expertise in that area to take a look, then I tend to follow their thoughts. This can get various answers: I passed on Space Monkey, which has both smart and vocal proponents behind it, because of some terrific analysis by friend and fellow angel Wayne Chang, who knows the storage area cold and saw some big problems that I hadn’t considered. I think Space Monkey has a good product and a terrific team, but it’s probably too early to escape a premature death against the current forces of evil (ISPs, phone companies, cable providers) who no longer allow “all you can eat” data plans. In another case I backed MomentFeed, because domain expert Jennifer Lum not only looked at it for me, she invested. Which is good enough for me. Social proof is, after all, a strong signal.

  4. I’m biased to people I know.   Amen again. The more you know the people, the better your odds are of predicting success. That’s one reason I love to invest in TechStars companies. As a mentor there and at MassChallenge, I get to see these teams closely over a period of months. There is no better predictor of success.  And sometimes you get lucky: the aforementioned Wayne mentioned he was starting a company, and I immediately wanted to get involved, in that I knew Wayne was driven (and his partner Jeff Seibert an equal superstar.) Easy decision…and that ended up as Crashlytics, which will “return the fund”, as they say. I invested double my usual stake, and it will come out multiples better than my next best exit. Thank you Wayne. I’m investing in dozens of more startups just rerolling the house money created from  brilliance and sweat.

  5. I haven’t invested the same amount in each deal.  Good! See above, sometimes it works. I have 3 levels of investment. Regular ($25k), Committed ($50k, plus follow-on), and Minimum ($15k). Works for me.  But when in doubt, invest less, and spread it over more deals. Here’s a blogpost I wrote a couple of years ago that explains exactly how I go about allocating my money, and why it’s important to have a big top-down plan. Don’t invest too much too early!

  6. I’m involved more in some than others.  That’s gonna happen. You can help some more than others. Even if you can’t be involved, though, you can always make intros and add the useful tip every now and then, including your expectations on how they should communicate with you and your fellow angels. And I know you do all that, so you’re spreading good karma regardless of involvement. 6a. If you need my help with the core business then we’re in trouble. (Love the “we”!) I can help with introductions, provide advice around analytics, Lean processes, recruiting (and a few other things I’m reasonably good at), offer a shoulder to cry on, listen, commiserate on the challenges of being an entrepreneur and probably a few other things too, but beyond that and I start to worry.  Agree completely.

  7. I haven’t always agreed with the entrepreneurs.  I can only think of one investment that I’ve made when I didn’t agree with the basic approach of the entrepreneurs. That was for a company that has great intellectual property which I believe can do good with great social good, but the entrepreneurs are passionate about it just being about fun.  I’m hoping that their passion continues them to tinker with their invention, but that once it’s improved that they then see the light and turn it into a money machine rather than a toy. We’ll see. If we were always logical, I wouldn’t have backed it, and it’s too early to tell. I’ll have a stronger opinion on this later, but it will still be off of a n of 1. 7a) My feeling on this is simple: entrepreneurs own and run their companies. Those startups are their babies, not mine, I’m just along for the ride.  Yep. But as for agreeing on the micro strategy–forget it, that’s in their hands. And when you get a bigger portfolio of investments, you can’t keep up with the micro.  You want entrepreneurs who will listen to your opinion, but make up their own minds. (See my post on Brent Grinna of Evertrue. Glad he didn’t listen to me to avoid the high school clients!)  If entrepreneurs don’t listen, or if they always change opinions based on yours, however, avoid.

  8. I haven’t developed a real thesis for making future investment decisions. That’s OK–whatever thesis you come up with generally gets outdated fast. In retrospect, some of my best investments have been in the mobile space: besides Crashlytics (Twitter), I’ve had exits with UpNext (Amazon), LocalMind (AirBnB), Cardmunch (LinkedIn), and a few others (with more than one being a “zero exit”.) Still, I have no mobile thesis: it’s a space where I have little expertise other than as a user, but all of these investments were in existing products that scratched an itch of mine in some way. But if you are looking to pick a thesis, how about this: pick companies that will be bought by bigger companies. Easy, right?

  9. I’ve been influenced by the participation of high-profile investors. Yeah, well that is not a sin. One reason YCombinator and TechStars companies have such a following is that it’s so hard to get accepted, they MUST have something on the ball. Same thing with getting great investors. AngelList is built on social proof, and I buy it as a good screen. If you think the idea is stupid but the investors are great–pass. (I think of Mahalo and Scvngr, both of which I wish I could have shorted.) If investors, team and concept look good and the valuation isn’t crazy? Buy. But if the CEO doesn’t sell well...run. One other thing: high profile doesn’t mean a good investor. Check their records too–respect goes to those with the best track record, not the best publicist.

  10. I’ve also been affected by investors saying no. Believe me, until you get to that A list of people with first looks, like Google Ventures and A16Z, a lot more smart investors will have said no then you realize. A couple of times I’ve second guessed my decision to invest after hearing that other investors have said “no”, but only when I heard their logic.  If you’re wrong, consider it tuition. If you’re lucky, you win! No downside, as long as your bets are small enough you can afford the lesson.

  11. Party rounds are bad. I knew this already, but when looking at an investment now, if I see a lot (say 7+) people participating I get very nervous.  I’ve got a big trouble with having a number make a difference. I’ve got well more than 10 people, because 1) virtually every one I know to be a value-add investor, and the others I’m friendly with or let in as a favor to another member of the syndicate, 2) I want to diversify, in that angels are great on terms and support, but can’t be depended upon to follow-on, and 3) I depend on all of them to feed me ideas, leads, etc. One investor got me my CTO, something I never expected. The more helpful investors you can find, the better! Passive investors…only take them if you need to. But do not judge a deal by the number of investors, large or small. If large, find out WHY there are so many. Numbers alone don’t make a party round. Is there a strong lead investor? Then it’s not a party round.

  12. I’d like to work more closely with other angels. Yep. It’s great. I’m indebted to have been part of syndicates with great investors. And as you expand your network, you’ll get better deal flow and be a better investor. And those angels may even back you on your next startup, because entrepreneurs never stop, they just start another company again. Let’s see more posts on life at GoInstant!

  13. I’d like an early exit or two. Or three or four. Your fellow Canuck Basil Peters literally wrote the book on the subject. A balanced portfolio or team has both power hitter/sluggers with low batting averages, and some leadoff batters with better odds of getting on base, even if they have less power. OK, obligatory sports analogy is completed.

  14. Angel investing is almost completely irrational. I don’t think anyone is disagreeing with you on that one. May the force be with us all!

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