Lastest Investment: Localmind

Happy to be part of a $600k seed round funding Localmind, with the deal led by Granite Ventures, joined by Montreal VC firms Inovia Capital and Real Ventures. The company is moving to San Francisco and looking to shake things up.

Here’s the story from Tech Crunch and from the Localmind blog itself. Ever want to pose a question to someone at a specific location? Localmind gives you the ability to send any question you want to someone that is at a location you are interested in. That person (who is either a Localmind user or one of your Foursquare friends) receives the question to their phone and responds, in real-time. Localmind goes on top of not just Foursquare, but also Gowalla, Facebook Places, etc. to get you that quick answer. I’ll certainly be using it the next three days while I’m in Montreal attending the International Startup Festival.

While there are a lot of sites (like Yelp, Loopt) which try to post evergreen answers to questions like “What’s good on the menu?”, Localmind is the best to ask questions like “What’s the special TODAY?” and other time-sensitive queries.

What do I like about this as an investor? Normally, I like deals that can have an early exit and be totally funded by angels, and I also like deals which are enterprise-oriented. This deal qualifies on neither case. But as I’ve said before, I first look at the team (and this is a great team which has worked together before) and then look at the market. It’s eminently clear that our phones will be doing more and more for us. And a lot of the value of the mobile platform is location-based. Localmind (think Quora meets Foursquare) solves a big need, and I have no doubt that the market will be immense. However, I also realize that when you swing for the really long ball, you need to have access to VC money. This isn’t a play looking for a quick phone app to be acquired; this is more hoping to get in at the ground floor as an API that can work with multiple platforms and become ubiquitous. So having VCs on both coasts can only help. Additionally, the challenge for Localmind will be to grow viral, from hub to hub. That’s a model I don’t mind studying, and you can only learn by getting involved.

I especially want to thank the good folks at Year One Labs for bringing Localmind to Montreal and introducing them to their great team of mentors. We’re keeping our fingers crossed on this one: unlike other companies I normally look at, this one is binary. It’s go big or go home.  Guys, hoping you go BIG!

Why Every Angel Should Beg to Mentor at an Accelerator

The Original Mentor

Most angels who volunteer as mentors cite noble reasons to do so: “paying it forward”, “giving back”, educating the next generation of entrepreneurs, and so on.  I love people who help others purely for altruistic reasons, and I hope such motives stay foremost in mentors’ minds.  The more favors you do, the more come back your way. At AngelBootCamp on 6/14 in Boston, there’s a great session with Katie Rae (TechStars, Project 11) , David Skok (Matrix), Roy Rodenstein (HackerAngels, just back from mentoring in Russia) and Sean Lindsay (Founder Mentors) entitled “Preaching Words of Wisdom: The Art of Mentoring”. Every panelist is a terrific, experienced mentor.

But besides creating good karma, there is one other big benefit of mentoring at an Accelerator: it’s SMART BUSINESS for an angel investor. One of my first pieces of advice on the opening panel at Angel Boot Camp in Boston this Tuesday will be for any angel, new or old, to affiliate themselves with MassChallenge or any of the other great accelerators now recruiting mentors.

#1 Inside Track to Great Investments in Accelerator’s Startup Cohort

Last year, I remember attending my first TechStars Demo Day and being part of a feeding frenzy of investors looking to be able to get into the oversubscribed round at one of the standout companies. A number of angels—Joe Caruso, Jean Hammond, Will Herman—were already invested, and another, Dharmesh Shah, announced his investment by tweeting (OK, “Marginizing”) live during the demo. All that social proof created a ton of well-deserved excitement, and for most, if you were late, you were out. Then and there I realized that there was a demonstrable financial benefit to getting in at the ground floor with the startups at the best incubators.  I was totally smitten with the event, but I also realized that a smooth, well-rehearsed 6 minute pitch was too seductive and too quick to prod for holes. (BTW—the good companies don’t always sell out fast: take the case of Occipital/Red Laser.) Being on the inside as a mentor means that you also can discern when to stay away from what might generally be acclaimed as a hot investment: I can promise you that you’ll never be able to do better due diligence on a startup or gain better insight into the founders than by working side-by-side with them during an accelerator program.

#2 Inside Track to Investments In Other Mentors’ Companies

I’m probably one of the more risk-averse angels, with a strong predilection for backing repeat entrepreneurs. And who better to back than fellow mentors, almost all of whom have started and ran successful startups prior to becoming angels and mentors. Last year at MassChallenge, I backed one of the startups (Pixability) run by an MC judge, and this year I plan to be backing a stealth startup being quietly put together by one of the TechStars mentors. That deal will never see the light of an angel group pitch, and it will be done totally with those angels who the founders know intimately.

#3: Community and Networking with other Mentors

I’m currently finishing up mentoring the Summer 2011 crop of companies at TechStars Boston. When you check out the list of mentors, you can tell that there are fantastic connections to be made. These connections aren’t necessarily mean just local—you might find Brad Feld or David Cohen in from Boulder, several prolific and experienced VCs checking in, or several of the NY mentors stopping by as well. Who better to help evaluate and discuss various investment issues than with your peers (or more often in my case, my superiors?) Just keep a lot of free meal slots available, and bring business cards. For instance, I ended up having dinner with Sean Lindsay (Viximo, Founder Mentors, etc.,) Fred Destin of Atlas Venture, and Harry Briggs from Balderton Capital, one of the leading VCs in Europe. Sean knows web engagement like the back of his hand, I found a slew of Wall St connections with Fred (yes, he used to be on the really Dark Side) and Harry brought a whole different global perspective on internet startups, in addition to stories about cricket, which we don’t normally hear around these parts. It was a great evening. Currently I’m looking to become more integrated into the Montreal startup community, so helping out as a mentor with Founder Fuel will give me an up-close view not just of the local startups, but also the regional angels and VCs. I can’t think of a better way than getting down and dirty with founders to find out from them who in the community is most knowledgeable and helpful to entrepreneurs.

#4 Education—YOURS

It’s assumed that mentors are the ones dispensing wisdom to mentees. But it’s a two-way street. While one-on-ones are the standard means of mentorship, accelerators also provide terrific opportunities to learn via participation in groups.  For instance, last month I sat in as a hot, VC-backed entrepreneur disrupting a big business gave a master class at an accelerator privately showing off the slide deck which he had just used to close a major B round of funding. The speaker fielded questions on what the objections were, what he handled well and where he might have lost points, gave tips on how he successfully managed old investors while bringing in new ones, etc. This was a fabulous, closed-door event where I was able to be the proverbial fly on the wall, just watching, all due to my involvement as a fellow mentor.

Equally important can be the small group meetings, where instead of one-on-ones, a handful of companies within a broad sector will meet. Last year I participated in the life science/healthtech group events, and was amazed at the amount I picked up from the companies. All of the entrepreneurs came with different perspectives into the industry, relevant resources such as lists of the best blogs, and insights as to what is coming down the pike in terms of new developments that hadn’t crossed my radar screen.

So, how to get involved?  Contact your local incubators—at this time last year there were more than 100 and the number (and quality) continues to grow. Mass Challenge is about to start, and there are several ways to get involved. Your local incubator probably has something similar.

Here’s an excerpt from a letter I sent out to Massachusetts angel groups looking for angels to volunteer at MassChallenge. (I’m coordinating some of the angel sessions.) With 125 Finalists participating over the next 3 months (or you also can follow them via MassChallenge on AngelList), there’s plenty of opportunities to get involved.

There are four basic ways for angels to participate in MassChallenge:

1. “Open Office Hours”
Entrepreneurs will sign up for sessions to talk about issues facing their companies.
This is a great way to get to know a lot of companies and entrepreneurs in a short period of time.
Contact:  ty@tydanco.com, (or just reply to this email) and we can start assigning time slots on a first-come, first-served basis.

2. Mentor
Angels who want to take a relationship with one or more companies more deeply can apply to be a mentor.
The Chief Mentorship Officer is Karl Buttner
Contact: mentor@masschallenge.org

3. Group Meeting/ Event
These will either be arranged either via a business theme or in a 
pitch setting.  Should the angel have some specific business expertise he would like to share e.g. cloud computing or financial technology, we would look to gather companies with an interest in this area to be led by the angel–perhaps a case study of a company you feel would be instructive, straight Q&A, etc.
Contact :  ty@tydanco.com,

4. Investor Pitch “Master Classes”
This would be a public event open to all companies – to see 3-5 companies pitch to angels and receive feedback. This was done last year by about 40 companies, and was considered one of the most valuable learning experiences of the program.
Contact:  ty@tydanco.com

Again, I’ll be at the Angel Boot Camp on June 14. If any of you want to get involved in MassChallenge, find me or John Harthorne, Akhil Nigam or Karl Buttner of MassChallenge.

evertrue_logo_stacked_gray

Next week I’ll write about my latest angel investment, EverTrue.  EverTrue is the TechStars company I have been mentoring, and they are raising a $1mm round. Most of that $1mm is already spoken before DemoDay, much of it by mentors. I don’t want to steal any of their fire, but Evertrue is a story of a classic lean startup blessed with brilliant execution. I’ve worked with them, talked to their customers, sat in on a sales call, and seen them successfully recruit talented developers in a tight market. The Evertrue story is due for a good long telling, and I’ll talk about it in the very near future.

My Next 8 Months of Angel Investing: One Fund and a Half Dozen Startups

OK, the title of this post has ensured that I’ve gone and blown any shreds of suspense. But I’m writing this to get feedback from all of you, so feel free to pick apart my logic.

Angel investing itself is 100% bottom-up, i.e., picking the right companies. However, in order to figure out how much I have to spend, I need to think top-down, or macro.  I start by figuring out how much is a proper amount to go into illiquid assets, and after subtracting housing and existing private equity (which includes my remaining stake in my old startup), I then determine what’s left over to go into early stage.  Finally, I need to figure out a time period.

I started investing in startups (not including my own) in early 2009, which was a great time to invest…but the size of the investment pie to split up was smaller because of the stock market crash.  The logic for jumping in then was two-fold. As liquidity was drying up, private equity should be scarcer, and thus be able to get higher returns on less risk than usual. (First disclaimer: while we won’t know the side by side results for years, it’s hard to argue that I shouldn’t have put EVERYTHING into the public markets from a risk-reward point of view. With public markets up 50% in general off the lows, I’m betting the average public manager will have done better in 2009 than the average VC cohort, without sweating over the risks of illiquidity.) Second part of the thesis was the observation that many of the best startups are funded in bad economic times, given the ability to assemble a great team of workers who otherwise have few prospects.

The plan was to try out 3-4 investments, and if I wasn’t spooked by the process, to go on to acquire stakes in 20-30 companies in the next 30 months.  I figured that that volume was the bare prudent minimum for diversification…and even then realizing that an uncomfortable amount of return would be up to chance. Like Brad Feld here and Sim Simeonov here and here say, it pays to be promiscuous by making lots of bets. (It should be noted that over time, as my initial investments have been getting more frequent, they are getting smaller, while I’m reserving more for follow-ons.) Since I see that startup valuations are going the wrong way—higher and frothier—my hunch is that I am better off  investing more and sooner rather than dollar-cost averaging over, say, a year-longer period. If the markets stay frothy, then I should have some exits and the ability to re-invest again, should I so choose.

So far, so good. 2 exits (CardMunch, and an unnamed medical device company) already this year, with no angel investments yet on life support. My very first angel investment went on to a fair-sized B round injection from Bain Venture Capital; while that might seem like a good sign, personally I prefer aiming for 3-5x early exits as opposed to holding out for the 20x mega-hits required by large VC firm math. (See Basil Peters’ terrific book Early Exits for more on this topic.)

Believing that a) diversification is good; and b) I don’t have all the answers; I’ve also committed to three commingled early stage funds: CommonAngels Fund III; Project 11 Fund I; and TechStars Boston Funds 2011-14. (I should note that this mixing direct angel investments with investments in early stage funds is copied from a few successful angels I admire, including John Landry.) However, I’ve passed on the chance to diversify in several other well-respected seed funds. I passed late last year on an attractive secondary opportunity in a small VC fund where I could have bought into some old positions at par, even with the knowledge that there was at least 1 good sized winner in there.  My rationalization, which may be dumb from a financial point of view, was that even though that investment probably will offer more return than what I will achieve with that same money, I wouldn’t learn as much or have nearly as much fun as I would by investing directly—when did you ever hear of a minor LP getting in to talk strategy with a VC’s portfolio companies? Instead, I am able to invest in another 10 startups.  And in the two other cases I passed on that had lower minimums, the investments previously made in those funds just didn’t resonate with me, in spite of their logic. While the funds in which I did invest didn’t have any such “free look”, I really liked the philosophy, resources and backgrounds of all of those managers. The bonus: along with the potential investment return comes the terrific opportunity to get that much closer to both the funds’ managers, but also to their underlying portfolio companies. The negative—all three are in the same geographic area, in more or less the same sectors.

Which is why I still am probably going to make one more pooled fund investment, and then probably call it a day. Being overweighted in Boston, both by funds and in individual companies, I want to diversify geographically and get more insights into the Montreal scene. So as soon as they open up their Fund 2, I’m hoping to invest in the next fund started at Year One Labs. Philosophically, I consider Year One Labs as identical to Project 11, just dressed in an anorak and a toque. While I think highly of the folks at Real Ventures, another Montreal startup fund, I favor Y1Labs for 3 reasons: the smaller scale, mentors, and existing portfolio. Raymond Luk talks with Daniel Drouet about Year1Labs in this video.

I was fortunate to visit Year One earlier during an Investor Day, in which they paraded out their 5 current companies in their current (first) fund. While the portfolio companies were great (especially LOCALMIND! and the game company PLEASE STAY CALM!, both of which moved to Montreal to take advantage of the YearOneLab program,) just as attractive to me was the list of mentors they have brought together.  Just as I adore being involved with TechStars mentor program, being able to sit in and watch and learn from the great TechStar Boston mentors, it’s the same at YearOneLabs. Virtually all of their mentors have successfully founded one or more successful businesses, with most having exits as well.  Interestingly, a good number of these Y1L mentors travel into Montreal from Ottawa and Toronto, giving them longer commutes in than I have from Burlington, VT.  Lastly, while TechStars is pretty large (80 mentors just in Boston), and Project 11 itself is a small startup, YearOneLabs has that Goldilocks “just right” feel.  It’s more intimate than, say, Real Ventures in Montreal, which has more than $50 million in dry powder, with much of that raised via governmental mandates as opposed to angels. I haven’t figured out whether that’s good or, as one Montreal entrepreneur who left for Silicon Valley, believes, bad; with no such debates, I’ll instead be lining up at the YearOneLab queue when it opens up its second fund.

Which leaves angel investments.  I’m slowing down my direct investment pace as I slowly have established some diversification in my angel holdings. And as my available discretionary funds begin to draw down just as my deal flow is ramping up, I need to be pickier going forward.

So, what to choose?  First, I anticipate investing in 1 or more companies in this year’s TechStars Boston class. (Technically, I’m investing in a teensy-weensy fraction in all of them via my TechStars Fund exposure, but I mean a specific, targeted investments, not in the class as a whole.) There are 12 companies currently in the program, and I’m fortunate to be able to have a front-row seat as they work through product-market fit issues. Being a mentor allows me terrific access (effectively, better diligence and possibly a better investment) to see which companies I want to spend the next several years with as an investor. Many talented companies I’ll pass on, just because I don’t understand their product or field. Still, being able to receive weekly updates and data from each of the ones that interest me is truly a blessing—I can foresee where a significant percentage of any seed round raised comes just from mentors. That access is an edge I normally will never have as just some angel group member. How will I choose among the last 3-4? For me, a big factor will be the momentum each establishes over the three month program, and how wisely they use that time to make meaningful connections. By the way, at this point I just don’t think of this allocation as another Massachusetts investment. The companies come from Estonia, Israel, England, Memphis, Texas, San Francisco–all over. So who knows….

I also have joined Anges Quebec. If I’m serious about the investment opportunities in Quebec (other than those sourced at Year One Labs), I’m going to need good guides. And when the leading Quebec angel group has raised a $20mm sidecar fund to co-invest in the companies they back (such that I know that any dollar I invest is matched by two other dollars), a lot of future funding risk is lowered. So à partir de maintenant, je suis fier d’être membre.

I will continue to see deals from North Country Angels and AngelList, which are the largest deal sources for me to date with 6 and 5 deals respectively.  Plus my favorite angel group, Open Angel Forum.  But I expect their percentages to drop as I get increasingly picky.

Now for my favorites: there are two other companies who haven’t come to market yet who I’m saving ammo for, one of whom I know well from the MassChallenge 2010 class. (Yes, you guys know who you are.)

So, that makes for some tough math: if I want to keep my discipline and keep it down to 8 more individual deals in 2011, and I’ve already soft-circled 3 in the pipeline, and I expect another 1 or 2 from TechStars, that only leaves 3-4 deals left in 2011 from all other sources. I’m going to have to be very, very choosy. David Rose, CEO of AngelSoft, discusses this well on Quora. I could perhaps do more deals if I chose not to participate in follow-on rounds, but for now I’m reserving 75% of my initial purchases for those, assuming a doubling down on ¾ of the deals, and passing on ¼. But I’m not going to blow my discipline. The old joke still applies: How do you make a small fortune in angel investing? Start with a larger one.

So, that’s the playbook as it stands now. I’m not considering cold deals from over the transom, although I feel obligated to give a response to any entrepreneur who asks.  And while I know a lot depends on luck,  I am trying to bring some institutional logic and discipline to a field where frankly, most people lose money, and most deserve to lose it.

Now I’m asking you, readers, to give me some hints on where my macro logic needs some retuning. What percentage do you feel is appropriate to put into angel investments?  For ease of math, start with a $10mm liquid portfolio, assuming no other appreciation over time. How much should be sold and allocated to startups? How much of that gets allocated to funds, with better diversification—and perhaps management—but higher fees? What time frame do you now feel is appropriate to assume for an average life until exit of the companies that remain viable? (I’m using 8 years on average, expecting at least one of the hoped-for winners to take more than 12 years to exit, and I expect to rolling reinvest any proceeds.)  What should be the average pre-money valuation for the portfolio, and what’s the top price you’d pay?  (I personally no longer consider investing companies above $4mm pre-money valuations, and expect to sit out the cycle when that happens…and it looks like it’s already happening on the West Coast.)  And lastly, would you opt for smaller than average size investments, perhaps getting shut out of some more competitive deals, in order to spread the same amount of money on more bets?

Fire away in the comments section below or just email me directly if you want anonymity.

Montreal ACCELERATES! Or, Ty’s Excellent Adventures Up North

Montreal startup

The opportunities in Montreal are looking even hotter than the Canadiens (6-3-1 last 10 games), and a lot of the excitement is due to companies emerging from a new group of accelerators. While the idea of new business incubators is hardly a new one, the last 5 years have seen an explosion of activity.  As I mentioned in my post on the MassChallenge, last time I looked more than 100 accelerators had sprung up in the U.S.

The startup scene in Montreal appears to me to be growing at least as fast.  I’ve visited there twice in the last two weeks, and things were hopping.  First was a kick-off party by Capital Innovation, headed by Martin Duchaine, which brings together angels (primarily from Anges Quebec), VCs (including RealVentures, Inovia Capital, BDC Capital, and healthcare investor GO Capital, ), accelerators (including YearOneLabs, Bolidea, MontrealStartup, and Tandem Launch Technologies), regional development authorities, entrepreneurs, service providers—in short, the whole entrepreneurial community.  There was considerable press attention at the party, but particularly I’d like to mention NextMontreal, edited by YearOne Labs co-founder Ben Yoskovitz, as THE source for all startup-related news.  Capital Innovation is in its 4th year, with 6 larger events taking place throughout Quebec, ending with several of the best companies winning cash prizes and exposure.

I returned to poke around some of the more interesting opportunities at the incubators. Raymond Luk, one of the co-founders at YearOneLabs, introduced me to some of his portfolio companies who are based at RPM Montreal, a giant co-working space,  well equipped with high-speed net, and high-speed espresso (I guess that’s redundant), and super high-speed entrepreneurs. YearOneLabs, like Project11, which I wrote about here, is EXACTLY where I want to go to find cool companies. The founders recently sponsored a Google Hack-a-thon at their offices, bringing in ambitious nerds from all over. And Raymond’s initiation of StartupDrinks undoubtedly brings even more talent to their door.  Unlike large VCs who can make a cushy living from their 2.5% management fees on big bucks, YearOne’s managers’ interests are totally aligned with investors. They don’t make a penny from management fees, their compensation is 100% dependent upon performance.

My favorite company at YearOne was Localmind, which is described as “what would happen if you crossed Quora and Foursquare”.  It’s a modest, 2- about to become 3-person shop, with a decidedly audacious vision of “Knowing what’s happening. Anywhere. Anytime.” And the buzz is out that this is worth following. The headline in GigaOm says it all:  ”Localmind iPhone App is the Future of Local Crowdsourcing”, with the article picked up by the New York Times, and expanded upon by The Next Web.  This is definitely a company to watch, but would-be investors can relax a bit–they’ll be building out the system for awhile before looking for additional funding. Localmind is debuting at SXSW, and you should soon be able to download an invite for their beta here. One interesting item for trend followers: Localmind’s founder, Lenny Rachitsky, is an American who moved to Montreal to take part in the tech startup scene there. Among other things, the government gives major tax credits and other subsidies to software companies. But rather than tell you how that works, I’ll dig up some articles that might explain this better.  (Readers, feel free to add links in comments section.) That, along with changes that make it friendlier for American angels to invest in Canada, make it clear that on the tech front, Montreal is decidedly open for business.

On the other side of the development spectrum from Localmind is Wajam, one of the Bolidea companies with serial entrepreneur Martin-Luc Archambault in charge.  Martin-Luc has already had a few successful launches and sales, and to date he has personally assembled (and financed) a large team of developers working on social search.  Social search is hot now, and Wajam is a friendlier version of Greplin, which I use instead of Google Desktop to search for correspondence that comes in from, say, LinkedIn.  Like Greplin, it incorporates streams from your friends from various social sites such as Twitter, Facebook, etc., but has the added important convenience that it can be laid over any search engine. Hence, Googlers can access through Google, Bingers via Bing, without having to go to a separate website. (I corresponded with one VC who prefers dedicated websites to plug-ins, but as a user I disagree) and ultimately there is no reason Wajam can’t be overlaid on Amazon, BestBuy, etc.  Thanks to Alexandra Dao at Wajam for the terrific tour of the private beta version. Alex was one of three separate hackers I met from Guelph, Ontario, all of whom  I moved to Montreal for the flourishing tech scene.

Martin-Luc has a clear vision of how he is going to acquire users and monetize the site. Interestingly, he consciously is not going the “get as many users as possible right away with a minimum viable product”, preferring to do his testing within a smaller testing group, and only then launching publicly.  Here’s a video of Martin-Luc talking about Wajam.  When it raises funds, it will be well above the normal angel valuation range. Nonetheless, this is one of those big upside possibilities where an experienced, successful team takes on a big market and big problem—the fact that search now become less usable as content farms screw up the credibility of search results. In my opinion, that makes it VC material.

And there are plenty of more companies out there.  As I get more involved with Montreal via CapitalInnovation, I’ll blog more.  Right now, as a newbie to the Quebec investing scene, I’m still unsure who to seek out besides Michel Brûlé (winner of Canada’ angel association “Angel of the Year” award in 2010, Vice-Chair of Anges Quebec, and a massively successful entrepreneur on his own) and a few young guns like Daniel Robichaud and Martin-Luc Archambault (who, like Raymond Luk and Martin Duchaine, is on the Board of Anges Quebec in addition to his role as an entrepreneur and super-angel.)  I like some of the VCs I’ve met, but due to a variety of factors, venture funds have yet to bring in meaningful returns in Canada. Nonethless, the majority of US Venture Funds have had a sorry decade as well. I’ve heard in the Canadian instance the industry had the misfortune of most of the institutional money coming in all at the 2000 top of the market, followed by a long drought which was only cured by the re-infusion of government funds into the system.  But I have no way to verify that yet–I’m still mostly in the dark on the context and history here, and thus still a bit cautious.  As Warren Buffet says, “If after 10 minutes into the poker game, you don’t know who the patsy is—YOU are the patsy.”  More on this as I figure it all out.  Unfortunately, it’s taken me more than 10 minutes so far…but I’m still feeling very solid about the possibilities.

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