AngelList’s Big Four Benefits for Investors

Posted on August 8, 2011 by Ty Danco

Anyone who regularly reads this column knows I love AngelList. It’s the matchmaker service between promising startups and early stage investors which has revolutionized angel and maybe even VC investing.  There has been a slew of recent articles on AL, including good ones from Venture Hacks, Venture Beat, and BostInnovation.  But while there are a few guides on how to hack AngelList from a startup’s point of view, almost nothing exists for angels looking to get started. Which is where this blog post comes in.

I’ve put down a few the best strategies for angels to get the most out of AngelList—how to broaden your network, improve your deal flow, turbocharge your due diligence, and strengthen your existing angel investments.

I.                 You’ve Got to Be In It to Win It—Improving Your Deal Flow

Trust me on this, just open an account. It’s an unbelievable gift: there are no fees and no requirements for participation once you get in. Even if you only lurk on AL, being connected will make you a better investor—you’ll be more in tune with what is going on. But first you need to get on: you can register here.

Assuming that you are an accredited angel and you have participated in some deals (if not, you’re better off joining a local angel group to get started), the process is straightforward.  Our first hack: get 4 members to endorse you, and you go straight to the head of the line.  How do you find out who’s already on? The website is dead simple to explore, and you can search for angels by geography, name, activity level, followers, etc.

Setting up your Profile

Once you get accepted as a member, you’ll be asked to set up a profile including representative angel investments, the sectors and geography you’re interested in. How complete you do this is up to you; I haven’t noticed people listing their losers.  I prefer to list most of my angel investments over the past 2 years, as well as displaying my linkedin profile and website. Consider this how you want to introduce yourself, because it is all public.  Here’s my profile as an example.

Your Follows Determine the Quantity of Deals You See in Your Private Stream

Now the fun begins.  Just like Facebook or Twitter, what you see is determined by who you follow. Any activity done by an angel you follow is sent into your activity stream, and it’s easy to be overwhelmed by the thousands of investors and companies represented on the site, especially if you opt into the public site instead of setting up a personalized, filtered site.  If you were to follow me, you would get notified every time I follow a company, request an introduction, make an endorsement or comment, invest, etc.  So you don’t necessarily want to follow too broadly at first. Rather than get swept away by the full force of the firehose, you might wish to start by just following 25 or so semi-active angels. There are a number of ways you can decide which angels to follow: you could just import your list of contacts from LinkedIn, Facebook or Twitter, and AngelList can cross-reference to see who of those is on AngelList. Or you can look up the most followed investors here. Note that oftentimes the most respected VCs on the list with big followings might not necessarily be the best people to follow on AngelList. Why? It is unlikely Fred Wilson, Reid Hoffman or Mark Suster (all of whom are on AngelList) are going to tip their hand concerning which startups they are interested in.  Junior analyst VCs are just the opposite: they will take dozens of intros before even doing any hard diligence, as that’s their job–finding and then doing light scouting on hundreds of companies before bringing a handful of vetted leads up to their partners. Either way, I often find following either senior or beginning VCs creates too low a signal to noise ratio, so I concentrate mostly on active angels I respect. There are exceptions: some micro-VCs associated with incubators (e.g., Dave McClure) work AngelList hard to promote their companies…but you need to recognize that that is part of the brand strategy for their companies and their incubators.  One of my first investments via AngelList was CardMunch, in which I co-invested with Manu Kumar, Mitch Kapor, and Dave. And while I wrote about all the reasons I loved investing in CardMunch here, I never would have known about the opportunity if I hadn’t followed those investors.

Consider AngelList more like Twitter and less like Facebook: you can add people or drop them, there is no shame of “unfriending”.  For me, before I add someone, I check out what they show on their activity list to date.  If it is in areas I want to invest in or learn more about, great. If not…unfollow.  I may temporarily follow an investor whose portfolio I want to check out, but my follow list is fluid until I actually co-invest with someone, when I lock it in.

You’ll also be asked in your profile to define the areas in which you’ll want to see deals. You can define that geographically and/or by investment sector.  There are no limits other than your ability to process information on how many sectors to look at. However, if you choose “World” as your geographic area, there are literally no filters, and filters are your friend.  I have no interest in fashion, food, biotech, etc., and so I block those fields. But I want to see deals in mobile, location-based-services, fintech, and a few other areas of interest. So that’s what I include and what I see on my private stream.  The breadth or focus of anyone’s private stream can be discerned in their profile. I don’t know for sure, but I’ll guess the narrower the stream, the more disciplined and the more insightful the investor, although undoubtedly there are some hardworking people who are the exception that prove the rule.

II.               Turbocharging Your Due Diligence 

So, after seeing a few dozen deals (including archives of deals you wish you’d seen when they were live), you get the hang of AngelList.  But it may be a little scary being outside of the comfort of an angel group. The beauty of being in a group is less about gathering deal flow and more about learning via the insights of others. While AngelList may be decentralized, the ability to lean on others’ knowledge is at least as great. This can be done both within your current network and outside of it. Here’s how I approach due diligence on AngelList.

Before the Intro

Before I request an introduction to a company, I first check out what’s publicly available. Typically there is a slide deck, perhaps a video, links to a website, LinkedIn profiles of the key players, and a list of existing investors and advisors. I’ll click through everything that’s easily available, and more than half of the time I don’t go further, whether that be from some perceived flaw, too high a valuation demanded, or whatever. If things seem promising, I’ll then follow the company. In that way, I’ll stay abreast of all changes in status. (Don’t get carried away, however, if all of a sudden everyone is requesting an introduction.  If you follow the herd, you’ll most likely get trampled.) If I still like something a few hours later, I’ll request an introduction. Thomas Korte, ex-Googler and founder of the San Francisco-based incubator AngelPad, says that while he’s a big fan of his companies putting themselves up on AngelList, some of the companies have found themselves distracted by non-serious angel window-shoppers piling onto whatever companies are receiving the most introduction requests.  (There may be a solution for this coming up, as AngelList is beginning to post reviews of investors as well as companies.) If you see tons of other investors all requesting intros to the same company you want to talk to, take the opportunity at the introduction to give a little snippet about yourself to help persuade the company to take you seriously. But don’t sell yourself too hard—later on you’ll want to see if they gave as much effort to checking out you as you did to research them.

The Skype Call

Next comes a call to the CEO via Skype or some other video chat. (Phone is OK, but video is so much better.) Some angels have had success just riding on the coattails of others,  but I can’t imagine making an early stage investment without doing my own due diligence.

The interview is the time to read the CEO and find out more about the company. In other words, no different than at any other angel pitch.  And more often than not, companies flunk the interview. See “Why I Passed on Investing in a Hot Startup” and “5 Reasons an Angel Will Walk From Your Deal”. There’s nothing new to tell here.

There is, however,  one aspect of due diligence that is almost unique to AngelList: checking how thoroughly the companies do their due diligence on YOU. If they take your call without having done any preparation, that implies they are just looking for a check and are wasting their chance to see what other strengths the investor can bring.  But if they have taken the time to look at my list of portfolio companies, thought of what connections I might be able to bring, checked out my LinkedIn account, know where I’m from, etc., then I know that that the CEO is prepared and hungry.  A simple question like “How do you think I specifically might be able to add value to your company?” will often quickly tell you whether someone has taken the time to prepare for your interview.

Leaning on Others Inside Your Network

Assuming the CEO has passed muster, then it is time to compare notes with your fellow investors. When I don’t have specific domain expertise, which is true more often than not, I like to call in the reinforcements. MomentFeed, for instance, had some great traction, persuasive management, well-regarded investors and was involved in a sector I liked, but I was (and still am) lacking sufficient understanding of their approach to mobile marketing. I asked Jennifer Lum (ex-Quattro Wireless, ex-iAd, investor in Peekaboo Mobile) of Apricot Capital to check them out, and Momentfeed passed her more sophisticated review with flying colors. Both of us ended up investing.

Similarly, I recently saw a company with an intriguing product in data storage using a novel type of architecture. They have an excellent advisor, a tested prototype, and might be a big winner with a differentiated and cheaper product. In this case, however, my friend Wayne, the expert I asked to check it out, brought out a number of potential problems which I hadn’t thought of. While it’s still an open question if I go in, my decision undoubtedly will be more considered due to my friend’s involvement.

I’ve co-invested with both of the angel experts I mentioned above, and I really value their judgment. The funny thing is that I’m not in an angel group with either of them, and it would have been hard to get their input on a similar deal if it hadn’t been on AL. But as a result of the instant networking available with AngelList, where colleagues can get up to speed on a company almost instantly, due diligence can zip along at higher levels than usual.  One knock on AngelList is that many investors may get lazy and depend on someone else to do the due diligence, to the extent that no one does any. But I feel that’s more a critique of the investors involved rather than the software making it possible. 

Going Outside: Looking Up Investors and Advisors

Sometimes, I need to go outside of my network. While I went into ScriptPad, GreenGoose, Saygent and UpNext after talking to folks I knew who were involved, sometimes you need to go outside to a new source.  I invested in NoiseToys, for instance, after introducing myself to not one but to two Charles Huangs.

Checking in with investors is especially important in the 2nd round of a deal. AngelList will list not just current investors but also previous investors, which allows you to explore “signaling”, which can happen when an earlier investor chooses not to follow a round. If you see, for instance, Dharmesh Shah as a first round investor but not in the 2nd round, that doesn’t signal anything, as Dharmesh explicitly tells everyone that he’s a seed stage investor only and doesn’t follow in subsequent rounds.  However, I’ve found more than once a company that has great name investors in the early rounds who have chosen not to follow in subsequent rounds even though following is their normal modus operandi. How did I find this out? They told me when I contacted them. For these investors, their reputation is worth more than any single investment, so generally they’ll be straight up about their reasons. It may be that key management doesn’t work well together, that customers hate the product, or some other flaw that you should be aware of. AngelList makes it easier to find the skeletons in the closet due to the ease of referencing within the network.

Handicapping the Endorsers—How sincere is the praise?

It’s difficult to determine the difference between who is good vs. who is merely active, but there are hints. I’m a believer in the “Where there’s smoke there is fire”, and so generally those investors with large followings probably deserve them, and I will give them good weight, especially if they’ve had any recent successes. I tend to do an informal signal-to-noise ratio. If someone has 1000 followers, I first look at their investments to try to understand why. But when there are 2 people with 1000 followers, and you can determine through someone’s profile page that person A has made 50 recommendations and endorsements, and person B has only made 5, I give more weight to person B’s comments if only for scarcity value. The more you dig in and research, the better you understand where they are coming from. Brad Feld recently blogged “Why I Won’t Game AngelList.” While I think his policy of not following is perhaps too strong, I applaud the big picture. If you discover endorsements where the angel ISN’T putting his own money to work, discount appropriately.

III.              Expanding Your Own Network

The best leads come from your own portfolio companies. They are the folks on the ground closest to new technology, the customers, and their fellow startups. But a close second are co-investors from earlier deals. A particular beauty of AngelList is the ability to send private messages between those who follow each other. I first talked to Thomas Korte of AngelPad via private messaging on AngelList. He uses it often, and says that people tend to respond far quicker via AngelList than via normal emails or voicemail.

Follow Your Co-Investors so You Can Private Message

I’ve found this as well. Last week, I visited New York to see the current class at TechStars.  Before leaving home, I remembered that Localmind had been delighted to add Peter Bordes to the investor group via AngelList. Via the AngelList/Localmind connection, we were able to connect at TechStars (Peter is a TS mentor as well,) where we compared opinions on the new vintage of TS companies, shared ideas and leads, and got to know each other better. I absolutely know that I’ll want to seek out Peter’s opinion on media companies going forward, and hopefully I’ll be able to return the favor to him whenever I have something to add.

It used to be that the rule was to stick to your geographical area when investing…but now as my list of co-investors/scouts has branched out to San Francisco, New York, Toronto and the like, I know that my opportunities to invest profitably has only expanded along with my network. I make it a rule to follow the investors who I co-invest with via AngelList. While I might not know them now, following them and keeping track makes it much more likely we’ll meet up going forward.

IV.             Refer Your Own Deals

How can you not want your portfolio companies to attract investors with deep pockets, domain expertise, geographical diversity and broader connections? That’s the potential with AngelList.

I recently met 4 companies at MassChallenge who had put themselves up on AngelList, including founders of Fig, BrassMonkey, and Rentabilities, who all had success, and one other company that came up blank.  Some of their stories made the Boston Globe. As you might expect, the three companies that raised money all were very positive on their experience, whereas the unsuccessful company only received one lowball offer.

One difference is that the three successful companies all had already landed a strong lead angel and had refined their pitch through the process. And those backers endorsed them on AngelList–just as you should promote your own portfolio companies when they need new money. (Nivi of AngelList disagrees strongly that a champion is necessary, but I’ll take the traditional view. See Seed Stage Capital’s terrific article for more on this one.)  If you have found a company that has already landed you and perhaps others, think about sponsoring them on AngelList.  Being listed doesn’t mean that they necessarily have to take the meetings or commit to anything, and there are no fees to pay. The companies can and should use the process to pinpoint the investors that would be the best fit, avail themselves of the help that Nivi, Naval and the AngelList team can give in terms of strengthening their pitch. And you as an angel have just made it that much more likely that your company will succeed. Even if a fund raise is almost over, having the company list on AL means that they will establish more data points for future investors—and as Mark Suster says, smart VCs invest in lines and not dots. It’s a no-lose proposition to list: encourage your portfolio companies to do so, and even if it doesn’t bear immediate fruit, it may lay the groundwork for success in later rounds.

A Few Final Thoughts

AngelList’s biggest problem may be that it becomes a victim of its own success. It’s like the old Yogi Berra complaint, “No one goes to that restaurant any more, it’s too crowded.” Some of the site’s success has been due to the high level of curation to date. Inevitably, as the site’s popularity grows, it will have to scale via use of algorithms and crowd-sourcing, and undoubtedly average quality, which to date has been great, will suffer. But there’s no turning back now.  So, as is increasingly the case, we all have to learn how to process and boil down ever-increasing information.  At least AngelList makes it super-easy.

The basic game of investing is the same, but tactics keep changing.  AngelList is distributing information away from an exclusive “inside” crowd in much the same way that Bloomberg terminals revolutionized the institutional investing landscape by making the buy-side as informed as the sell-side. And that’s good for companies, and very good for folks like me in Vermont who don’t bump into startups every day the way you do in Palo Alto, Boston, Seattle, New York or Austin.  I’m not sure where AngelList goes, but it continues to add value in different ways—not just the end of a seed round, but in B rounds, as a way to test pitches, etc.  What I do know is that early stage investors who don’t spend time and master it don’t know what they are missing. I don’t know if my investment returns will go up because I study AngelList, but I know the odds of success have improved and I am a smarter investor.

Have you used it? Let me know what you think.

Filed under: Angel, AngelList, startup, Uncategorized | Tagged: , , , , , , , , , , , , , , , , , , , , , , , | 16 Comments »

How First-Time Entrepreneurs Can Establish Credibility: 3 Case Studies

Posted on June 23, 2011 by Ty Danco

Last week I had a conversation with an eager young first time entrepreneur (let’s call him Joey) just out of school who was looking for funding. If desire equaled fundability, this guy would have raised $50mm already. I try to make it a point to always respond, even though the bulk of those responses will be a “I’m not interested, here’s why, and here’s a thought for what might be good to do.” In his case, I had to roll out the “tough love” speech, and tell him that he simply didn’t have sufficient credibility with me yet to persuade me to invest time or money. He was annoyed. “How can I build a prototype if I don’t have any money?” he asked.  To me, that was the tell-tale sign that he didn’t (at least yet) have the right stuff.  As is often told to wannabe entrepreneurs, but more often is not heard, you don’t need money to build credibility and traction. Here’s some of what I told Joey, and I’ll contrast his credibility with that of another new college graduate–Jon Fischer of Speedbump, who is doing all of the right things on  his way to getting some funding, as well as that of Sravish Sridhar of Kinvey, a killer startup who not only got funding from me but raised more than $1mm from Atlas Venture and others.

As is often said, ideas are a dime a dozen, it’s execution that creates the milestones which de-risk a company and increase a valuation. Here are the first three milestones I’ll look at, assuming that the market and the problem to be solved seem significantly large.

Team:  Who besides yourself is committed? It’s understandable that the earliest ventures may not have assembled much of a team, but if you haven’t talked any future colleagues into leaving their jobs and joining with you, why should an investor? The ability to recruit a solid team is even more important for a CEO than the ability to raise money. Companies can be bootstrapped without much money, but they can never grow without great people. The student who wanted to start a game-related company had no coding experience and had yet to find a technical co-founder. He thought he needed money to hire people…but as far as I thought, if he can’t sell his vision so that he can find the right partner to come in, (in the classic “hustler and hacker” 2 person combo,) something is wrong.

Contrast his status with that of Jon Fischer of Speedbump. Jon isn’t a hacker and he hasn’t yet settled on a technical co-founder, yet he was able to assemble an informal group of advisors behind him, including me, the head of the business program at his college, and a few others in his local community. Jon may not have the team yet to make me want to write a check, but he’s on the way. He’s just moved to Boston, and he’s checking out the local hackathon scene as he looks to expand. Not quite there, but a work in progress.

And in the “Nailed It” category, look at Kinvey. Prior to raising money, they put together a team of hackers and designers who individually have put together millions of applications used by consumers. That’s a great start and creates substantial credibility. The CEO, Sravish, has worked at startups and has developed some serious technical chops and managerial experience. (BTW, I was 44 when I started my company. It’s not only for college dropout wunderkind.) He brought in two other co-founders each of whom also had written software used by millions of people. That team has already proven its staying power by working together for months without paychecks to get to where they are–no small feat.

What’s my advice for Joey? First, get immersed in the network. Since he’s in Boston, he should check out DartBoston, hit all the MassChallenge networking events, go to Mobile Mondays, Tech Tuesdays, Open Coffee at Voltage Cafe on Wednesday, all of the meetups and events constantly going on to meet other people interested in startups. This stuff is around everywhere. In Vermont there is the Vermont Growth Company Meetup, Vermont Venture Network, Vermont Investors Forum, Vermont Software Developers Association, Vermont Biosciences Alliance, Champlain College’s Speaking from Experience series, you get the picture.

Next, start hanging out at some hackathons, and maybe even try to teach himself basic coding, even if it’s nothing more than setting up websites. How else is he going to be able to find and recognize a technical co-founder or two?

And while he’s at it, think about soliciting that Advisory Board. Start as high as you can dream, and ask. When you land that Advisor, they should be able to steer you towards good opportunities and provide that mentoring you’re looking for.

Prototype:  Joey, of course, doesn’t have a prototype. He’s read all about Eric Ries and minimum viable product, but until he builds something and tries it out, it’s just an abstract experience. As they say, “If wishes were horses, then beggars would ride.”  JFDI and build something, or persuade someone else to build it for you. We know it is only a start…but even Apple launched the iPhone without features like cut and paste, a working app store model, etc.

Here’s where Speedbump is solid–they’ve built a prototype application that uses Android phones to monitor teenage driving habits (not just speeding, but also texting or talking while driving.)

Likewise with Kinvey. They are building out an entire suite of cloud-based back end support for applications, and they have plenty of features they plan to add eventually. However, right now they have built a scalable base, and it is super-robust.

Customers/Data: The last product-related checkpoint I’m looking for is beta customer feedback–even better if I can experience the product as a beta tester or customer myself (see CardMunch story.) Here’s a key problem for Speedbump: they have a product, but it hasn’t really been tested much, with very little customer feedback on this version. (They did have a previous, hardware-based version that became obsolete when smart phones started offering GPS.) While Jon needs to develop a customer acquisition strategy, what he needs most for credibility is proof that his product works.  My suggestion–give it away for awhile to local high school students or PTAs so he can find out what works and what doesn’t, and what’s needed. Then he’ll be able to come back with data on the device’s effectiveness, as well as user feedback.

Kinvey, once again, has nailed the execution once again–they developed an MVP, and they went after user feedback–not just free users, but paid users, who are more demanding. They gave themselves a goal of getting 30 customers (in their case, app developers) by the end of the three month TechStars program–and before the program was over they had exceeded their goal many times over, with dozens of phone apps now up and running on their platform.  Working their hacker connections, they are testing everything from features to pricing while they continue to build out their product  Clearly, these guys haven’t just read about lean product development, agile software development, all of the other trendy theories–they are putting them to practice, getting customer feedback, and constantly improving not just the product but their whole approach. It’s textbook execution, and investors and customers alike can’t get enough.

Next Steps for Joey:

What other pearls of wisdom did I cast down from on high to Joey? While I felt that he believed I wasn’t giving him a chance to tell me all about his plans for the product, I really am trying to help.

First, since he already stated that he needed to either get funding right away or get a job to pay off loans, I suggest that he get a job in something as close as possible to what he is trying to do. Even better if it can be at a well-respected startup or market leader. You want to do something in games? How about trying to get into Zynga Boston, or one of the many smaller companies focusing on gamification–there are plenty. Getting some experience somewhere else in his case isn’t going to slow him down, but rather improve his odds: the race is not to whomever starts first, but rather the person that executes best along the way. Acquire some chops and wisdom.

Second, he needs to figure out how fund-raising works by hanging out with investors: go to any of the lectures put on by VCs, accounting firms, incubators, etc., and see if you can talk your way into one of the angel groups as a volunteer to take notes, coordinate schedules, and communicate meeting minutes to members. You’ll quickly learn what kind of companies can easily raise money, and which can’t.

Third, get totally immersed in the community. Joey’s figuring this out already–I met him at a function sponsored by The Capital Network, which is an organization dedicated to helping out first-time entrepreneurs learn the ropes. Check out their upcoming events here. Virtually everyone in the network is an angel, and all have experience in startups. No better investor than someone who has seen you via mentoring.  I’d hit every meetup, lecture, event on the circuit. In Boston, there are calendars or events posted via GreenHorn Connect, DartBoston, BostInnovation, Boston.com, meetup.com–each city has its own center of gravity and activity. Read the Young Hustlers series featuring Gen Yers like @evanish and @janetaronica.

Fourth, spend an hour a day getting smarter about startup stuff. There’s a load of links on my authors and resources pages, see which ones speak to you. And here’s a recent video from @naval from @venturehacks you might like.

Finally, show me you can excel at something. People I want to back are successful at lots of things–that’s why they are excel-lent people to back in a startup–they EXCEL. Wow me. Not with your idea, but with you. And to do that, you need to be able to tell a good story. Take every chance to speak, to pitch, to try things out with everyone. And as you practice, you’ll improve, and as you improve, you gain credibility. The companies which are at TechStars, where I met Kinvey and Evertrue, two companies I’m investing in, gained great credibility with me and other investors by making it through the <2% odds of getting selected…but as good as they already were, they practiced their pitch every day on everyone who came through the door–and it showed on Demo Day, when they wowed the investment world. So why should you do less? (BTW, companies can get great mileage out of putting a killer pitch onto video; here’s part of the pitch that Kinvey enclosed in their TechStars application at the beginning of the year. Low tech, almost no cost, but thoroughly effective.)

Joey, good luck, and go get ‘em. I hope to see you again on the circuit, undaunted and positive, and I look forward to seeing your progress.  And I hope I haven’t embarrassed Kinvey and Speedbump–thanks for letting me use you for comparative purposes.

By the way–credibility goes both ways. Any entrepreneurs having advice for me (other than write more checks), I’m totally open to hearing your comments.

Filed under: Angel, Champlain College, Entrepreneur, startup, Uncategorized | Tagged: , , , , , , , , , , , , , , , , , , | 13 Comments »

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

Posted on April 11, 2011 by Ty Danco

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.

Filed under: accelerator, Angel, Boston, Entrepreneur, MassChallenge, Montreal, startup, Uncategorized | Tagged: , , , , , , , , , , , , , , , , , , | 6 Comments »

Changing from No to Yes

Posted on February 10, 2011 by Ty Danco

Changing investment decisionsI recently changed course and invested in a (unnamed for the time being) green energy-related company.  I see all sorts of startups related to green energy, all of whom previously got a thumbs down. Most often the no is on the team or on capital inefficiency questions, just as in any other sector.

I had seen “X Company” present at angel meetings or conferences three times before, and I never regretted passing on them. So what changed my mind and got me to invest? In this instance, there were four things: personnel, a recommendation, addressable market opportunity, and traction.

Let’s take them in order. (more…)

Filed under: Angel, Entrepreneur, Vermont | Tagged: , , , , , , , , , | 1 Comment »

CardMunch Acquired by LinkedIn—An Investor’s View

Posted on January 26, 2011 by Ty Danco

Well, that was quick, wasn’t it? Today it was announced that CardMunch, which just did its seed round of funding in late November, (see my writeup on why I invested here,) has been bought by LinkedIn. Here’s a standard news release on the deal here.

A whole flood of thoughts come by, in this order: (more…)

Filed under: Uncategorized | Tagged: , , , , , , , , | 9 Comments »

Why I’m Investing in CardMunch

Posted on December 2, 2010 by Ty Danco

This post will replay some of my thought process prior to investing in CardMunch. I’ll attempt to discuss not just the standard checklist features (“Is beta built?” “How much revenue?”) but also the intangibles that led me to jump in.

At startup presentations, I initially have interest in probably 1 in 4 deals, but in most cases any infatuation goes away after a little due diligence on the team and market. In the end, the actual hit ratio ends up much lower—in 2010, I’ve invested in 12 deals out of 237 seen, i.e., 5% of the deals I’ve seen, and I’m only counting the ones that came to me via a filter, such as angel group presentations, incubator demo days, and recommendations from angel friends. So, 95% of the time, fear/apathy/conservatism trumps excitement/greed for me. (more…)

Filed under: Angel, Mobile | Tagged: , , , , , , , , , , | 18 Comments »

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