Reheating Ben Yoskovitz: the Lost Post

lean analytics

As I dig through my Google Docs “electronic shoebox”, I’ve been amazed at the stuff in there. Old family pictures. Unfinished to-do lists. And an hour ago I saw a blog post I wrote on 9/13/13, just over 1 year ago, but never posted because I didn’t want to take the time to edit it and make it acceptable.  I am finally putting it up, and I will use red italics to signify my updated comments. Here goes.

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Author, entrepreneur, mentor and investor Ben Yoskovitz just wrote a retrospective on his first 9 months as an angel investor, listing 19 observations. (Only 76 short of Martin Luther’s 95 Theses–perhaps Ben launches the Angel Reformation after his next 3 posts.)  Since I haven’t actually seen Ben in 8 months, [still haven’t seen Ben, but his startup in Halifax had an exit and now he’s working on a new one in Toronto] and don’t get up to the Great White North often enough, I thought I’d send this back as an open letter. Ben, this one is for you!

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

 

  • Angel investing is fun.  You got that right, Yosko. 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.)
  1. 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 mentioned here. One newly made standard in the last year is YC’s SAFE documents, which I believe do everyone a disservice. More on that in future blogs, but entrepreneurs, believe me, uncapped converts are not the way to go, and there are other unpalatable things in there for investors. Don’t start pissing them off from the start. 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? I 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. And I’m heavily biased to bet on repeat entrepreneurs, especially on repeat winning entrepreneurs. And due diligence on them is pretty darn easy. However, for new angels I recommend the opposite. 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 a fellow angel 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. [Jeez did I get this wrong. They just had a super exit, and are in the top few of my anti-portfolio. Space Monkey found a way to reshare the files only within other users of the ISP, and thus became beloved by the ISPs. We outsmarted ourselves.] 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. It’s fine to follow smart money if you know they’ve done their homework and it smells right to you. [Nice call Jen–I am now backing her AngelList syndicate. She has a killer record, with a huge exit percentage, including at least one 30x.]
  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: Wayne Chang 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 “pay for the fund”, as they say. I invested double my usual stake, and it will come out at least 2x better than my next best exit. [Make that almost 3x as of today.] Thank you Wayne. I’m investing in dozens of more startups just rerolling the house money created from your brilliance and sweat.
  5. I haven’t invested the same amount in each deal.  Good! See above. I have 3 levels. Regular, double, and token. 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.  SO? 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.
  • Having said that, I always think to myself, “Don’t invest in entrepreneurs that need a lot of help, you want to invest in those that don’t need any help, because they get it.”  I know a few prolific angels who like investing very early because they want to give back to the community and help people who need it most. “Early Money Is Like Yeast”, and all that. Unfortunately, most of us are not that wealthy to be angel investing as a proxy for charity. I’ll talk to anyone for a few minutes, but my investments are strictly for profit.
  • At the same time, there’s definitely some truth to the statement as well. If you need my help with the core business then we’re in trouble. 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.
  1. 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 designs 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. [That company pivoted and now is into a serious B2B model and is doing well. So it worked out.]
  • 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, you need people who will listen to your opinion, but make up their own minds. If they don’t do both of those, however, avoid.
  1. 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, most of my best exited investments have been in the mobile space: Crashlytics (Twitter), UpNext (Amazon), LocalMind (AirBnB), Cardmunch (LinkedIn)–OK, enough bragging–there’s an equal number of writeoffs, and some other zombies nominally breathing but really living dead.) [Strangely, had no more activity in the mobile space all year, and no zombies changed status either. Bizarre.] I didn’t intend to invest so heavily in mobile, a space where I have little expertise, but all of these products scratched an itch of mine in some way that made me say “I need that, others must as well.”. But if you are looking to pick a thesis, pick companies that will be bought by bigger companies. Easy, right?
  2. I’ve invested in a broad range of companies so far. But one common thread (other than what I’ve mentioned above) is that they’ve all got the makings of an unfair advantage (i.e. a hook, a new approach, something they’ve learned that they can take real advantage of) that could result in them winning big time. Good for you! Send me your leads! Just be prepared for me to say no.
  3. I’ve been influenced by the participation of high-profile investors (but not too often). 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. But don’t necessarily think “high-profile”, try to think knowledgeable. Wayne and Jen above aren’t high profile, but they sure as hell are smarter than me. Now, 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. Both ideas sucked.) If investors, team and concept look good and the valuation isn’t crazy? Buy. But if the CEO doesn’t sell well...run.

 

  1. I’ve also been affected by investors saying no. A couple of times I’ve second guessed my decision to invest after hearing that other investors have said “no”.  If you’re wrong, consider it tuition. If you’re right, you won!

 

  • 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.
  1. I’d like to work more closely with other angels. Yep. It’s great. And as you expand your network, you’ll get better deal flow and be a better investor.
  2. 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.

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

yosko

All in all, I think the advice still holds up. Plus ça change, plus c’est la même chose. Ben, sorry I took so long to post my response, but glad I still had it. BTW, Lean Analytics is next on my list to finally study, not just skim. 


2 thoughts on “Reheating Ben Yoskovitz: the Lost Post

  1. Wow…That’s an epic post, and I kept nodding throughout, as an Angel newbie myself.

    There’s one point though that I was a bit surprised to hear your support on: angel networks diligence process. Is the gruesomeness of it really necessary (at the angel stage)? How does it help the entrepreneur? As you said, angel investing is totally irrational and has lots of relationship trusting and gut feeling to it. So, applying too much diligence can distort things a bit, in my opinion.

    1. So pleased to see your comment! I’ve been a fan of your commentary on the various other VC blogs.

      As for due diligence, it’s different strokes for different folks. I am generally not a fan of angel groups, and the best angels I know generally work on a loosely independent mesh–it’s almost a fulltime deal for them, not a “2nd Tuesday of the month” type of thing. I give two exceptions: one for new angels, by all means, they need to sit down and learn. I never did more due diligence than I did for my first investment, and that was with other angels from different groups. (Pity the poor company.) Exception #2, medical devices/pharma. Prior to tossing your money away, someone knowledgeable has to be doing some tough looking. But for consumer stuff–I believe most good angels make up their mind in 1 meeting, especially if they don’t feel compelled, like a VC, to back only one entry. Until even the B round, I think “due” diligence is pretty light.

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