Startup Istanbul 2017 - Asra Nadeem - Angel Investing Basics
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This document provides an overview of angel investing basics. It defines angel investing as providing financial backing for startups, usually during early funding rounds. It outlines the typical funding stages for startups and the actors involved, such as angels, seed funds, and venture capital. The document discusses why people become angel investors, the legal requirements, and mindset needed. It provides tips for starting an angel investing journey, including joining syndicates to source deals and build networks. The document offers guidance on evaluating investment opportunities and working with portfolio companies after investing.
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Startup Istanbul 2017 - Asra Nadeem - Angel Investing Basics
- 2. Angel Investing Basics Startup Istanbul
- 3. Hi, I’m Asra Partner @ Draper University Ventures Program Director @ Draper University
- 4. Presentation Roadmap ➔ Angel Investing: What, Why, How (Legally, Worldview) ➔ Starting Your Journey: Angel Syndicates ➔ Generating Deal Flow: Brand, Network ➔ Deal Flow Meetings ➔ Assessing Opportunities ➔ Post-Investment Insights
- 6. What is angel investing?
- 7. Landscape STARTUP FUNDING ROUNDS FUNDING ACTORS Sweat Equity, Bootstrapping, Self-Funding, Friends & Family Self, Friends & Family Crowdfunding Public Incubator/Accelerator Programs Angel Angels Seed Early-Stage Funds, Angels Bridge Early-Stage Funds, Angels Series A Early-Stage Funds Series B+ Growth Funds, Corporates, Private Equity
- 8. ANGEL EARLY-STAGE FUND FINANCIAL INCENTIVE STRUCTURE Invests own money, sees 100% returns Manages and invests other people’s money, sees ~20% returns $$$ DEPLOYED/DEAL Invests tens of thousands per deal Invests hundreds of thousands - millions per deal NO. DEALS/YEAR 5-15 deals/year, rarely joins board Individual VC invests 1-2 deals/year, likely retains option to join board DECISION MAKING & WORKLOAD Alone Debates investment decisions over multiple meetings with partners (has a team to consult and delegate work to) PROCESS Less formal/structured More standardized/codified process for investment process (ex: deal flow, deal memos, due diligence)
- 9. Why angel invest? ● Return life changing money ● Change your home > change the world ● Be a part of your local startup ecosystem > the global startup ecosystem ● Stay current with ideas, technologies, the market ● Engage in entrepreneurship without the responsibility ● Deep relationship building with founders as a mentor/coach/therapist figure ● Give back, ex: founder turned angel
- 10. Official Requisites (US) In the US, these are the minimum for angel investing: Be an accredited investor ● Net worth of $1,000,000, excluding value of one’s primary residence, or ● Net income of at least $200,000/year for last two years, or ● If married, combined income of $300,000, and expectation to make same amount this year Have capital to deploy when it’s time to write founders a check ● Rule of Thumb: Invest <10% of your net worth
- 11. Unofficial Requisites Are you cut out for this? ❏ Long tail view for success (aka returns) ❏ Ok with 99% failure, 1% success ❏ Work with wide range of (strong) personalities
- 13. You’re legally able to invest You have the financial means to invest You are mentally prepared to invest How do you find the “right” companies to give your money to?
- 14. Deal Flow
- 15. Non-Proprietary Deal Flow Definition: Deals in the public domain ● Startup conferences ● Accelerator demo days ● Online (AngeLlist, Crunchbase, SeedInvest) ● Angel groups and/or syndicates
- 16. Proprietary Deal Flow Definition: Deals that never see the light of day - insider’s information shared with you by elite founders and investors based on your network and reputation
- 17. How do you become an insider?
- 18. Step 1: Join an Angel Syndicate
- 19. Overview What Lead, experienced angel pools together $$ from other angels > takes a carry of ~20% of return Appear on cap table as one entity represented by the syndicate lead Where In the US, you can find angel syndicates on sites like AngelList, SeedInvest, and Funders Club How Need to be an accredited investor to join a syndicate Buy in between $1000 to $2500 per deal Why Whether you put in $1000 or $100,000 into a startup, you’re still an angel, reaping all that comes with that association > increase your brand and build deep relationships with founders and other angels in your syndicate
- 20. Recommendation New angels participate in 10 small angel syndicates before direct investing ● Build your reputation ● Have a chance to build relationship with founders > prove worth ● Jump-start network
- 21. Picking a syndicate What characteristics should you look for when looking for syndicates to join? Look for a syndicate with a lead that has been investing for at least five years and has at least one notable, unicorn investment Look for a syndicate investing in a startup that ○ Has at least two founders (in case one quits) ○ Has a product or service that is already in the market ○ Has either (a) six months of continuous user growth or (b) six months of revenue ○ Has notable investors ○ Post-funding, will have eighteen months of cash remaining (aka runway)
- 22. How to behave in a syndicate ● Pick the brain of your syndicate lead and fellow syndicate members ● Meet with the founders at least once ● Write deal memos
- 23. Step 2: Launch Your Brand and Network
- 24. Building social currency with other angels Take stock of the angels that are now in your network thanks to your participation in angel syndicates Connect with them across platforms like LinkedIn, AngelList, Twitter, and Facebook Engage with them across these platforms Discover which investors you find most interesting Reach out to the investors you find most interesting via email
- 25. Meeting with other angels/investors During Meeting Figure out what they invest in and why Figure out what value they bring to startups Communicate what value you bring to startups Ask have you seen anything interesting lately? Offer I just invested in these two startups, which are exceptional. Would you like to get introduced to the founders? Logistics determine if they prefer double opt-in introductions or blind introductions Post Meeting Promptly email ● Thank them for their time ● Include a list of the ten startups you’ve invested in (include links) ● Ask them if they are interested in meeting any of your founders
- 26. Setting the stage for proprietary deal flow Specific Angel Tim, it was great getting coffee with you last week. I noticed you’re an angel investor in Tesla and I think they have a really interesting vision of a carbon-free future. Was wondering, would you mind introducing me to Elon Musk? I believe strongly in Elon’s vision and I’ve got two specific ideas that I’m positive will help improve Tesla’s marketing and social media. Network of Angels Have you seen anything compelling recently?
- 27. Step 3: Meeting Founders
- 28. Pre-Meeting Research ● Look into founder background (LinkedIn) ● Review their product ● Understand the market they operate in ● Know who their competitors are (AngelList, Crunchbase) ● Know who else has already invested in the company (AngelList, Crunchbase)
- 29. The Meeting: Four Founder Questions 1. What are you working on? 2. Why are you doing this 3. Why now? 4. What’s your unfair advantage
- 30. The Meeting: Five Tactical Questions 1. Tell me about the competition 2. How do you make money? 3. How much do you charge customers? 4. How much does your average customer spend? 5. Tell me the top three reasons why this business might fail
- 31. The Meeting: Other Topics ● What stage is the product/service ● Market/size of opportunity ● Management team experience/holes ● Use of funds ● Other investors
- 32. First Meeting: Common Red Flags ● “We are the X of Y” (ex: FB, Uber, AirBnb) ● “We have no competition” ● “We need to know right away” ● “Tim Draper committed to us already” ● Argumentative founder ● Lack of market statistics
- 33. Deciding Who To Invest In
- 34. Four Investor Questions 1. Why has this founder chosen this business? 2. How committed is this founder? 3. What are this founder’s chances of succeeding in this business - and in life? 4. What does winning look like in terms of revenue and my return?
- 35. Ideal Founder Characteristics Tangibles Domain expertise Startup experience Management experience Operating knowledge Intangibles Passion Integrity (Even) temperament Leadership Commitment Pragmatism Flexibility
- 36. Pre- vs. Post-Traction Startups Pre-Traction No users or revenue Post-Traction People using and sometimes paying for a product Considerations ● Post-traction there are market metrics you can evaluate and use to forecast ● Pre-traction there is less information > chances of losing $ are higher > *but valuations are lower to reward you for taking this risk
- 37. Pre-Traction Phases of Progress Back of the napkin Basic research Business plan Mock-ups Functional prototype Minimum viable product Beta testing Stealth mode
- 38. Getting in too early Some observations about the market ● 99% of people who write an idea on the back of a napkin never do it ● 95% of people who write a BP never execute on it ● 90% of people who build a prototype never build an MVP ● 80% of people who do a beta test never incorporate ● 95% of people who run a successful beta never raise money Add this to an 80-90% mortality rate of startups that do raise money You want the people who are doing it, not the people talking about maybe doing it after you fund them
- 39. Process: Deciding who to invest in Company Name Rating Comment 2nd Round Comment 6 Months Out Okay Why you’re not going to invest Raised $250k Okay Why you’re not going to invest Shut down Okay Why you’re not going to invest Shut down Good Why you’re not going to invest Raised $600k Good Why you’re not going to invest Shut down Great Why they’re going to win Why you said no Shut down Great Why they’re going to win Why you said yes Raised $1.5M
- 40. Writing Deal Memos Angels don’t need to write deal memos, but they should Deal memos force you to crystalize your thinking in the short term Deal memos should cover: ● Why are you investing ● What you think the risks are ● What you think has to go right for the startup to return money on your investment Review deal memos every time a given startup raises a new round of funding so you can test your original thesis and see if it still applies *For every startup you don’t invest in, write clear notes on the reasons why you passed, review these periodically as well
- 41. Saying Not Yet When you decline a deal: ● Say “not yet” instead of “no” ● Ask founder to add you to their monthly updates Benefit? Give founders the ability to prove your wrong but still include you
- 42. Saying Yes Have a solid startup attorney review documents for investing, giving you a brief summary of the deal and calling out anything they find unusual. Double check that you have pro rata, and ask for that to be added if it’s not there. Let the founders know how excited you are + that you look forward to getting their monthly updates Schedule a quick-check in/coffee meeting with the founders a hundred days from then on your calendar + a one-year follow-up call Get your documents in order > try to get a copy of the cap table > file away signed docs in Dropbox
- 43. What if the round fills up before I commit?
- 44. Post-Investment
- 45. Following Progress Ask for monthly updates ● Keep track of them in a Google Sheet ● Read updates and send a short follow-up ● If you don’t get an update from a company for 2+ months check in kindly Set up Google Alerts for founder, company, and competitors Use the product Share the product
- 46. Year Two Year two is when many of the companies you’ve invested in begin to run out of runway Bad founders are revealed quickly - they are no longer selling a promise, they’re selling their performance Founders from strong companies will raise another round (likely from an institutional investor) based on their performance
- 47. Bridge Rounds Talk to the founders about what the bridge will accomplish Have the founders present goals and a vision for what the startup will look like when this new capital comes in Goals/vision usually come in (3) flavors of *one magical event will save the startup*: ● Savior hire ● New feature ● Partnership When presented with these strategies, ask yourself: ● Is it true that this one event will change their trajectory? ● Is it possible to reach that event given these additional resources? Also look at: ● MRR growth - are they on a path to get to profitability? ● For consumer product, growth of users and engagement
- 48. Criteria for Follow-On Investments ● What’s changed since your initial investment? ● Who is pricing this round? ● Has the founder sent updates consistently? ● How many of the existing investors are participating in this round? ● Did the startup hit their stated goals over the past year? ● Will they send you a revenue/users since inception chart by quarter, month, week, and day? ● Ask for their monthly profit and loss since inception and talk to their outside accountant
- 49. De-escalating Problems When a founder comes to you with a problem ● What is going on? ● Is there anything else I should know? ● What are you planning to do? ● How can I help Do not speak for your portfolio company If the press contacts you, do two things: 1. Forward mail to portfolio company FYI, let me know if you would like me to respond 2. Do not reply to the journalist! Even “I have no comment” can be twisted into a headline. Never engage the press unless founders themselves ask you to
- 50. Different Flavors of Investment Thesis Bet on people | Zuck, Holmes Bet on problems | AirBnb, Uber Bet on delight | Apple Bet on markets | Pharma, Finance, Social Bet on technologies | Blockchain, CRISPR
- 51. Selling Shares, Making Money There are three ways to make money All involve selling the shares you bought to another party down the road 1. IPO: Become a publicly traded company 2. Secondary Shares: Sell off shares to investors/PE pre-IPO 3. M&A: ○ Acquihire ○ Appropriate acquisitions ○ Premium sales *great companies are bought not sold (WhatsApp, Instagram, YouTube)
Notas do Editor
- Today I’m going to share Silicon Valley insights and best practices for angel investing My knowledge base for angel investing currently comes from Silicon Valley, and there is a limitation to that Some things will be applicable to angel investing in an emerging market, but other things will not be As such, there will be moments in the presentation when I turn questions to you to share out your insights for your markets *Should there be a Google form that we synthesize information from and share out with workshop participants post event?
- Investing is the act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit. (http://www.investopedia.com/terms/i/investing.asp) In the US, traditional investing includes bonds, treasuries, gold, exchange-traded funds, and mutual funds Characteristically they are: highly regulated, safe, and predictable relative to angel investing US Stock Market currently returns (on average) 7% a year, takes 10 years to 2x your money Government bonds currently trading 2.4% a year, takes 30 years to 2x your money
- The act of putting money into the earliest investment round of a private business in exchange for shares (aka for a spot on a cap table) An opportunity to make life changing money: 10x, 100x, 1000x over 5 to 10 years
- On the previous slide, you may have noted that the funding actor angels invest most similarly to are early-stage funds Here we take a closer look at the differences between these two funding actors *Angels may invest earlier than or co-invest with early stage institutional *You may note that the process for angel investing is less formal/structured - the goal of this workshop is, at least in part, to help share best practices for a more structured angel investing practice
- Return life changing money: 100x to 10000x Change your home > change the world Be a part of your local startup ecosystem > the global startup ecosystem Be a part of a community Grow your network Stay current with ideas, technologies, the market Engage in entrepreneurship without the responsibility Deep relationship building with founders as a mentor/coach/therapist figure Give back, ex: founder turned angel
- Long tail view for success (aka returns) Losses come early, big wins come late How long is this tail? Depends on your investment thesis 5-10 years 10-20 years 20-30 years Ok with 99% failure, 1% success Work with wide range of (strong) personalities The nature of the biz and founders with vision Other JC Insights: Angel investing is stacked in favor of people who take a long view and who quadruple down on their winners - stacked in favor of people self-aware enough to realize that losses come early and big wins come late in the process - think of angel investing as a decade long pursuit - you don’t need to win every pot, nor every day, just in the long term With angel investing, you need to say “no” (not yet) to at least 50 founders for every 1 you invest in, while understanding that 1/200 of your investments will make 99.9+ percent of your overall returns In a decade, review 10,000+ startups, meet with 1000+ of them in person, place 200 best, of which 197-199 will have little/no impact on overall returns
- https://blog.dealroom.co/behind-closed-doors-investment-platforms-vs-proprietary-deal-flow/ What is deal flow? There are two different types of deal flow
- The first type of deal flow is non-proprietary. This means that these deals exist within a public domain. You can find deal flow like this at startup conferences, accelerator demo days, through online aggregators (ex: AngelList, Crunchbase, and SeedInvest), and through angel groups or syndicates.
- The second kind of deal flow is proprietary. These are the deals that never see the light of day - they are insiders info, and that information gets shared with you by founders and other investors based on your network and reputation *You may have guessed that the best deals are typically not on platforms like AngelList or at incubators like YC and 500 - best deals tend to never see the light of day - quickly filled by insiders who are sharing deal flow and by elite founders tapping their existing networks - therefore, it is critical that you build a deal-sharing network *Which brings us to our next question...
- As an outsider just starting out with angel investing, how do you become an insider?
- In the next section you’ll learn about how joining an angel syndicate can help build your brand and lay the foundation for your network
- Non-used text: Benefits: require very little paperwork, choose to invest without taking any meetings or doing an due diligence Find a syndicate run by an angel you admire, who’s thesis you can get behind, etc.
- What characteristics should you look for when looking for syndicates to join? Look for a syndicate with a lead that has been investing for at least five years and has at least one notable, unicorn investment Look for a syndicate investing in a startup that Is based in SV *did not include in slide bc of audience Has at least two founders (in case one quits) Has a product or service that is already in the market Has either (a) six months of continuous user growth or (b) six months of revenue Has notable investors Post-funding, will have eighteen months of cash remaining (aka runway) Fill your resume with ten quality angel investments that include dozens of well known, successful angels
- Participating in a syndicate can be an incredibly passive experience, or it can be meaningfully active learning ground Although this is a low-stakes poker table, treat it like it’s the real-deal Here are my recommendations for making it a meaningful learning experience Pick the brain of your syndicate lead and fellow syndicate members Find out why they’re investing *syndicates are a place where you can learn from angel masters is a low-risk way Meet with the founders at least once Visit their office Talk to their customers Connect and offer to help in whatever ways you can Practice: You should only invest in these ten startups if you would buy stock in the founders themselves Write deal memos
- After you’ve completed your first 10 investments via angel syndicates, leverage your brand and network from these deals to position yourself as an insider While you start your angel journey taking advantage of non-proprietary deal flow via an angel syndicate, the goal is to generate your own proprietary deal flow - to do this you need to position yourself as an insider (Remember: Best deals are typically not on platforms like AngelList or at incubators like YC and 500 - best deals tend to never see the light of day - quickly filled by insiders who are sharing deal flow and by elite founders tapping their existing networks - therefore, it is critical that you build a deal-sharing network) After 10 syndicate deals, you can now build out your network, able to say something like: “Hi I’m Asra Nadeem, and I’m an angel investor in 10 new startups with angels including Tim Draper, Jason Calacanis, Dave McClure, and Chris Sacca.”
- Take stock of the angels that are now in your network thanks to your participation in angel syndicates Create a spreadsheet of all the co-investors in the 10 startups you invested in (~50 investors from each syndicate and a dozen other investors for each startup) for a pool of roughly 600 investors (although there may be some overlap) > note their social platforms on this spreadsheet then... Connect with them across platforms like LinkedIn, AngelList, Twitter, and Facebook With a message like “Hey Tim, we’re co-investors in Elon Musk’s startup Tesla” Engage with them across these platforms, and discover which investors you find most interesting Make a private Twitter list called “co_investors” and include all these investors in it - bookmark that list on your browser and open it once or twice a day, favoriting, retweeting, and replying to your fellow investors’ tweets - this allows you to build basic “social currency” Reach out to the investors you find most interesting via email Sample Email: Hey Name, we co-invested in Company X together. Do you have time for a quick cup of coffee next week? I’ll be investing at least $2500 each into 2 startups per month going forward and I’d like to trade notes. All the best, Jane Smith
- General note: keep mtg short, be willing to travel to them Goals: Figure out what they invest in and why Figure out what value they bring to startups Make sure they understand what value you bring to startups Ask: “Have you seen anything interesting lately?” Offer: “I just invested in these two startups, which are exceptional. Would you like to get introduced to the founders?” Logistics: Determine if they prefer double opt-in introductions or blind introductions Post meeting: promptly email them and thank them for their time - include a list of the ten startups you’ve invested in, with links to each one, and ask them if they are interested in meeting any of your founders *Email your founders and let them know that they don’t need permission to introduce you to other founders who are looking for investors, or investors who are looking to expand their network
- Once you’ve met with a dozen angel investors > proprietary deal flow > this is how you might approach: Jason, it was great getting coffee with you last week. I noticed you’re an angel investor in Tesla and I think they have a really interesting vision of a carbon-free future. Was wondering, would you mind introducing me to Elon Musk? I believe strongly in Elon’s vision and I’ve got two specific ideas that I’m positive will help improve Tesla’s marketing and social media. To your network of angels: Have you seen anything compelling recently? If each person you reach out to introduces you to two startups, you are now getting warm introductions to founders who are either raising money or will be in the future by people who have already given them money
- Once you get introduced to founders via your network, or if founders begin to cold reach out based on your growing presence/brand online (yay, syndicate deals) it’s time to set up meetings There seems to be a gap between this slide and the next :(
- Sometimes this information is freely available, some of it will be in a deck they send you, and sometimes it doesn’t exist publicly - but there are always ways to do your research Stories to share re: researching things that aren’t publicly available: For investors who didn’t have a .edu when Facebook popped on to the scene, you could still study the space based on well-established competitors like MySpace, LinkedIn, and Friendster For Uber and Airbnb, they transformed their markets - what Ford did had little to do with what Uber was doing, and your classical hotel guests weren’t the types who stayed in Airbnb in the early days - that being said, you could take a ride in an Uber or stay at someone’s Airbnb, and you would have done so much more research and impressed the hell out of the founders *Your challenge isn’t writing the checks, it’s convincing the right founders to cash them Meeting with founders - before a pitch meeting Allocate (3) hours for each startup meeting - one hour prep, one hour with founders, one hour of post-mortem
- Meeting with founders - the four founder questions Meetings are important and free - 10 one-hour meetings a week is a good target for a professional angel Be promiscuous with meetings, but a prude when it comes to writing checks If you’re a great listener you’ll be a great investor, friend, parent, and human being - hah Question 0 (establish common ground): How do you know Jane? > You worked with Jane? What was that like? Four questions to ask founders What are you working on? Why are you doing this Bad answers = to make money, because (successful company) doesn’t do it If money is the motivation, founders will eventually quit because there are many better ways to make money faster and with more certainty Feature motivation - lack vision - the act of selecting a feture as their life’s work, as opposed to a full-blown product of mission disqualifies them from being a true founder - ok to start small, not ok to be a small thinker Why now? Unpacked to: why will this idea succeed now? Uber - mobile phones becoming ubiquitous and they had GPS (advanced mobile CPUs to power touch screens with military precision GPS) YouTube Bandwidth costs plummeted after the dot-com crash, storage costs dropping due to cloud computing, blogging taking off (millions of folks writing millions of posts every week) Dozens of video companies before YouTube, but they all charged people for bandwidth and storage, which meant that if you wanted to post your video on the internet, your reward was a 10,000$ server bill In many ways, this is the most important question you can ask about the business, because there are so many folks constantly trying the same ideas over and over again in our business Google = 12th search engine Facebook = 10th social network iPad = 20th tablet It’s no who gets there first, it’s who gets there first when the market’s ready What’s your unfair advantage Founders with breakout success often have an unfair advantage Google had Stanford connections, a talent pool of algorithm writing engineering geniuses Facebook launched when Zuck was at Harvard, at they used their understanding of campus culture and directories to figure out the dynamics of building online social networks that scale Mark Pincus launched Zynga with a multiyear cross-promotion deal with Facebook that allowed Zynga to tag along with Facebook as it grew Mary Gates was on the board of United Way with the CEO of IBM, which led directly to IBM hiring her son Bill’s new company, Microsoft, to the build the operating system for their first personal computer “What makes you uniquely qualified to pursue this business? What secrets do you know that will help you beat both the incumbents and your fast followers?” Meeting with founders - the next five questions (tactical) Transition “Can I ask you a couple of quick tactical questions?” - you can add qualifiers in front or back (“briefly” or “quickly” so the founder knows that you just want the short version”) Tell me about the competition How do you make money? How much do you charge customers? How much does your average customer spend? Tell me the top three reasons why this business might fail Great founders tend to be able to answer them efficiently, example for how AirBnb might answer: Hotels and HomeAway are our two biggest competitors. Hotels and HomeAway are both much more expensive - typically two to three times more expensive - than an Airbnb We take a transaction fee We take 3 percent from the host and charge a 10 percent fee from the guest Our average stay is 1.7 nights with a total charge of $225 of which we keep about $40 Regulations are our biggest challenge, finding inventory is our second-biggest challenge, and having a consistent high-quality experience is our third-biggest challenge Many founders tend to (delusionally) answer this way: We don’t have any competition, except maybe someone putting their couch on Craigslist. No one is capable of doing what we do! We take a transaction fee, we’re going to have advertising, we’re going to sell our data to marketers, and we’re going to sell our software. Plus we’re going to have merch! A lot! We have one person stay for a month, and this other host put their mansion on for $5,000 a night and sold it for ten days last month! There is no way we can lost - the only questions is how big the business can be Calculating burn rate ~party trick~
- Transition “Can I ask you a couple of quick tactical questions?” - you can add qualifiers in front or back (“briefly” or “quickly” so the founder knows that you just want the short version”) Great founders tend to be able to answer them efficiently, example for how AirBnb might answer: Hotels and HomeAway are our two biggest competitors. Hotels and HomeAway are both much more expensive - typically two to three times more expensive - than an Airbnb We take a transaction fee We take 3 percent from the host and charge a 10 percent fee from the guest Our average stay is 1.7 nights with a total charge of $225 of which we keep about $40 Regulations are our biggest challenge, finding inventory is our second-biggest challenge, and having a consistent high-quality experience is our third-biggest challenge Many founders tend to (delusionally) answer this way: We don’t have any competition, except maybe someone putting their couch on Craigslist. No one is capable of doing what we do! We take a transaction fee, we’re going to have advertising, we’re going to sell our data to marketers, and we’re going to sell our software. Plus we’re going to have merch! A lot! We have one person stay for a month, and this other host put their mansion on for $5,000 a night and sold it for ten days last month! There is no way we can lost - the only questions is how big the business can be
- You should be able to answer these questions by the end of your first meeting
- You should be able to answer these questions by the end of your first meeting
- Evaluating the deal When you’re evaluating deals at the earliest stages of a startup’s life, there is not a lot of data to go on - two buckets: 1) pre-traction (no users or revenue), 2) post-traction (people using and sometimes paying for a product) Pre-traction chances of losing money high, but valuations are lower to reward you for taking this risk
- *Generally don’t consider pre-traction investments that aren’t even @ the bolded levels First time founder with an idea is generally not deserving of your funding - as a first time founder, it is your job to build a functioning prototype or MVp and hopefully run a beta test Seasoned founder who has built and sold a company before can generally raise a seed with an idea or the back of a napkin - but a seasoned founder should also be able to build an MBP and run a beta test on their own before funding In SV, no reason for a new angel to invest in pre-traction startups - according to JC, founders shouldn’t be contacting angel investors in the idea, bp, or even-MVP stage *a sign that they can’t build the product themselves, lack the ability to et talented folks to build the product with them Angel investing is not charity
- In SV there are enough companies that have product/market fit, some traction, and some angel investors but need more capital to finish their mission - those are the startups you should focus on with your first 30 angel investments
- Only after you have seen a number of startups/founders (ex: 35), circle back and pick the best ones *To sort through your options, you can create a spreadsheet. Every 6 months revisit the spreadsheet, update, and reflect on your ability to forecast Never say yes in a meeting - do research, think about deal terms, and only after you have seen all twenty-five, circle back and pick the best one(s) Company name > great, good, or okay > one sentence next to “okay” and “good” on why you’re not going to invest > for “greats” write out why you think they are going to win > these sentences are for you to look back at six, twelve, and twenty-four months from now when you check your ability to forecast For great companies (top 4?) ask for a second meeting and do a little due diligence > add your second round of comments detailing why you said no to three and yes to one Put a recurring calendar reminder for every 6 months to revisit this spreadsheet and make a fifth column with notes on how the twenty-four companies you passed on are doing (have they raised more money or shut down)? Forecasting is about learning from your past decisions - you can’t forecast well if you don’t write down your thougths and check back on them This part of your angel journey is the opposite of getting into syndicate deals - in syndicate deals you just need to get ten logos on your site from vetted startups - in these direct deals, however, you need to be methodical
- Angels don’t need to write deal memos, but they should, because deal memos force you to crystalize your thinking in the short term Deal memos should cover: Why are you investing What you think the risks are What you think has to go right for the startup to return money on your investment Review deal memos every time a given startup raises a new round of funding so you can test your original thesis and see if it still applies You’ll learn that no one knows with certainty how/why a startup breaks out, but there are trends, especially in the ways you think *For every startup you don’t invest in, write clear notes on the reasons why you passes, review these periodically as well
- Incubator Fatigue Go to a demo day > put startups in spreadsheet > rank chances of success (low, medium, high), write some notes in a column with a date > pick top 5-10 and invite them to come for a formal mtg > write impressions after the mtg + amount raising and valuation > look at them again 6-12 months after they’ve graduated When you decline a deal: Say “not yet” instead of “no” Ask founder to add you to their monthly updates Benefit? Gives founder ability to prove your wrong but still include you Life is a giant test and seeing a person execute on their plan over time is the best way to decide if you should invest
- Have a solid startup attorney review documents for investing, giving you a brief summary of the deal and calling out anything they find unusual - it will take the attorney an hour and it is well worth the cost Double check that you have pro rata - ask for that to be added if it’s not there Let the founders know how excited you are, and that you look forward to getting their monthly updates Put a quick-check in/coffee meeting with the founders a hundred days from then on your calendar and a one-year follow-up call If an early round you want to join fills up or a single investor wants to take entire lead you can always ask the founder is there any way you can fit me in by expanding the round or carving someone else back? I want to work with you and help make this company a huge win for everyone involved Usually rewarded - if you can’t join the round, you can always stay in touch and jump in down the road because they will definitely need to raise money again in the future File away your signed docs in Dropbox, try to get a copy of the cap table Make sure you never speak for the company - if you write a blog post, make sure you share it with the founder and get approval before posting
- If an early round you want to join fills up or a single investor wants to take entire lead you can always ask the founder Is there any way you can fit me in by expanding the round or carving someone else back? I want to work with you and help make this company a huge win for everyone involved Usually rewarded - if you can’t join the round, you can always stay in touch and jump in down the road because they will definitely need to raise money again in the future
- Ask for monthly updates Keep track of them in a Google Sheet Read them and send a short follow-up: Include positivity for what’s working Pose suggestions as questions Ex: you need to do FB ads vs. have you considered doing FB ads? If you don’t get an update from a company for 2+ months check in kindly (ex: did we miss your monthly update?) Set up Google Alerts for founder, company, and competitors Use the product, share the product You can keep a google sheet with each startup in column A, most recent month in column B, previous month in column C etc - when founder sends monthly update, put a 1 in the corresponding cell, when they don’t put a zero, zero cells = red, one cells = green
- Timeline Ten $1000 syndicate bets Twenty $25,000 investments over twenty months Deployed $510,000 in just under two years (eight three-month quarters) 2nd year is rough - while most startups try to raise 18 mo of runway, often raise under a year, so many of your early investors will be asking for coffee 9-15 after you invest Fundraising process tends to be 2-4 mo When founders from strong companies raise another round they will simply let you know that they’ve found a new investor, tell you new terms, ask if you want to take your prorata - if new money wants in, you should figure out what this new investor sees - it probably means you picked a winner and you might want to consider putting in another 100,000 Years 3-4 are when founders confirm that you made the right decision Bad founders revealed quickly in year 2 bc they are no longer selling the promise, they’re selling their performance - if they have performance, they should get funding - if they won’t they will likely vanish Bad news comes early and in large quantities, while the good news takes years to arrive If startup is selling a product or is a marketplace, you have a simple metric you can study when determining whether to invest again: revenue - you can also talk to customers and look at their NPS - for consumer product, look at growth of users Year two is when the companies you’ve invested in begin to run out of runway Bad news comes early and in large quantities as companies you’ve invested in begin to run out of runway When founders from strong companies raise another round they will simply let you know that they’ve found a new investor, tell you new terms, ask if you want to take your prorata Bad founders revealed quickly in year 2 bc they are no longer selling the promise, they’re selling their performance - if they have performance, they should get funding When considering when to reinvest in a company If startup is selling a product or is a marketplace, look at revenue and NPS For consumer product, look at growth of users Years 3-4 are when founders confirm that you made the right decision
- A bridge round is not a death sentence, but it’s not a great sign - you’re not getting new money to validate the company’s merits When deciding whether to do a bridge, talk to the founders about what the bridge will accomplish by having them present some goals and a vision for what the startup will look like when this new capital comes in Usually goals/vision come in (3) flavors of *one magical event will save the startup*: Savior Hire How close are they to making this hire? New Feature Have they tested it or started building it? How long will it take to deploy, test, and iterate on? (Triple time given) Partnership How close are they to securing this partnership? When presented with these strategies, ask yourself: Is it true that this one event will change their trajectory? Is it possible to reach that event given these additional resources? Also, look at how they’re growing their MRR. Are they on a path to get to profitability? For consumer product, look at growth of users
- Spend your effort on things you have control over - knowledge and work ethic - if you’re constantly learning and working hard good things will happen “do the work” When a founder comes to you with a problem here’s an approach (panic is contagious): What is going on? Is there anything else I should know? What are you planning to do? How can I help *Do not speak for your portfolio company - if the press contacts you, do two things: Forward mail to portfolio company “FYI, let me know if you would like me to respond” DO NOT REPLY TO THE JOURNALIST even “I have no comment” can be twisted into a headline “Three FB investors refuse to comment on Zuck’s 5th lawsuit” Never engage the press unless founders themselves ask you to The only way to understand where the market is going will be to study not just the market winners but the market failures, along with doing a postmortem on your own forecasting and behavior - meditate on the winners and losers and look for patterns
- Three ways to make money, all involve sell of the shares you bought (noted on the cap table) to another party down the road This can happen voluntarily or involuntarily Best/Least common: IPO (locked for 6 months, hold or sell without permission of company, investors, or founders) - should you hold after an IPO? Generally, diversify Secondary shares: sell off shares to investors/PE pre-IPO (@ high enough price, diversify, reinvest in your portfolio) M&A: acquihire (fire sales - want to acquire your staff), appropriate acquisitions, premium sales *great companies are bought not sold (WhatsApp, Instagram, YouTube)