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December 26 - December 29, 2022
Another huge red flag is founders who won’t start working until they are funded.
These founders, who are not concise in their communications, are probably not going to do well in the long term. They are probably playing the role of founder.
A first-time founder with an idea written on the back of a napkin is, generally speaking, not deserving of your funding. If you’re a first-time founder, it is your job to build a functioning prototype, or MVP, and hopefully run a beta test.
When evaluating deals in Silicon Valley, there is no reason for you, a new angel investor, to invest in pre-traction startups. You can, but you will be taking unnecessary risk. Furthermore because of your limited time, I recommend that you not meet with anyone who doesn’t have a product in the market.
Is this fair? No. Is the world fair? No. You have thirty bullets to fire and this is not a charity; this is a war. You should meet with the best teams capable of building products with sweat equity (see chapter 7) and who have the most traction.
Why would one startup get a $3 million valuation when another gets $6 million? Simply put, competition for the deal. Founders are generally going to price their rounds at the highest number they can to reduce the number of shares they have to sell to hit their funding target.
Valuations matter, but what’s more important is that you get into the best deals.
Another great technique is to simply ask the founder, “Is that valuation set in stone?” and just listen. Perhaps they, like countless startups in the past, will come back to you in a couple of weeks, after their round didn’t materialize, and have a different number in mind.
Venture capitalists place a smaller number of bets, so they are much more careful about doing so. I’ve seen venture capitalists not invest in a company for a year or more, while they focus on the startups they have already invested in. Another major difference between your process for investing in startups vs. a venture capitalist’s process is that you will make your decisions alone, whereas VCs will debate every investment over multiple meetings with their partners.
As we’ve discussed, in the earliest stages of startups the list of reasons why a startup will fail is long and the list of reasons it will succeed is short.
Angels don’t write deal memos, but they should, because deal memos force you to crystalize your thinking in the short term. They also help you refine your selection ability in the future by reading your past deal memos to see what you got right and wrong.
The truth about 95 percent of incubators is that they are for the founders of startups that couldn’t raise money on their own.
The second great part about the “not yet” is that I give the founder the ability to prove me wrong but still include me. A fire in their belly has been lit and they’re thinking, “I’m going to show that guy!” Nothing pleases me more than having a founder “show me,” because that means I’m going to be able to make a bet on a stronger company. Third, I set the tone that monthly updates are something I like to see before I give the founder my money.
Congratulations, you just learned your first lesson as a detective: your best next question is asking your last question a slightly different way.
If it took me some legwork to figure out that this person was lying, what chances would these folks have—putting in $100 or $500 of their savings without ever having lunch with the founder and without a chief of staff to ask the right questions and cut through the nonsense? There is a reason that financial regulators created a lot of restrictions around taking investment money from the public.
All relationships that start with lies will end in tears. Avoid the liars. Embrace the delusional. There’s a fine line between those two groups to the untrained eye, but after you’ve invested in a couple dozen companies and taken a few hundred meetings and asked a few thousand questions, you’ll find that the bad ones stick out like a neon sign.
There is always a small chance that an early round can fill up or that one greedy investor will try to take the whole round. If this happens, you can always take a shot by asking 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.” These kinds of heartfelt pleas rarely go unrewarded. If they absolutely can’t get you in this round, you can always stay in touch and jump in down the road because startups never stop raising money. Ever.
you’re going to know what actually matters most: your ability to build a product or service that a large group of people find delightful—and indispensable.
Want to make an angel investor feel special? Ask them how they and their portfolio are doing.
We believed that you would have greater success with our money than we would. Consider that and call us when you start your next big thing. Save us a precious slice of that next cap table so we can, again, bet on you and your supreme entrepreneurial ability.
If you can’t be bothered to tell us how our investment is going, especially when it’s not going well, or you let other investors trample our rights, lose our numbers.
Life may be short, but people have long memories—even if you don’t think they do.
Information rights can be broad or specific, but mine are very specific, including all key metrics, board documents, and bank and financial statements. The reason I require these additional rights is because many of my friends will invest in a startup if I do, and I like to be able to help massively if the company gets in trouble. These rights don’t actually give me the ability to control the company—far from it—but they do give me the ability to have more information and a greater level of influence.
The moral of the story is threefold: First, as an angel, you need to document and fight for your rights. Be candid with people about why they should respect your rights and make clear the ramifications of them not respecting you. In most cases, people will apologize for whacking you in your privates and claim it was inadvertent. You’ll forgive them, even though it might have been intentional, and everyone will move on with a deeper and more trusted relationship.
Third, as a co-investor or later-stage investor, it’s important to keep up the esprit des corps at all times. Building startups is brutally hard and infighting between investors is an unacceptable waste of precious time and attention that we should be giving to our founders.
I have a very simple rule of startups that is cleverly called Jason’s Rule of Startups: “If a startup isn’t sending you monthly investor updates, it’s going out of business.”
The death spiral of founder and angel communication happens when a founder doesn’t disclose any of their problems until they are out of money.
The more concise and professional the updates, the greater the chances that angels will be able to help you, including investing more money and introducing you to their friends as a responsible founder who’s a delight to work with.
“I would like a monthly update from you that includes the key metrics for the business, as well as what you consider the wins and losses since the last email. I would like you to put requests for me and your other investors in the email as well. Every email should have how much cash you have left, your burn rate, and when you will be out of cash so that we can all plan for future raises.”
When deciding to give a bridge, you need to have a candid talk with the founders about what the bridge will accomplish, typically by having them present some goals and what the startup will look like when this new tranche of capital comes in. Many founders are on what I call the “feature death march,” believing that if they just add two or three more features to a product they will break out. Sometimes this happens. Most times it does not. Some founders are on a “savior search,” believing that if they just add one superstar to their team, everything will fall into place. Typically they think
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Life is random, but luck isn’t. Lucky people surround themselves with the most successful people in the world and take chances. It isn’t hard or impossible. It just takes work. Do the work. Trust me, just do the work.
