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January 10 - January 11, 2021
Yes, while the greatest opportunity on the planet today is probably being a software engineer, I just invested in a company that hopes to eliminate software engineers by letting you type into a box “make me an app that does X, Y, and Z,” before spitting out your own version of “Uber for . . . [insert service that sucks right now].”
By the way, a lot of rich folks have already planned for this outcome by buying islands or huge ranches in remote places like Wyoming or New Zealand (I’m not kidding) that are fully off the grid—complete with solar, water desalination, fortifications, and weapons.
More mind-blowing, however, is that the majority of my investment dollars were invested in the past three years ($9 million of the $10 million, in fact). If you drill down, I invested under $100,000 in the first year as an angel and hit my two big winners to date, Uber and Thumbtack, in my first five investments. The return multiple from the first two years of my investing is actually fifteen hundred times.
The businesses that angels invest in are typically less than three years old, have little or no “traction,” and are trying to find something we call product/market fit. If these businesses didn’t look completely crazy, then everyone would want to invest in them and there would be no need for angels. In fact, the term “angel” is used because we are the investors who come to a founder’s rescue in their hour of need—when nobody else believes in them.
I’m famous for having invested $25,000 in Uber when it was worth around $5 million—it’s now worth $70 billion in the private markets.
However, there is one rub: your shares can be “diluted” over time as the company sells more shares to other investors. The impact of dilution can be mitigated against if you take your “pro rata” in future rounds. Pro rata means you continue to invest additional money in each subsequent round to maintain your original percentage ownership in a company. It’s generally a good idea, but it can get very, very expensive if you hit a major unicorn.
So, if you have a net worth of $2.5 million and are thinking about becoming an angel investor, you’re basically looking at a likely, worst-case scenario of losing 7 percent, but realistically being somewhere in the range of losing 1 to 3 percent to gaining 20 percent.
That’s $210,000 from just going to some board meetings, making introductions, and letting founders put my name on their website. Of course, you have to have some type of reputation and industry knowledge to make those kinds of deals work.
There is a long-standing, and totally accepted, tradition of “advisors” getting 10 or 50 BPS—basis points, or hundredths of a percentage point—over two or three years, for helping a startup.
Your job as an angel investor is to block out the haters, doubters, and small thinkers, because if you think small you’ll be small. I’d rather see my founders fail at a big goal than succeed at a small one.
My approach is to be judgmental and combative, if you haven’t figured that out. I deploy this style for two reasons: (1) It’s who I am; and (2) it is effective in repelling the weak and developing deep, meaningful relationships with the strong.
The Series A is the most coveted and important round for a startup because it is typically done by a professional venture capital firm that will join the board and create proper “governance.”
Once you have a Series A, the chief executive officer (CEO) is going to spend about 20 percent of their time “managing their board.” This means, setting up a board meeting every six to ten weeks, or six to eight times a year. They will prepare a board deck, have a lawyer create resolutions around stock options for employees, and they will essentially have a boss.
Pro rata means you get to keep your percentage ownership in a company. Typically when you angel invest, you don’t get pro rata rights—unless you demand them, and then you do. I won’t do a deal without pro rata rights anymore. If someone doesn’t think I deserve to get to keep my percentage ownership, even though I was one of their earliest supporters, well, I’m not the right investor for them—and they’re not the right founder for me. It’s disrespectful not to give angels pro rata rights. Period.
Startup founders often sell too early, leaving money on the table. VCs often force founders to hold out and swing for the fences, risking blowing up companies and locking in gains. We angel investors are generally along for the ride. The good news is that our industry has figured out this divergence of interest and has come up with an effective way to address it: secondary share transactions.
Now, in today’s modern age, I think the first $5 million you make is “take the edge off” money. You now have a decade of capital to rest on. However, when you break $10 million you have “escape velocity,” where you will never have to work again. The $500,000 in yearly interest you net should cover your expenses for a lifetime.
There are a number of sites offering angel syndicates here in the United States including AngelList, SeedInvest, and Funders Club.
Once you have ten investments, you can list them all on your LinkedIn profile, in your Twitter and Facebook bios, and on your gorgeous-looking, $15-a-month Squarespace website. (I missed investing in Squarespace—damn it!) You’ll also be able to be as unapologetic and gauche as I was in my early career and put “Angel investor in . . .” in your really long email signature. Once you have the phrase “angel investor” on your online profiles, you will have instant deal flow.
Every month, dozens of startups are syndicated on AngelList, SeedInvest, and Funders Club.
You should plan to put $1.5 million to work in these fifty deals, which is $30,000 per startup on average. However, you’re probably going to want to put $1 million into the first forty-five deals and an extra $100,000 into each of your top five winners. This gives you a chance to get a five-times return on the winners, any one of which might go to a fifteen-times return based on the inside knowledge you have—and return your entire $1.5 million invested.
When you visit the various sites offering syndicates and browse the deals, I suggest looking for these basic characteristics: A syndicate lead who has been investing for at least five years and has at least one notable, unicorn investment A startup that is based in Silicon Valley A startup that has at least two founders (with two, you have a backup in case one quits) A startup that has a product or service that is already in the market (you’re not qualified to invest in startups that haven’t released their products—and frankly you don’t need to take this risk) A startup that has either (a) six
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Most important, you should only invest in these ten startups if you would buy stock in the founders themselves. I explain this in more detail in chapter 17.
If you’re going to be a great angel investor, start at the small tables while you learn—there is no rush. Every year, billion-dollar companies are created, and that will continue for the rest of our lives—unless, of course, one of these startups figures out how to make us live for two hundred years, in which case you might live to see the era where a trillion-dollar company is made every year.
That was a $50 million mistake. Fifty. Million. Dollars. It was at that point I realized that I didn’t need to know if the idea would be successful. I only needed to know if the person would be.
Step one, create a spreadsheet of all the co-investors in those ten startups you’ve invested in. There should be about fifty investors from the syndicate and a dozen other investors for each startup. That means you will have a pool of six hundred potential investors you can reach out to, minus duplicates. In your spreadsheet, put the person’s LinkedIn, AngelList, Twitter, and Facebook URLs. Connect with each of them on each of these four critical services. When you connect with them, send them a message that says, “Hey Jason, we’re co-investors in Evan Williams’s startup Twitter.” It will take
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Forecasting is about learning from your past decisions, and you can’t forecast well if you don’t write down your thoughts 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.
Great founders have many options to fund their companies, and your $25,000 isn’t any different from mine or another investor’s. But how a person feels coming out of an investor meeting will determine whether you’re getting in or missing out.
I just couldn’t relent. In my younger days, I had a horrible habit—back to those habits—of needing to explain to stupid people just how stupid they were. I’ve since learned that the best way to deal with stupid people is not to have them anywhere near your company and, if possible, not even in your life!
Over time I’ve learned that your best next question is hidden in the subject’s answer to your last question. I’ve interviewed thousands of people as a journalist, podcaster, and investor, and in that time the best interviews are the ones that morph into conversations. In a conversation you don’t have a list of questions to run through, you have a discussion partner who you volley ideas back and forth with.
People always ask me, “How do you pick billion-dollar companies to invest in?” You don’t pick billion-dollar companies. You pick billion-dollar founders.
I try to choose companies based on the people running them, not the idea or market, because I’ve learned that no one can tell the future but I am an exceptional judge of talent.
People aren’t everything, they are the only thing.
Meetings are important and free. You should take a lot of them. Ten one-hour meetings a week is a good target for a professional angel. Half that if you’re doing this part-time.
My best advice to you as you start dating is to be promiscuous with meetings—but a prude when it comes to writing checks. Don’t be a tramp like I was.
I’m going to take you through the four most important questions I ask all founders. The goal of asking these questions is not just for you to understand the business but also so you yourself can answer four critical investor questions: Why has this founder chosen this business? How committed is this founder? What are this founder’s chances of succeeding...
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This is why, when you talk to your therapist about your mom, they say “hmm . . .” while tilting their head and looking at you with sympathy. Then they add, “Tell me more about your mother,” or “Unpack that some more,” or simply “Your mother . . .” There are six words, four words, and two words in those responses. The last one is the most powerful because it just hangs there, inviting you to build on the topic.
1. What are you working on?
2. Why are you doing this?
3. Why now?
4. What’s your unfair advantage?
Here are some quick tactical questions you can get into with the founder so you understand how they plan on executing on their vision. You can prepare them for this part of the meeting by saying, “Can I ask you a couple of quick tactical questions?” They will say yes, and you can rip through a bunch of these, with a qualifier in front (or back) of them like “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
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There are personal questions you can ask founders to get a sense of what they’re about. The one I care about most is, “What did your parents do?”
At the core of being a great founder is the unrelenting desire to see your vision—or version—of the world realized. When you meet with founders as often as an angel should, you’re going to very quickly be able to sense if their startup matters enough to them.
If a founder starts a discussion about their compensation at a startup with “I would like to make what Google just offered me,” you can be sure that this founder will quit when they get a better offer.
Another huge red flag is founders who won’t start working until they are funded. Or founders who won’t do certain jobs, like making a sales call. Or ones who want to have balance in their lives. The founders who want to go to Coachella, TED, TEDx, or to other conferences before their company is profitable are not the ones you want to invest in. When I see founders wasting time at events that will not directly result in landing investors, clients, or team members, I cringe. And I take my chip stack elsewhere.
The same goes for founders who spend their money and time on their office space instead of their products. Taj Mahal syndrome is perhaps the surest sign that a company has peaked. When I saw that Apple was building the most amazing campus in the history of humanity, with a 2.8-million-square-foot spaceship-shaped building at its center, while their phones and laptops were being panned by their most loyal fans, I shook my head.
Not only did these dopes cash in big, they went out and bought an actual Ferrari to wave in the faces of their employees and the rest of the industry. Rule number one if you do a big hit is to keep your head down and not do any conspicuous consumption. When they shut the company down shortly after raising all this money, Bill Maris, then the head of Google’s venture capital arm, said, “It’s like a bank heist. I think they should return all the money.”
Pro rata rights are a must and you should never do a deal without them.
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.
