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February 7 - March 1, 2018
Some folks call these people visionaries, but that’s only after they’ve made a ton of money and launched products that people can’t live without. When you meet them, they’ll be just starting out and people will refer to them as assholes, narcissists, and nutjobs.
The term “network effect” means that the value of a network increases with the square of the total number of members or nodes. If a network has ten nodes and you add an eleventh, the network becomes 21 percent more valuable—not 10 percent. It’s very powerful math.
If founders set goals like “colonize Mars,” our return on investment is going to be much bigger than if they set goals like “make software for people who want to launch a satellite.”
I’d rather see my founders fail at a big goal than succeed at a small one.
I prefer founders who are willing to pursue their visions long before an investor comes along and takes some of the pressure off of them.
What this signals, in my experience, is that if these founders someday run out of money—and almost all startups do—they will likely revert back to not paying themselves, while still pushing the company forward with their effort, in order to save the business (and your investment).
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.
You can make your own luck in this life by putting yourself next to the people who are already winning.
For all ten of the startups you select, you need to write a “deal memo” explaining why you’re investing, what you think the risks are, and what you think has to go right for the startup to return money on your investment. You will review these deal memos every time the startup raises a new round of funding so that you can test if your original thesis still applies. What you’ll undoubtedly learn is that no one knows exactly how or why a startup breaks out, but there are trends—especially in how you think.
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.
legit people are ones who are present, considerate, and courteous.
Your challenge isn’t writing the checks, it’s convincing the right founders to cash them.
when you get in that meeting, look at it like you’re being videotaped and it will be on the local news that night. Show up focused, with a notebook and pen so you can take notes like an adult. Never take notes on your laptop, and certainly don’t be “that guy” who takes notes on their tablet with a stylus. For the love of God, never take notes on your smartphone—you’ll look like a clueless idiot. Adults take notes on paper and review them later. If you take notes in a book, you are signaling this person that their product and their vision are worthy of being commemorated in your journal for all
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I use two methods to sort through the deluge of startups contacting me. I eliminate the small ideas and weak founders. Then I double down on the great founders and big ideas.
there are two types of businesses in my world: insanely scalable ones and everything else.
“I don’t need to know if your idea is going to succeed, I need to know if you are,”
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 in this business—and in life? What does winning look like in terms of revenue and my return?
0. How do you know Jane?
1. What are you working on?
2. Why are you doing this?
The big problem with “founders” who build a feature that a market leader will inevitably get to—and I use quotes here for a reason—is that they lack vision. The act of selecting a feature as their life’s work, as opposed to a full-blown product or a mission, disqualifies them from being a true founder. Elon Musk didn’t build a battery pack: he built a car and eventually an energy solution that included solar, home batteries, and, perhaps when you read this, a ride-sharing service like Uber’s. It’s okay to start small, but it’s not okay to be a small thinker.
Zuckerberg was awkward with the ladies, so he built a social network that would show him their relationship statuses.
3. Why now?
For YouTube, which had Roelof Botha as its first investor, the “Why now?” was a confluence of factors and breakout successes that tend to be born during these perfect storms. First, bandwidth costs plummeted after the dot-com crash. Second, storage costs were dropping due to this new thing called cloud computing. Third, blogging was taking off. Millions of folks were writing tens of millions of posts every week and YouTube offered a clever way to embed their videos on other people’s sites—reaching a massive audience for free.
4. What’s your unfair advantage?
The number one reason a startup shuts down is not actually running out of money, which is what most people believe. The number one reason a startup fails is that the founder gives up.
In the pre-traction bucket, you will hear investors discuss startups in various phases of progress including, roughly from early to later: back of the napkin, basic research, business plan, mock-ups, functional prototype, MVP (minimum viable product), beta testing, and stealth mode.
99 percent of people who write an idea on the back of napkin never do it. 95 percent of people who write a business plan never execute on it. 90 percent of people who build a prototype never build an MVP. 80 percent of people who build an MVP never do a beta test. 80 percent of people who do a beta test never incorporate. 95 percent of people who run a successful beta never raise money.
You want the people who are doing it, not the people talking about maybe doing it after you fund them.
Pro rata rights are a must and you should never do a deal without them.
The easiest way to understand what a deal memo is, and why it’s important, is to discuss the greatest deal memo ever publicly released: a young Roelof Botha’s passionate, and well-reasoned, plea to invest in a video startup that was burning money, had come after a dozen previous failures doing the same thing, and had massive legal risks. That startup was called YouTube and it made Sequoia over $500 million. In his deal memo, Botha included the following sections: Introduction, Deal, Competition, Hiring Plan, Key Risks, and a Recommendation.
the simple act of reporting on how their business is doing creates a discipline in founders and continues an ongoing dialogue with their investors.
Make an x axis and y axis and name them “intensity of pain” and “frequency of people experiencing that pain.” In the top right, you have things that are very painful and that you experience all the time; in the bottom left you have things that are not painful and that don’t happen that often. Then there are things that are very painful and infrequent or not very painful but very frequent.
