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The world has trillions of dollars sitting in bonds, cash, stocks, and real estate, which is all really “dead money.” It sits there and grows slowly and safely, taking no risk and not changing the world at all. Wouldn’t it be more interesting if we put that money to work on crazy experiments like the next Tesla, Google, Uber, Cafe X, or SpaceX?
Product/market fit means that the product the founder has built, whether it’s Uber’s ride-sharing app or Instagram’s photo filters, has found a group that is delighted by it. If a large number of folks find a product delightful, there is a solid—but not guaranteed—chance that the founder can then solve the next biggest challenge: scaling and monetization.
focus on not just what could go wrong with a business but what could go right.
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.
If you didn’t take your pro rata in this scenario, my guess is your shares would have been diluted by about 50 percent over time. This means you would own 5 BPS, one-twentieth of 1 percent of th...
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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.
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.
invest in people who build things, not people who talk about building things.”
These kinds of founders are called check writers in my world. They are often exceptionally good at spending money and spinning yarns, but they frequently become habitual beggars who are so disconnected from the actual product
When I meet a founder who says, “I’m currently funding the company,” I immediately want to know two things: how and why.
Founders can also join an incubator or accelerator in order to get a modest amount of funding. Most incubators will give founders $25,000 to $150,000 in seed funding for 5 to 10 percent of their startup.
In fact, there is only one $10 billion–plus company to ever come out of an incubator, and that’s Airbnb. Zenefits, Stripe, and Dropbox, valued in the single-digit billions, also came out of incubators.
It’s called a bridge round because it’s a bridge between where they are now and where they need to go.
Participating in a bridge round can lead to putting “bad money after good,”
I look at each bridge round I’m asked to participate in with a simple question: What has changed since I made my original investment?
A down round simply means you’re going to change the value of the company, making the people who invested in the last round mark their investment down.
Another way to deal with a bridge that won’t close is to keep the valuation the same but give the bridge investors a “pot sweetener”—a bonus. There are a couple of financial and legal devices to do this. One is a liquidation preference. Another option is issuing warrants.
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.”
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
It’s disrespectful not to give angels pro rata rights. Period.
In fact, if your angel investment is starting to raise a Series B, C, D, or further rounds of financing, it’s probably time for you to consider selling some part of your stake in what’s called a “secondary” stock sale.
Remember the old adage, when they asked the rich man how he got so rich: “By selling too early.”
As an angel investor, your job is to provide a combination of money, time, network, and expertise to startups in order to “get on the cap table.”
The cap table, short for capitalization table, is the official list of all the shareholders in a company and it includes how much they paid for their shares and what class of shares they each own. Different share classes have different benefits.
In simple terms, there are five kinds of people on a cap table: founders, employees, advisors, angels, and VCs.
If you’re an angel in a startup with fifty million shares issued and an enterprise value of $5 million, then every share is worth ten cents.
VCs invest OPM and get a 20 percent “carry,” or, simply put, 20 percent of the gains.
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.
This is where secondary sales come in. What a VC firm will do is offer to buy some of the founder’s shares to provide the “idiot insurance” we talked about before. This is a delicate balance, and it usually results in a founder being able to sell 10 to 20 percent of their position,
For angels, secondary shares are a wise way to “dollar cost average” your returns. If you have a chance to sell 25 percent of your position once or twice before the IPO, it would be wise to do so because we’ve all seen companies worth billions go to zero many, many, many times.
Carry is short for “carried interest,” and it’s defined as the share of profits that go to the fund manager—in this case called the syndicate lead.
Angel syndicates love the program because it can easily triple their returns, simply by sharing their deal flow. In the example below, if I invested $20,000 in a startup and got a 20 percent carry on $300,000 raised from a syndicate, and the company had a ten-times return, the leader of the angel syndicate would get a return of $740,000 vs. $200,000 on their $20,000 investment.
The only thing you give up by being in a syndicate is 20 percent of the return, which seems like a fair trade of services.
In the investment community, we have a term for an investment that returns all your capital invested: a “dragon.” So your job is to find dragon eggs.
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
startup that has either (a) six months of continuous user growth or (b) six months of revenue
A startup that has notable investors
A startup that, post-funding, will have eighteen months of cash remaining, commonly referred to as runway (ask the founder and syndicate lead how many mo...
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Also, as a syndicate member, you can easily do important things like retweet a news story about the company, provide introductions to potential employees or customers via your LinkedIn network, or help advise them on something you have expertise in like sales or marketing or copywriting.
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.
out, but there are trends—especially in how you think. For every startup you didn’t invest in, write clear notes on the reasons why you passed.
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
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.
Step two, 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.
The next step is to start emailing the top, most interesting investors in this process. They might be the syndicate leads, or they might be people who co-invested with you in a syndicate.
After you’ve met with a dozen angel investors, it’s time for you to start looking for “proprietary deal flow,” which is to say, deal flow that is yours—not the public stuff on AngelList, on FundersClub, or at Y Combinator’s demo day.
Important people have the ability to turn off their phones because the world can wait for them. People who are not important have to react to their phones and be at the mercy of people pinging them.
