Angel Investing/Venture Funds: March 2010 Archives

Lately I've been going through my info@ email address which I put on my site. It's a throwback to when it was proper to put a contact email address on your website to be a good netizen. However, whenever I check it, it's always filled with cold calls: random emails with business plans (often from Nigeria!) and then there are some that are totally not within my stated interests on my website. Occasionally, I do get the important email from someone who is trying to get hold of me, like an old colleague or some organization that wants to get hold of me. But most of it is unfortunately tends to be cold call emails asking for my investment.

This morning I saw @davidhornik tweeted:

Spending the morning talking with students about the power of networking. Cold calls are for suckers.

That last line says it all: "Cold calls are for suckers."

It is so true. Those emails I get in my info@ inbox are just that: cold calls which I will never engage with. I know that sounds cold and uncaring but it's true. Why is that? It's because I use referrals as an effective filter to be able to tell whether or not somebody has some sort of legitimacy or not. Otherwise, I would get deluged with a ton of meetings that would inevitably be a waste of time for both me and the entrepreneur.

Thus, 99% of my deal flow comes from trusted sources: friends, fellow investors, other entrepreneurs, etc. These are sources with whom I've worked and know that they value the judgement call they place on sending a referral over to me. That's because giving great referrals is a relationship building tactic, and giving bad ones is definitely not.

Then @bfeld published an article on the Business Insider called If A VC Turns You Down, Don't Ask Them To Refer You To Someone Else which also talks about how not to ask for a referral. His last paragraph hits home:

Venture capitalists take referrals seriously. If someone I trust e-mails me a referral, the first thing I do is ask the VC for more information about the person being referred and whether the VC is interested in investing in the person. If the VC doesn't know the person, I immediately question the validity of the introduction. If this happens regularly, I heavily discount the value of any introduction from the VC. This is a self-correcting phenomenon. Good VCs are careful with introductions because they want to make sure both parties view the introduction as valuable. Hopefully entrepreneurs understand this dynamic.

Smart relationships know and live Brad's comment. They know that there is value in giving great referrals and know when not to give a referral.

To get my attention AND if you don't know me, find someone who does know me; entrepreneur circles in the Bay area are pretty small and I think it would not be hard to network to someone who is connected to me. If you pitch them well, you'll get a referral to me and, thus, my attention. But don't send me random emails to my info@ inbox.

I've come to realize that startup investing is very much like my experience with online dating sites. Despite dating sites attempting to match people via their personalities, attributes, and interests, it still really boiled down to one thing: how they looked in their profile pictures. I know that sounds incredibly lame, but after trying dating sites and also talking to others who have used dating sites more than me, the main reason why someone responds is if you like how they look in their profile picture and whether or not you're attracted to the way they look.

I have found that a major reason why I invest in a startup is if I feel some kind of personal attraction to it. Some of those personal reasons are:

1. I'm personally interested in the area that the startup is working in.
2. I have some emotional connection to their project, perhaps due to some similar project I had worked on in the past.
3. It tickles some intellectual part of my psyche, and my desire to learn more about their space.
4. There is some inherent coolness to their project, and that coolness may rub off on me from a brand perspective of being associated with it.

...and so on.

However, none of these reasons have any kind of relation to whether the startup makes any kind of business sense. A startup could very well have a strong business case, even up to the point of having lots of traction and revenue, but yet be unsexy to me. I think there are many untapped business areas that aren't all that sexy and therefore ripe picking grounds for new entrants to disrupt old businesses in those areas and do very well. In fact, I've met some, BUT...have found that I just could not pull the trigger.

I've come to realize that it just boils down to personal attraction. On a dating site, I found that if a profile picture wasn't attractive to me no matter what the site said how much her attributes were compatible with mine. The same goes with startups; if for some reason the project isn't all that sexy to me, I just can't seem to bring myself to do it.

As an angel with limited resources, I need to deploy them smartly and maximize their value to me, which also includes a sexiness component. That's not to say that there aren't angels out there who would take a chance on something unsexy to them; I think that for them, it's more about being part of a great business and building it then the inherent product area they are working in. Me, being a product and UX guy, I love being associated with products I love, which introduces an inherent sexy bias when deciding on whether to invest or not.

I think that if I were running a fund, my decision process would be broaden to less sexy projects. Still, we have limited time and resources and need to make sure value can be added to the startups even in a larger portfolio and need to pick wisely for the reasons we have. I think that when you're investing someone else's money, you'll have to think twice about passing on something that can produce a gain for your investors.

However, all this sucks for entrepreneurs who are working in business areas that aren't part of what's hot right now. Real time? Ride the excitement of Twitter and Ashton Kutcher! Social? Maybe that's so yesteday. Social gaming, now that's sexy! Virtual goods yeah! Processing waste? Yech, even if it is profitable. I think you get the idea.

How does an entrepreneur combat unsexy? I think it's like improving your chances on a dating site:

1. Some people just aren't attracted to you, so you'll just have to get over it. There will be some investors who just don't think your project is interesting enough to them and you won't be able to convince them otherwise.

2. Improving your profile picture helps a lot. So how do you improve the way your startup looks? You may introduce some interesting component to your plan that makes your project more sexy. You might actually increase the sexiness of your visual/interaction design. That in itself may be enough to sway an investor to like you versus not.

But beware of pursuing sexy for sexy's sake. Even though we may look for dates of attractive people and they may be eye candy to us, in the end, it's what's underneath that drives whether we will go out with them again. So even as you dress up your project, it may take you down a path that is detrimental to your future. It may even waste your time as you should be working on your core product.

3. You could rewrite your profile description to be more fun and engaging, which in theory is a reflection of how cool and fun you are. This is like creating a better pitch deck, or sexy prototype, or some kind of cool new UX for your product.

4. You could learn how to chat better and be more interesting and fun, which is probably a skill that is more for men than women and sort of like learning how to pick up girls. This is worthwhile both before the actual face to face and during the date. If you write an engaging first message to a prospective date, that can solicit a response better than a boring, lame one. Certainly chatting up someone better during a date will have a great effect on whether you get another date. This is like when you may simply just pitch better and that can be sexy in itself when the sales job is so good you can't resist falling under the spell of a great pitch guy.

5. Go and find someone who likes you the way you are, which means that being on a free for all dating site like Match.com is not right, but maybe eHarmony is more for you. Tackling a non-sexy business in the world of sexy can be tough, even if the potential benefits are clear to you. As in dating, you should probably go and find someone who loves you the way you are now, versus trying to put on a different dress or suit, or changing your make up or hairdo.

Thus getting introduced to the right investor, who actually does know something about your industry, can get you the resources that you need.

Still having said all that, it may not be enough to convince me to invest in you. I just may not find you sexy enough even if you are wearing a thong bikini...

These last few weeks I've been part of the Ycombinator Mentors program where we get a few of the YC startups to hang with and help them, as Paul Graham puts it, "convince us to invest in them." It's been a great experience going through product and business issues, and helping them shape something meaningful and hopefully world dominating with their initial ideas.

I just completed this email to send out to my mentees (is that a word?) as I realized that, after attending several YC Demo Days, that I have seen a remarkable number of the teams not take advantage of the opportunity to really engage with the audience of investors, reporters, and corporations. As both a reminder and a call to action (mostly to make introverted engineers break out of their shell!), I listed some items that might help. I think it also helps to know how we feel on our end, as we sit through 20+ fast paced presentations and then enter a whirlwind of conversations after.

Here's the email:

I thought I would send some thoughts on handling Demo Day and its aftermath (if anything to be a good YC mentor..!) as I've seen some YC teams really handle it poorly. This is not about the presentation as I'm sure that PG and others are hammering you guys on getting that good. Rather, this about what happens during Demo Day after the presentations and how to manage the crowd, and even afterwards.

BEFOREHAND:

1. If you don't have business cards, get some made now! Go to FedEx/Kinko's and give them an illustrator file. They can make business cards overnight.

2. PG undoubtedly has an attendee list; can you get that from him? Review it beforehand and try to prioritize those people to meet. Keep it in your pocket and check off people that you meet and make quick notes on interest, experience, follow ups, next steps, etc.

If you can, prepare beforehand a little about what you may talk to certain people about. This can be as simple as knowing a few of the recent investments an investor has made, or how you can help Google build one of their products better. Or perhaps you'd like to get in touch with someone's portfolio company. This can be as simple as a conversation starter to break the ice, or as big as trying to do a deal with Google to integrate your technology.

3. Think about your own status. Are you raising money now? Soon? Or not? Have you raised money already? Looking for business partnerships? Want to sell out or get acquired right now?

Make sure you decide as much of this beforehand as it will undoubtedly affect your conversations. You will inevitably be asked, "are you raising money now?" and you should have some sense for yes or no, and if yes, for how much. You want to be confident in your progress and in your answers, not wishy washy. The worst thing you could say is, "well, I don't know...maybe...we're not really sure yet...hem haw..." But also, don't lie or make things up. This is more about anticipating what questions will be asked of you post-presentations and just taking a bit of time to prepare your response.

4. Try to get a good night's sleep the night before. Try to arrive at the top of your game, not sleep deprived and/or over-caffeinated.

AT DEMO DAY, AFTER THE PRESENTATIONS:

1. The crowd as you can imagine is filled with reporters, corporate representatives (typically from venture arms), angel investors, and venture capitalists. It is really like speed dating; you should get out there and meet as many people as possible, getting their contact info and gauging their interest in you.

It will be, and expect it to be, overwhelming. It is definitely overwhelming to us. We'll have been overloaded by the quick machine gun set of presentations and trying to absorb it all, and then we're thrown into fast smoozing with those startups that somehow have grabbed our attention. We'll be scribbling fast notes on our Demo Day sheets and then we're going to try to go back and figure out who we want to meet first before we have to leave.

2. Don't be a wallflower! I've seen some teams hang on the sidelines and not mingle. This is bad! This is a chance for you to meet and try to woo some investors to be interested in you! If you don't meet them now, you may never get a chance to interact face to face with them again. If you have more than one founder, split up and meet more people! There are 20+ teams this time; everyone is going to be competing for attention of the audience. Get in there and meet!

3. As you get business cards, make notes on the back of their cards as well. Stick them in a safe place and don't lose them! I've met many people who simply lost my business card and somehow found me later. Bad!

4. Regarding reporters: you probably have never gone through media training but it's not hard. You should just prepare some great sound bites for reporters to hang onto and include in their writeups. These are simple sentences that sound great, and of course promote your product/company/service.

5. Be lively, upbeat, friendly, excited about what you're working on, and excited about future prospects. I think that engineering types tend to be very introverted. Unfortunately, this doesn't serve you well here! So go out and be an extrovert. Force yourself to go out and meet everyone and to be Mr. Fun and Cool with the best product in the world to talk about. People react to and engage with people they like; boring, uninteresting people get left behind. It sucks but it's true.

So psyche yourself up for some power smoozing and have a positive attitude about it. This won't be the last time you'll be power smoozing for your business!

6. Gauge whether a conversation is going nowhere or somewhere. Lack of interest, conversation seems to slow down or feel strained, etc. all are signs that you should disengage gracefully and move on to the next person. Shake their hand, make eye contact and say nice meeting you and move on!

Definitely stay with someone a bit longer at least if they are interested in you and what you're doing. But don't extend the conversation too long as you only have about 2-3 hours after the presentations end to talk to all the people you want to talk to. People start trickling away after an hour of smoozing; remember many people have other meetings and places to go. It's very rare that people stay all the way to the end! Again, disengage with set action items to follow up, and with contact info exchanged.

AFTERMATH:

1. Write a follow up email to everyone you met! Say hi, it was nice meeting up and you'd love to get together to talk further. Remind them with what you and he discussed.

Keep in the mindset of the folks you meet - remember that we're going to be totally talked out and our brains won't be able to remember all the conversations and people we've met. We'll have gone through so many people in so little time; it's overwhelming and you will want to rise above the noise by following up.

2. Keep an email list of everyone you met for updates. This is to keep reminding everyone of the progress you're making. Don't spam this list; just put out an update once a month or every two months. This is also to keep in everyone's mindshare. Even if someone doesn't invest in you today, they may invest in you tomorrow when you're bigger. Or they may contact you for a deal, or to acquire you. They won't do any of that if they forget about you.

3. Pursue those follow up meetings! Get feedback on why someone isn't investing and improve yourself, your product, and your pitch. It's amazing how I've had to contact people afterwards and chase them down. But that also signals poorly; aggressive fund raisers who don't give up are those who succeed in raising the money they need. Passive entrepreneurs only increase the risk that they will fail, because they aren't aggressive.

A lot of this is basic smoozing, or "How to Work a Room" 101. I just wanted to bring it up because while some of this is basic, it's been obvious to me from attending past Demo Days that many YCers either haven't learned it, or maybe forgot about it in the heat of prepping for Demo Day.

Looking forward to Demo Day next week!

Over the last few months, I've spoken to a number of investors who work in the early stage startup space. It seems that many of them have come to the same conclusion I had in my earlier blog post, Angel Odds vs. Venture Odds, which was that they really had to go broad in investing to try to find those few Google super-investments to generate the bulk of the fund's returns.

The numbers they propose are staggering: 50-100 investments over the life of a fund! If 100, that's 20 investments per year if spread out over 5 years (typical life of fund). Some of them may even try to front load the investments, exceeding the 20 and perhaps going up to as much as 30-50. That's about 1 investment accepted, negotiated, gone through due diligence, lining up a wire, and docs signed and delivered every 2-3 weeks. If you've ever invested, you know how difficult that process can be.

Some thoughts on this, from the perspective of working on the measly 16 investments I've done over the last 3.5+ years:

1. Investor management of this number of startups will be challenging. What will it mean to have 20+ startups emailing you for help, meetings, introductions, advice, etc? Time management will be very difficult.

Entrepreneurs will have to be prepared to find ways of capturing dwindling time slices of the investors, and working hard to deserve more time. By deserving more time, I mean it is natural that the more successful startups will get more time as they have the best chance to return the most money to the fund.

2. Investor teams will need to increase, but paying for them may be difficult as early stage funds are typically smaller in size, and thus management fees collected will also be proportionally smaller.

3. It will be interesting to see how the money being moved around can be optimized. Typically capital calls are made to limited partners when an investment happens. If there are a lot of capital calls, making and collecting a huge volume of capital calls can be a lot of work on the fund personnel and limited partners. Capital calls may work differently for these early stage funds.

4. In this world of proliferating me-too products, it may be impossible to not invest in startups which overlap in plan. Many investors and entrepreneurs worry about their plans being discovered by competitors or near competitors. This is why we don't like investing in startups who are competitive to one another. But if they are investing in 50-100 startups, I wonder how they avoid competitive conflicts? Or should they even care?

5. Can 50-100 quality startups be found in one area even if it is in the Bay area, the startup capital of the world? It may be that going far afield will need to happen in order to find quality startups. This will strain time commitments for investors to travel and keep tabs on investments far away. It will also mean entrepreneurs may only get as much help as they can remotely.

6. Entrepreneurs should be prepared for what I call "survival of the fittest" and "ruthless culling". Given the limited attention time of the investor in the face of overwhelming numbers, entrepreneurs need to work extra hard to prove they deserve more investor time. The best will get more help, and get follow on investment. Those that do not get follow on investment may find this is a detriment to them getting more money.

Entrepreneurs will have to get over the fact that while they think they are the coolest kid on the block, in the face of being in group of cool kids, their own coolness will be the norm and therefore commonplace and they will have to find ways to be even cooler than their peers. Being commonplace in a group of equally cool kids could mean neglect as the even cooler kids get more attention and help.

Despite all this, I firmly believe this is the way to play the early stage startup game from an investor point of view. It is the only way to raise the probability that they will find the Google super-investments that will create the oversized return of the fund.