I've been doing David Shen Ventures, LLC for about 4 months now and it's been a truly positive and educational experience.
Coming off the difficulties of raising my own venture fund, Chroma Ventures, which showed me that the current market was just too unfriendly to new fund managers, I leaped into the world of early stage internet startups on my own. With only pocket change, when compared to the mega venture funds out there, I tiptoed into the world of angel investing.
Early on, I knew I had to learn everything as fast as possible. All this investor stuff was very new to me. I had learned some of it while trying to raise Chroma Ventures, but I hadn't gotten everything yet. So I enlisted my lawyer to sit down with me for about an hour and a half and just go through a whole bunch of financing docs and talk briefly about all the different ways people could screw you.
Lawyers can definitely be worst case scenario guys. They will scare the crap out of you on how you can be taken by everyone. It sure scared me, hearing all the stories of how people were cheated out of millions of dollars, and what happens if you invest on the wrong terms. I listened to all this and it could have made me run for the hills....but it didn't.
Investing in early stage companies, internet or no, is an inherently risky business. I like to think of it as better than gambling as you can personally affect the odds in early stage investing by making the right bets among other things. So you have to take some risks and be ready to lose that money. And sometimes, the investment terms aren't exactly the way you like them. I've walked away from terms that were just too risky. I've also invested in terms that were still risky to a point, but I thought there was a good chance of my risk being mitigated by other things. Basically, to invest in early stage companies, you have to be willing to lose a lot but hopefully win it all back on one or two big wins. (My advice here: if you're not a risk tolerant person, don't invest in early stage companies; you'll drive yourself and the entrepreneurs crazy.)
Learning about terms was one big education. I think I'm getting better at solo-ing on reading a term sheet, but still like my lawyer to go through it and get his take on it. Finding out what terms were company friendly and what terms were investor friendly was really enlightening. I had wished that it was all standardized, but it's actually the wild west of terms out there. Everything is done to personal taste so you have to read every term sheet carefully.
Huge Positive Response
As I went out there, I had no idea whether people would want my involvement this way or not. I already had met some folks who were doing the same thing I was doing: advising for an equity stake in the company. Many were actually paid as consultants to help their ventures. They also touted their contacts in the venture world so they could help an entrepreneur through the funding process. They seemed to be doing OK and had an active roster of entrepreneurs they were working with. But I had no idea on how to find these entrepreneurs.
I started by going to a Silicon Valley Meetup. I met some folks there but also realized that it was not such a good thing to advertise my status as an angel investor - too many people are out there working on stuff that won't ever make it - or they themselves are not true entrepreneur material. I didn't have time to field every business plan that came across my email, nor did I have time to check up on every person to see if they were on the level.
I also met with some ex-Yahoos who had started their own startups and they were plugged into the entrepreneur "underground" in San Francisco and Silicon Valley. This seemed to be a better route than going to the more public forums. Getting to know these guys personally and by referral was much better.
But then, once word got around to the ex-Yahoos around the valley that I was doing this, the response picked up. They all knew me and I knew all of them and thus I focused on a (thankfully) constant stream of referrals to entrepreneurs working on all sorts of stuff. Filtering by referral is much better; your own personal reputation is at stake when you refer someone to someone else!
I also noticed one other thing about the positive responses - they really needed my expertise in their fledgling businesses. Mostly this was in the areas of:
1. Internet user experience and design
2. Product strategy
3. Online advertising and the media world
I thought back to the people I met who were doing the startup advising thing professionally, and there were no people who were operating these particular areas - only in business strategy and engineering. And in talking to entrepreneurs, they lacked someone with experience to lead them in these areas. This was hard won Yahoo knowledge from the 9 years I spent there working on just about every type of product out there. Over the last few years, it has only been in recent years where Yahoos have started leaving, and the knowledge is starting to get out there. But even then, how would an entrepreneur find an ex-Yahoo if you're not connected?
It's nice to be wanted. Now how do I work with the companies? I had to develop a strategy for picking the right entrepreneur, company, and business to work on. I did not want to work on everything that came by and I wanted to see if I could do better than that.
First, I said to myself that my knowledge and experience could increase a company's probability for success than without. So if I was going to invest money, then they would have to involve me. I figured an advisorship was the best way to formalize that (rather than being a bothersome investor). No involvement, no cash. (NOTE: I don't invest in everything I work on. A lot of things have to fall into place correctly for me to put money in, and not all of those are in my control.)
Second, I had to develop a set of criteria to base my decision on whether or not to get involved. These are:
1. The team must consist of quality people. They must be trustworthy and I must like to hang out with them. I want to have a good connection with them, and I want them to want me to be around. If I don't like hanging out with these people, then I would be less inclined to keep bugging them on their product and company. The moment something doesn't feel right, I don't do it. (NOTE: Honing one's intuition is paramount.)
2. I wanted to work with people who geniunely wanted my knowledge and participation, and not just my money. I am trying to be super sensitive of any sign that someone is looking only to get my money and don't really care about my participation. That participation needs to work from both sides; a team needs to pursue my knowledge just as much as I want to help them with it. It's too easy for a startup team to get caught up in the day to day and not leverage their advisors. I am trying to avoid it as much as possible but know I will not be 100% perfect in reading entrepreneurs on this matter.
3. I need to resonate with the product. See my Resonance post.
4. I need to believe in it and see a future for it. If I can't see the future for it or don't believe in it, I don't think I should work on it. That doesn't mean that someone else couldn't take it to success; it just means I'm not the right guy.
5. I like certain types of projects more than others. See my What Do I Think is the Next Wave of Business for the Web? post.
6. The team number must be between 1 and 10. I have found that it works best when there are not people in place with skills similar to mine. See my The Sweet Spot Number post. If there is a number on the team greater than 10, a red flag automatically goes up in my head.
7. Generally, I like teams with track records than without. And I also like teams with very strong people in them. If you don't have smart, experienced, motivated people from the beginning, you'll be severely hampered very soon. Let's not start the project with sub-standard people, shall we?
8. I am starting to be a bigger believer in the distance rule for investing. I have increased that to encompass San Francisco from Silicon Valley, so instead of the 20 minute rule is more like a 50 minute rule. (Hey, I've got a Prius with carpool lane stickers so driving ain't so bad - heh). Right now, I am concentrating on companies in Silicon Valley/SF, Los Angeles, and NYC. While that may seem like the distance rule is a bit stretched with this list, I count the distance rule from my place of dwelling in each of those places, which I am in a lot for a variety of reasons.
My message to entrepreneurs is this:
1. You shouldn't put me on critical path. We'll both be frustrated as I don't have the time to take projects to completion on my own.
2. By the end of my advisor term, my goal is to find replacements for all the skills and knowledge I bring to your table. This can be either by the hiring of individuals or by the actual teaching of knowledge to you.
3. Use me to the fullest. I am available to bring along to meetings, evaluate vendors, evaluate products and services, etc. Just schedule me ahead of time and if I have time, I 'll make best efforts to come along and help you.
4. I only take equity as payment. I do not want to charge hourly and drain an early stage firm's bank account. Save that money for operations and product. Let's build the damn thing together and win big later.
That last message expresses my philosophy in working with entrepreneurs. I am not in it to make money in the primary sense. If I were, I would have continued trying to raise money for Chroma Ventures or tried to join up with another venture fund. I get the most kick out of seeing a company grow from nothing to something big, and hanging out with a bunch of really cool, determined, smart individuals to do it. It was what it was like back in the old days of Yahoo; just a bunch of buddies hanging out doing great stuff. I truly believe it is the formula for great success.