Sunday, July 21, 2013

A Concise Guide to Angel Investing. Part 2--The Beginning.

So you've read Part 1, joined and angel group, and gotten a sense of the landscape. You fell ready to pull the trigger on a deal.

Make sure you are investing into a closing of a round that gets the company somewhere--at least 12 and preferably 18 months of lifespan, time enough to hit real milestones after the inevitable operational slips. Many entrepreneurs want you to write them a check right now, because they need the money right now. They are "piecemealing" their fundraising, grabbing money when and where they can. This usually leads to a bad outcome for the investor, because you dramatically increase the financing risk the company faces. Instead of being 100% focused on execution, the entrepreneur is 90% focused on fundraising.

The typical minimum investment for a seed round in the Bay Area is $25k. The company will often waive the minimum if you can show that you will add some additional value. For the company, having a large number of investors is a hassle.

Convertible debt still seems to be the norm for most deals, which frustrates me. Equity makes much more sense in my mind. There is a good summary of the discussion here. I will lay my thoughts out on this in a separate post soon.

Companies face many perils on the road to success. It is why only about 10% of startups are successful (and that percentage is probably dropping in the current environment). Among the many execution risks are:
  • Team--Is this the right team to make the company work?
  • Market--Is the market ready? Can you reach your target customers efficiently?
  • Product--Will you get product/market fit? Can you build a scalable product/service model?
  • Financing--you can do everything right, and just run out of cash. Just because you hit your milestones does not mean you will be able to raise money. Series A capital, the follow on to a seed round, is particularly hard to come by these days. How much cash do you think you need? Uhm, no, you need more.
Remember that entropy is the most powerful force in the Universe. It will thrash a carefully thought out business plan. You are likely in for a wild ride...many successful startups faced near death moments along the way. Few are still on their original business plan--including companies like Paypal and Twitter.

Once you have written your check, you have the right to sit back and cheer. Unless you are putting in a significant amount (eg. $100k), you generally do not have the right to get financial information or sit in on board meetings. Don't call every week for an update.

If you prove to be helpful, you will be invited to participate, and the entrepreneur will call you.

Whether or not you are helpful, you will get a call when the startup needs a top up of cash. This is more common than not, especially in the current Series A Crunch. I often see a 3-6 month slip in the business plan, which means that right at the company is starting to get the traction they are hoping for, they are running out of cash. They have not achieved the success necessary to get a Series A round done. At this point, they turn to their investors and ask for more. Top ups are generally done on the same terms as the original seed round.

Just doing top up rounds is an interesting business model, because you get the same deal after seeing a year of execution. But, finding them is tricky as they tend to be "inside rounds", done entirely by existing investors.

I believe that no one has the magical ability to pick winners. You need to have a portfolio of investments unless you plan on Luck being your core investment strategy. Most experienced venture capitalists I know will admit to being wrong about which of the companies they back was going to be their big winner. The key is to invest in a few companies that have that potential.

A word of warning--it will get dark before the dawn. The losers in your portfolio will usually show up first. Companies fail quickly, but they generally take years to achieve a successful liquidity event. While you may see increases in the valuation in subsequent rounds, until you have cash in hand, don't go yacht shopping.

Good luck!

Monday, July 1, 2013

A Concise Guide to Angel Investing. Part 1.

I have been making small investments in tech companies for almost 20 years. Some successes, lots of failures, and a few lessons along the way. I thought I would share some brief thoughts, focused on those who are new to the angel investing game.

We'll cover the following:
  • Getting Started
  • Deal Flow
  • Investment Terms
  • Lifecycle
I will break the topic up into a couple of posts for easy data snacking. That still leaves a lot of important stuff. For example, what makes a good deal? We'll get to that eventually as well.

I will reference some numbers carelessly and without attribution. That is because I am too lazy to dig back and find the original articles, but I will try to give you a clue as to where I heard the numbers. Over time, I will update the post with references. In some cases, I will just pull "facts" out of my ass based on my own anecdotal data.

Angel investing has become hip. It was not always thus. People used to look at me funny when I told them I plowed my life savings into companies that hemorrhage cash. Now, everyone is tripping over themselves to invest in startups. I view this as being actually destructive to innovation, because too many startups dilute the talent pool and make it harder for good ideas to break through the noise.

I question whether there is really a functioning business model for angel investing in the current environment. Valuations at the seed stage are high, but success rates are low. Statistically, returns are in the 20-30% range depending on whose data you look at (eg. ACA, NVCA), but there is a significant bias, I believe, to this data, as many less active and less successful angels do not contribute their data. You seem the same thing in the hedge fund indices. Hedge funds that go out of business or have a lousy year don't bother reporting, so you have a positive bias to the index which makes the asset class look more attractive than it really is.

Angel investing is, in many ways, like owning a vineyard for people who prefer tech to dirt. It is a romantic notion to help startups, and it is, in fact, good fun. But that leads to people doing it for love rather than money, and that perverts the original intent. Do you know what is cooler than bragging about all the startups you are invested in? Doing it on the deck of the yacht that angel investing paid for.

First of all, can you afford to be an angel? The typical minimum investment level in the Bay Area is $25k. You can reduce that on some deals and if you participate in an angel syndicate. To build an adequate portfolio means at least 10 deals. Chances are you will lose every penny.....allocate accordingly. Basically, you should have more than $2.5m and ideally more than $5m in net worth to be a sensible angel investor.

There is a core of angel investors, the "super angels", who are really just small venture capital funds. They spend OPM and earn management fees for doing so, which changes the investment philosophy to be more aggressive. Around this core is a cadre of active and experienced angels who have access to the best entrepreneurs, and therefore the hottest deals.

Chances are, you are not one these angels with premier access to deals. Deal flow is key to the angel model, but all is not lost if you are not one of the cool kids--it does not mean that you have to be the greater fool.

How do you get a look at a lot of deals? You can just join AngelList and tap on to a firehose of deals. Ideally, you join a local angel group so you have collaborators and can take advantage of the existing deal flow and experience. AngelList is a great resource for deal flow, but it lacks the face to face interaction that is important for accelerating your angel nous. Get a sense of the investment landscape--valuations, terms, sectors that are in or out of favor.

There are a number of angel groups in the Bay Area, some with a sector focus (eg. Life Science Angels). Personally, I am a member of the Sand Hill Angels, North Bay Angels and Berkeley Angel Network. The Angel Capital Association is a good place to start looking for a local group.

You want to look at a few deals before you pull a trigger with dollars attached. In an active angel group you can see 20 deals in 6 months. By look at, I mean actually have a meaningful discussion with the entrepreneur, not just read the plan. Don't just look at the Excel model.

I have yet to see Excel play out accurately in the real world, though it is useful for understanding unit economics. Ideally, invest in an industry where you have significant operational experience. It is more fun for you if you can be helpful, and it is also more fun when you dramatically improve your chances of making a successful investment.

In the next post, we will talk about the deal and what happens afterwards.

Sunday, November 18, 2012

Comparing the big tech conferences

This year I attended three large startup tech confabs--Launch!, TechCrunch Disrupt and DEMO. These conferences are a combination of startup pitches, thoughts from industry leaders, and networking.

Launch! is the new kid, started last year by Jason Calacanis, the maniac (in a good and bad way) who originally partnered with Michael Arrington to put on the TechCrunch conferences. I have been to every TechCrunch conference, but as I explained in an earlier post, this year's may be my last unless I can get cheaper tickets.

DEMO is the longest running, and was the target of the original TechCrunch conferences, which were even held at the same time. DEMO has caught a lot of flack for charging startups to present--up to $20k. That is a lot of money for a young startup, but the exposure can be worth well more than that. Attendees still pay as well, and plenty.

TechCrunch turned that business model on its head by allowing startups to present for free, and running a lower cost conference to make up for it. Instead of holding it in a swank conference center, it is held at the San Francisco Design Concourse, which is basically an empty shell of a building designed for furniture shows. Launch! used the same facility.

So as not to bore you, let me rank them by my criteria:
1. Launch!
2. TechCrunch Disrupt

My criteria are based on what benefits me as an angel investor. I want to see interesting seed stage startups, chat with VCs and other angels, and hear new insights into the world of early stage companies.

All of the conferences feature a live stream of the presentations, so what you are paying for ($1k-$2k for tickets) is face to face access.

Launch! is the clear winner because they have stayed true, so far, to the original formula of the TechCrunch conferences. Cheap and cheerful, with a lot of thought about who gets to present and a roster of luminaries. The wifi works most of the time, and there was plenty of food available, even if it was pizza after they ran out of sandwiches.

TechCrunch Disrupt has become a cash machine, and the quality of the conference has suffered. Some of the talks are just straight up commercials. VCs appear on stage, but rarely out on the conference floor any more. Kudos, btw, to George Zachary of CRV and Vinod Khosla for walking the floor and talking to entrepreneurs. They sell more tickets, and have so many startups exhibiting that they clear them out every day for a new batch. It has made the experience overwhelming. It has gone from a curated experience to a melee.  Just finding a place to park was tough.

DEMO, as the old man of the three, is also the most polished. But it clearly suffers from a cash flow orientation as well. The presenting companies were of lower quality than Launch! or Disrupt. Some of them were just junk. This is to be expected when you charge a lot of money. The top prospects can go to the free options and be selected. That leaves the B players and a lot of foreign companies who don't have the access to get selected to present for free. The speakers at DEMO were also less distinguished, and did not have anything to say that has not been beaten to death by the blogosphere.

DEMO has at least figured out the logistics. All presenters laptops were already on stage and routed into a sophisticated video display system, so there were very few technical issues with the presentations. The wifi was slow but worked, and lunch was fairly efficient. Free parking was easy in the huge convention center lot. These are the perks of having a large budget.

DEMO has also figured out something that I have known for a long time--your conference badge should not hang at navel level. I usually tie a knot in the string upon which the badge hangs, so that it hangs as high as possible (while still fitting over my head). It is just awkward to have people continually stare at your belly button to figure out who you are and whether you are worth talking to. The DEMO badges come with a locking slider that adjust the length of the string.

Have you been to all three conferences? Leave your thoughts in the comments.

Tuesday, October 23, 2012

Does buying a Prius make you stupid, or do stupid people buy Priuses? (Prii?)

The Toyota Prius has become the bestselling car in California [LA Times]. It makes a bold fashion statement that the owner is eco-friendly.

Of course, it also makes the statement that the owner is not facile with basic ROI math. Even at the currently outrageous gas prices, it will take more than 6 years to make up for the approximately $5,000 up front premium over an equivalent non-hybrid vehicle [Edmunds].

But this rant is about driving skills, not math.

Even now, the Prius is less than 4% of new car registrations, and so much less than 4% of cars on the road. And yet, about 20% of my experiences with bad driving involve a Prius, whether in my car or on my bicycle.

Incidents include drifting into the bike lane, turning without signaling, driving ridiculously slowly, being overly cowed by speed bumps, and generally driving like a turd.

Doesn't anyone notice this!? I feel like I am taking crazy pills!

On the plus side, Prius owners park well.

Now, the Prius demographic does trend toward the ancient citizen. Old people, in addition to smelling funny and wearing diapers, are not renowned for good driving. As if to give a wrinkly finger to youngsters, they periodically drive into a crowd of children while claiming they stomped on the brake pedal.

Prius owners may suffer from "moral licensing", where feeling like they are saving the planet causes them to act less altruistically in other ways [source]. The same phenomenon is observed of people who buy organic foods. In a recent study, hybrid drivers were less likely than most to yield to pedestrians in a crosswalk.

Prius owners (and hybrid drivers in general) get more tickets [I can't seem to find the original source, but it is referenced often].

But, the original question still stands. Does buying a Prius make you stupid, or do stupid people buy Priuses.

Friday, October 19, 2012

The dearth of innovative ideas

I get to see a lot of startup ideas these days, mostly thanks to AngelList and the conferences I attend.  I have noticed a significant trend that is understandable but troubling.  We seem to be running low on truly original ideas.

Almost every startup describes themselves as the "[Hot Company] for [Big Market]", or "like [Hot Company 1] meets [Hot Company 2] and [Hot Company 3]".  This is, of course, somewhat natural, as it helps your audience understand what you are doing if you can "anchor" it to known concepts.

But I can't help but wonder how Twitter described themselves.  Of course, they did not have to go out and raise money in their early days, since it was built out of the ashes of Odeo.

I am a big fan of things that take an offline process and put in online, adding efficiency and utility to the process.  So I like to hear comparisons to brick and mortar companies or processes. This also makes it more likely that you are not asking the carbon-based windbags who you hope will eventually give you money to materially change their behavior.

Automobile nav systems

This is another one of my random rants, triggered by this article on the proposed NHTSA guidelines on distracted driving.

I have decided that the nav systems in cars have little to do with navigation and everything to do with padding margins for automakers.

To sum up, the built-in nav systems are expensive and crappy. The "non-deletable option" costs upwards of $2,000 while providing less functionality than a $100 Garmin Nuvi.

I am particularly annoyed by the system in my Lexus, which does not allow input while the vehicle is moving. The lawyers clearly got to the engineers before the customers did. Ever heard of a passenger? Sure, it handles voice input, but not from my voice or anyone else who has ever tried it. Maybe you have to speak in Japanese.

To add to the insult, Lexus recently offered to sell me an updated map data DVD for $150. Gee, thanks guys, or maybe I will just buy 2 Garmins that work better anyway.

Some of the latest systems seem to at least have better interfaces.

I generally use Waze instead of the built in system in my truck. In addition to navigation, Waze shows me traffic and hazards along the way using crowdsourced data. If I need to go to a hotel, I can just put in the hotel name and search instead of having to know the address. If the car is moving, it will tell me to have a passenger do the input, which is sensible, and a better option than just crippling the system.

Of course, Waze has a minor problem--the navigation sucks, but that is definitely improving. Android users can use Google Maps for turn by turn directions. iOS users can use Apple Maps, but who knows where you will end up.

The ideal solution would seem to be to just have a relatively future-proof interface in the car for the owner to connect to their tablet or smartphone. I just got a decked out new iPad for less than half of what the in-car nav options cost. Ford and others are moving in this direction, but they seem loathe to give up the fat margins of yesterday's technology.

Monday, September 10, 2012

Has TechCrunch Disrupt jumped the shark?

I am hanging out at the TechCrunch Disrupt conference this week at the Design Concourse in SF this week. I have attended the conference every year since its inception as TechCrunch 40 in 2007, and it has always been top notch in terms of seeing exciting companies and speakers.

This year, though, has been a disappointment so far. Every year, it has grown, but this year it has finally gotten too big. Too crowded, too hot, too many exhibitors. Basically, too much focus on making money and not enough on providing value to the attendees.

This is the most expensive conference I attend, with a rack rate of $3,000 for the three days. Exhibitors also pay a lot to be here. Sponsors like Ford pay a lot to park a car in the hall. Meanwhile, most of the staff are volunteers, anxious for exposure to the magic startup ecosystem.

But this year, that magic ecosystem at Disrupt is turning into a ghetto.

In previous years, there were a lot of VCs and other investors, and financings got negotiated. This year, it is almost more of a jobs fair and networking pow wow. There is a huge number of startups with tables exhibiting in the main hall. So many that I can't possibly interact meaningfully with them. And yet, they are paying the same amount to be there as in the past. Most of the people they talk to are probably looking for jobs or networking. The VCs here are mostly up on stage, and I have not seen them spending time amongst the peons out on the conference exhibit floor.

There are almost 100 companies exhibiting today that get kicked out in favor of a new batch tomorrow.  How can the possibly be getting their money's worth. That isn't even counting the various "national pavilions" with another 40 or so companies. Like a swarm of underslept locusts, they devoured the lunch buffet. I had cookies and salad for lunch as the chicken was all gone, as were the drinks.

It is really warm in the auditorium because there are too many bodies. Air conditioning costs money (they had it in previous years). The wifi does not work--WTF? this is a tech conference! There was no parking available nearby, even in the paid lots. Bitch bitch bitch bitch......for $3k they should do better.

Worst of all, the quality of the conference content is also down this year. In previous years, 50 startups presented; only 30 this year. Could it be because presenters don't pay? Speaking of that, there have been a number of "conversations" so far on stage that were thinly veiled commercials. I am guessing they were paid for.

Why is Jessica Alba here to talk about entrepreneurship? To give us such nuggets on as "it is really, really hard"? WTF? And yet, what do I know? The auditorium was at its most crowded for Jessica, and a bunch of people left after she finished. And, she got a free pitch for her new company.

It is not all bad. Jack Dorsey did give a great talk on entrepreneurship, and Arrington's interview with Reid Hoffman was also good. But that is like wrapping something with bacon....Arrington's interviews are always good.

And, of course, let's not forget this guy.....I am glad some of my entry fee went for tumbling clowns.

We are not quite through the first batch of company presentations, and so far, they are good. The best presentation has been by Steve Newcomb of, a 3D app framework. He channeled Morpheus in voice and style. By the end, I thought he was going to offer me a choice between the red pill and the blue pill. Of course, it was no Tonchidot.

Hopefully over the next two days the quality of the companies presenting will change my mind, but at this moment, I don't think I am coming back next year. If I do, I am wearing shorts and bringing a cooler of beer.

[Update: the dancing robot has partially redeemed the conference experience.]

[Update: apparently the air conditioning is broken, but will be fixed by tomorrow.]