The Exchanges

Q and it's an, it's a very difficult one to quell to an extent. You don't obviously want to completely quell it, but how do you look to hone your excitement now, then, in a much more kind of realistic, pious, and experienced angel investor that you are compared to when you started out in the industry? How do you look to kind of embrace investments with a sense of realism?

A Yeah, I've definitely become more disciplined. As I said, I said yes too often, and one of the things that I've, I've learned is that you can get excited about a sector, and, and then from there, what's really important is to do the due diligence on the sector, because of course, as an angel, you have to stay optimistic that these companies can change the world, but you can't jump in, um, on the first company that you meet. So, um, so you get excited about a sector, you do your due diligence, and not only on that one company you meet, but it's really important to look at the next Four companies that are in the space, because I often tell an entrepreneur, um, if you think you have something really unique, there may be four other companies in Silicon Valley or around the world already doing the same thing, and what's your unique advantage? How do you beat them? So I need to, as an angel, identify those other four companies, and that's really important because often in markets, you'll see the number one company accrue 85 to 90% of the value, and then the next company, especially network effect companies, Um, and then the next company might get five or 10%, the number two, and then the long tail shares the last five or 10%. So you really don't want to ever play in the long tail, and you really rarely want to be in number two unless it's a huge TAM, unless it's a huge total addressa…

AI assessment note: “Yeah, I've definitely become more disciplined. As I said, I said yes too often”

Q Would you say your exit philosophy and desired exit is, is very different to a VCs? You know, we often hear VCs have to have the billion dollar outcome, and for angels, you know, technically that's not so much the case. Do you still adopt, though, the same VC exit demands, or do you think it is radically different?

A Well, I'll tell you, it's one of my biggest learnings over the last five years of really being an active angel, is the difference between an angel and a VC when it comes to exit. And let me give you a concrete example. So for me, I could look at a company and I could say, wow, easy. I can see a path to a 50 to a hundred million dollar exit. Totally get it. I know who the buyer set would be. Great. I'm investing it. Let's call it a convertible note with a five million dollar cap. So I could, I could go 10 to 20 X my money. Awesome. Then the VC comes in and the VC typically sees a partner in a series A firm typically sees between six and 700 deals a year. And a series A partner typically does one to two deals per year. If I'm saying yes, five to 10% of the time, they're saying yes, far less than one percent of the time. Here's the issue. They come in and look at that same company and say, yep, I could see this, you know, maybe selling up to a hundred million dollars. Okay, interesting, but not for me. I have a billion dollar fund. I can only sit on five or six boards at a time. Typically, I only get to do one to two investments per year. And I'm going to have to pass because the exit potential on this is only a hundred million and it won't even come close to returning my fund. Now, as the angel, as a guy who put the money in thinking I'm going to get, you know, 10 or 20 X my mone…

AI assessment note: “it's one of my biggest learnings over the last five years... is the difference”

Q and it's an, it's a very difficult one to quell to an extent. You don't obviously want to completely quell it, but how do you look to hone your excitement now, then, in a much more kind of realistic, pious, and experienced angel investor that you are compared to when you started out in the industry? How do you look to kind of embrace investments with a sense of realism?

A Yeah, I've definitely become more disciplined. As I said, I said yes too often, and one of the things that I've, I've learned is that you can get excited about a sector, and, and then from there, what's really important is to do the due diligence on the sector, because of course, as an angel, you have to stay optimistic that these companies can change the world, but you can't jump in, um, on the first company that you meet. So, um, so you get excited about a sector, you do your due diligence, and not only on that one company you meet, but it's really important to look at the next Four companies that are in the space, because I often tell an entrepreneur, um, if you think you have something really unique, there may be four other companies in Silicon Valley or around the world already doing the same thing, and what's your unique advantage? How do you beat them? So I need to, as an angel, identify those other four companies, and that's really important because often in markets, you'll see the number one company accrue 85 to 90% of the value, and then the next company, especially network effect companies, Um, and then the next company might get five or 10%, the number two, and then the long tail shares the last five or 10%. So you really don't want to ever play in the long tail, and you really rarely want to be in number two unless it's a huge TAM, unless it's a huge total addressa…

AI assessment note: “I've definitely become more disciplined. As I said, I said yes too often”

Q In terms of the dilution, do you think it's up to the founders then to kind of respect the early angels for their loyalty and reward them for that by being kind of tough on terms with the Series A investors? Or do you think it's up to the Series A investors to appreciate the early investors like you for backing the company?

A I think it really comes from the entrepreneur. Um, you know, I have a, you know, a great network of, of VCs and they typically bring me, you know, a lot of my deals, um, A VC will bring me into because they believe I can add value, but the reality is, once it goes to a Series A, or especially a B or a C, and later stage investors come in, the entrepreneur needs to fight for any kind of additional investment from an angel that you may want to do, and by the way, the valuation may get so high that the angel says, I can't play at this level. It doesn't make any sense, but I have had, um, in several cases, entrepreneurs where I've said, you know, I'd love to keep investing in this company. I love this And they've gone back to the VC and say, Hey, can we carve out 50 or a 100,000 for Rick? He's added a lot of value here. We want to keep him motivated. We want to reward him for that value, uh, in the past, as well as what he can do in the future. I think almost every time, if not every time, uh, the VC has said, yeah, we know Rick's going to add value. And if you believe he has, then let's carve out, you know, a fairly small amount, 50 to a hundred K and, you know, in a, in a much bigger round is palatable for them. But the entrepreneur has to go to bat for you. Which means you have to add value along the way. You can't just write a small check and go away, um, and expect that the en…

AI assessment note: “I think it really comes from the entrepreneur.”

Q Would you say your exit philosophy and desired exit is, is very different to a VCs? You know, we often hear VCs have to have the billion dollar outcome, and for angels, you know, technically that's not so much the case. Do you still adopt, though, the same VC exit demands, or do you think it is radically different?

A Well, I'll tell you, it's one of my biggest learnings over the last five years of really being an active angel, is the difference between an angel and a VC when it comes to exit. And let me give you a concrete example. So for me, I could look at a company and I could say, wow, easy. I can see a path to a 50 to a hundred million dollar exit. Totally get it. I know who the buyer set would be. Great. I'm investing it. Let's call it a convertible note with a five million dollar cap. So I could, I could go 10 to 20 X my money. Awesome. Then the VC comes in and the VC typically sees a partner in a series A firm typically sees between six and 700 deals a year. And a series A partner typically does one to two deals per year. If I'm saying yes, five to 10% of the time, they're saying yes, far less than one percent of the time. Here's the issue. They come in and look at that same company and say, yep, I could see this, you know, maybe selling up to a hundred million dollars. Okay, interesting, but not for me. I have a billion dollar fund. I can only sit on five or six boards at a time. Typically, I only get to do one to two investments per year. And I'm going to have to pass because the exit potential on this is only a hundred million and it won't even come close to returning my fund. Now, as the angel, as a guy who put the money in thinking I'm going to get, you know, 10 or 20 X my mone…

AI assessment note: “it's one of my biggest learnings... is the difference between an angel and a VC”

Q it's, I see in a brilliant young company and I see some real areas where I could add value, where it'd be strategic partnerships, go to market strategies, But I'm not sure whether to show all of my value up front pre-investment, or hold it back for once the term sheet's signed. What's your approach on the pre-investment value add, and to what extent you kind of fully give it?

A Well, I, I, I see your point that there could be a risk that you give all the value, and they say, why should we give you any equity now? My experience in Silicon Valley is the opposite, which is, um, Silicon Valley is a place where People share ideas. I'm originally from the Boston area, and anytime somebody wants to talk about their idea, they want you to sign an NDA, and you know, they're really secretive and closed, and when I came to Silicon Valley back in 2000, it was so different. You know, sign NDAs, that's a weird thing to ask someone to do, and people are very open, uh, and share their ideas, so for me, I would rather prove out my expertise to an entrepreneur. I would rather, uh, contribute to the ecosystem. And, and hope that they see that value, and, um, and instead of cutting me out of a deal, they're more motivated to bring me in.

AI assessment note: “I would rather prove out my expertise to an entrepreneur”

Q And then you mentioned kind of what you looked for in prospective investments. What always really concerns you? What are the big red flags for you?

A You know, a big red flag is when an entrepreneur doesn't listen. And, you know, for me, I believe that including myself, everyone can benefit from the help of others who have a lot of experience or expertise in a market. And I've been pitched many times by entrepreneurs who are just deaf to feedback, my feedback or the feedback of others. Because don't forget, angels and VCs, we all talk to each other, right? We all want to, um, to get feedback from others. And if I hear this entrepreneur was, was kind of deaf to my feedback as well as to others, Then I'm going to pass on them. Um, I have no regrets on passing on people like that, and, uh, and in some cases, I've had them come back to me and say, you know what, I realized I was arrogant six months ago, and, uh, and, and I really want your feedback now. You know, would you please reconsider investing? Um, that to me, uh, is a big red flag because you should always be in learning mode. You should always surround yourself with great people that you can learn from.

AI assessment note: “a big red flag is when an entrepreneur doesn't listen.”

Q In terms of the dilution, do you think it's up to the founders then to kind of respect the early angels for their loyalty and reward them for that by being kind of tough on terms with the Series A investors? Or do you think it's up to the Series A investors to appreciate the early investors like you for backing the company?

A I think it really comes from the entrepreneur. Um, you know, I have a, you know, a great network of, of VCs and they typically bring me, you know, a lot of my deals, um, A VC will bring me into because they believe I can add value, but the reality is, once it goes to a Series A, or especially a B or a C, and later stage investors come in, the entrepreneur needs to fight for any kind of additional investment from an angel that you may want to do, and by the way, the valuation may get so high that the angel says, I can't play at this level. It doesn't make any sense, but I have had, um, in several cases, entrepreneurs where I've said, you know, I'd love to keep investing in this company. I love this And they've gone back to the VC and say, Hey, can we carve out 50 or a 100,000 for Rick? He's added a lot of value here. We want to keep him motivated. We want to reward him for that value, uh, in the past, as well as what he can do in the future. I think almost every time, if not every time, uh, the VC has said, yeah, we know Rick's going to add value. And if you believe he has, then let's carve out, you know, a fairly small amount, 50 to a hundred K and, you know, in a, in a much bigger round is palatable for them. But the entrepreneur has to go to bat for you. Which means you have to add value along the way. You can't just write a small check and go away, um, and expect that the en…

AI assessment note: “I think it really comes from the entrepreneur.”

Q it's, I see in a brilliant young company and I see some real areas where I could add value, where it'd be strategic partnerships, go to market strategies, But I'm not sure whether to show all of my value up front pre-investment, or hold it back for once the term sheet's signed. What's your approach on the pre-investment value add, and to what extent you kind of fully give it?

A Well, I, I, I see your point that there could be a risk that you give all the value, and they say, why should we give you any equity now? My experience in Silicon Valley is the opposite, which is, um, Silicon Valley is a place where People share ideas. I'm originally from the Boston area, and anytime somebody wants to talk about their idea, they want you to sign an NDA, and you know, they're really secretive and closed, and when I came to Silicon Valley back in 2000, it was so different. You know, sign NDAs, that's a weird thing to ask someone to do, and people are very open, uh, and share their ideas, so for me, I would rather prove out my expertise to an entrepreneur. I would rather, uh, contribute to the ecosystem. And, and hope that they see that value, and, um, and instead of cutting me out of a deal, they're more motivated to bring me in.

AI assessment note: “I would rather prove out my expertise to an entrepreneur.”

Q And then you mentioned kind of what you looked for in prospective investments. What always really concerns you? What are the big red flags for you?

A You know, a big red flag is when an entrepreneur doesn't listen. And, you know, for me, I believe that including myself, everyone can benefit from the help of others who have a lot of experience or expertise in a market. And I've been pitched many times by entrepreneurs who are just deaf to feedback, my feedback or the feedback of others. Because don't forget, angels and VCs, we all talk to each other, right? We all want to, um, to get feedback from others. And if I hear this entrepreneur was, was kind of deaf to my feedback as well as to others, Then I'm going to pass on them. Um, I have no regrets on passing on people like that, and, uh, and in some cases, I've had them come back to me and say, you know what, I realized I was arrogant six months ago, and, uh, and, and I really want your feedback now. You know, would you please reconsider investing? Um, that to me, uh, is a big red flag because you should always be in learning mode. You should always surround yourself with great people that you can learn from.

AI assessment note: “a big red flag is when an entrepreneur doesn't listen.”

Q In terms of kind of the VCs being interested or not, if they are interested, how do you deal with the common issue for angels of dilution and kind of effectively being squeezed out despite your early loyalty and belief in the company? Is that a common problem for you?

A You know what, that's a great question, and actually, um, one that I wanted to cover today, because I don't think a lot of angels understand that. Um, and, and, you know, it's really important when you're looking at your total return. It's dilution for angels is actually a big thing. You know, you could invest in an angel round, you know, at a low valuation, you know, maybe it's a five million dollar valuation. Um, and you're writing a small check. You're typically writing a 25 K check, you know, maybe for some it's bigger, but that's a typical size for an angel investment. Let's call it a, uh, let's call it an eight cap. Eight million dollar cap, and let's say that the VC, you know, things go well, and the VC comes in, put four million in on a 12 pre, so right, that the post money is sixteen million, and you say, well, I doubled my money, right? I had an eight million dollar convertible note, um, eight million dollar cap, and I doubled my money. No, you didn't. Here, here's what really happened, is you just took on 25% dilution, right, um, with a VC coming in, and the other nuance here that's still important is that, Typically, the VC is going to require a 10 to 15% option pool for the employees, which makes sense, but usually the angel investor is getting squeezed by that as well. Um, usually the VC is going to say everybody in, uh, the entrepreneur, the employees, and the, t…

AI assessment note: “dilution for angels is actually a big thing”

Q 50 deals that you have done, or 45 to 50 deals that you've done. I, I, I heard, uh, Naval say before, and you, kind of, cite it from, uh, him, that the first 30 investments you make will likely not go to plan. And I, I'm intrigued to hear, was this correct for you? And, and do you think this thesis can be applied to the venture ecosystem itself?

A So yeah, Naval Ravikant, uh, the founder of AngelList, and, and one of the, the best angel investors in the world. Um, he's a good friend of mine, and Naval has been a mentor, um, as well as I've become an angel investor. And he had said to me several years ago, if you're serious about becoming an angel investor, you're going to need to do probably 30 investments before you really know what you're doing. And to me, that's the equivalent of an expert having to put in 10,000 hours. To become an expert. Um, now the problem here is that when you do 30 angel investments, I mean, that could cost you anywhere from half a million to a million dollars, and this is typically for angels, their own personal money that they're investing, so that is a very expensive, um, education. Um, now the reality is, you know, was he right on the 30? Yeah, he probably was, and, you know, some of the lessons are, I went too fast. Um, you know, I did a lot of, Um, investments, um, quickly, you know, getting excited about companies. Uh, but the reality is if you're going to do 30 investments, you should probably have a investment rate of, let's say, five to 10%, which means you should see 300 to 600 companies if you're investing at five to five to 10% acceptance rate before you hit 30 companies. Well, that's a lot of companies to meet. So, A, you really have to carve out the time To be able to, to meet the…

AI assessment note: “was he right on the 30? Yeah, he probably was, and, you know, some of the lessons are”

Q In terms of kind of the VCs being interested or not, if they are interested, how do you deal with the common issue for angels of dilution and kind of effectively being squeezed out despite your early loyalty and belief in the company? Is that a common problem for you?

A You know what, that's a great question, and actually, um, one that I wanted to cover today, because I don't think a lot of angels understand that. Um, and, and, you know, it's really important when you're looking at your total return. It's dilution for angels is actually a big thing. You know, you could invest in an angel round, you know, at a low valuation, you know, maybe it's a five million dollar valuation. Um, and you're writing a small check. You're typically writing a 25 K check, you know, maybe for some it's bigger, but that's a typical size for an angel investment. Let's call it a, uh, let's call it an eight cap. Eight million dollar cap, and let's say that the VC, you know, things go well, and the VC comes in, put four million in on a 12 pre, so right, that the post money is sixteen million, and you say, well, I doubled my money, right? I had an eight million dollar convertible note, um, eight million dollar cap, and I doubled my money. No, you didn't. Here, here's what really happened, is you just took on 25% dilution, right, um, with a VC coming in, and the other nuance here that's still important is that, Typically, the VC is going to require a 10 to 15% option pool for the employees, which makes sense, but usually the angel investor is getting squeezed by that as well. Um, usually the VC is going to say everybody in, uh, the entrepreneur, the employees, and the, t…

AI assessment note: “dilution for angels is actually a big thing.”

Q 50 deals that you have done, or 45 to 50 deals that you've done. I, I, I heard, uh, Naval say before, and you, kind of, cite it from, uh, him, that the first 30 investments you make will likely not go to plan. And I, I'm intrigued to hear, was this correct for you? And, and do you think this thesis can be applied to the venture ecosystem itself?

A So yeah, Naval Ravikant, uh, the founder of AngelList, and, and one of the, the best angel investors in the world. Um, he's a good friend of mine, and Naval has been a mentor, um, as well as I've become an angel investor. And he had said to me several years ago, if you're serious about becoming an angel investor, you're going to need to do probably 30 investments before you really know what you're doing. And to me, that's the equivalent of an expert having to put in 10,000 hours. To become an expert. Um, now the problem here is that when you do 30 angel investments, I mean, that could cost you anywhere from half a million to a million dollars, and this is typically for angels, their own personal money that they're investing, so that is a very expensive, um, education. Um, now the reality is, you know, was he right on the 30? Yeah, he probably was, and, you know, some of the lessons are, I went too fast. Um, you know, I did a lot of, Um, investments, um, quickly, you know, getting excited about companies. Uh, but the reality is if you're going to do 30 investments, you should probably have a investment rate of, let's say, five to 10%, which means you should see 300 to 600 companies if you're investing at five to five to 10% acceptance rate before you hit 30 companies. Well, that's a lot of companies to meet. So, A, you really have to carve out the time To be able to, to meet the…

AI assessment note: “was he right on the 30? Yeah, he probably was”