Q: Gil Penchina (the top-ranked angel on AngelList) said one of the things he has learned about investing is how little control he has on the outcome. Do you feel the same way?
Absolutely. Most investors like to pretend they add a ton of value and expertise but they don’t. I am clear about it. The value I add is in having a good enough relationship with the founder so that when things aren’t going well they tell me. I then open my Rolodex and connect them with people that can help.
What value can an investor add? Help with hiring, firing, biz dev (sales), raising money and in some rare circumstances, coaching/mentoring. But if you ask most investees how many of their investors are engaged, available, and helping move the needle, most would tell you not many.
Adding value is something I constantly think about. How can I be a better board member? How can I know a particular area or ecosystem? What area should I be deeper in? It is hard because if you don’t re-sharpen the saw, you get stale. Most people are stale in that sense.
Nothing makes me feel as good as when I can honestly say some small success of the company was because of something I helped with beyond writing a check.
Q: Pundits are painting a picture of doom and gloom for startups in the near term? What do you think? And what has led to this situation?
You know, it makes a good CNBC commentary. It all depends on your time horizon. If it’s the next year we can talk doom and gloom. That’s not my time horizon.
I’ve been in this business for 30 years and people love to jump on the boat and predict trends. We’ve had an unbelievably good 5-6 year run, so it’s natural to have a pullback.
I prefer to look at the next 10 or 20 years. Buckle in as they say, but if you are in for the long-term there are great opportunities. I am really excited about what is playing out!
Q: Do you have any advice for startups struggling to raise money due to the challenging times?
Yeah, it pretty simple. If it is hard to raise money, figure out how you don’t have to — get to profitability.
That discipline is healthy. There are very few companies that have the hyper-growth that allows them to forgo profitability in the short-term and everyone wrongly assumes those examples are the norm, whether it’s a Facebook or a YouTube.
I want to be in a company that can have great growth, but it is important to know what your business model really is. I don’t invest in companies that say we are going to get to 10 million users and then figure it out.
Q: Let’s talk unicorns. There’s been talk about companies being over-valued and suddenly having to revise their valuation. If you were an early investor in such companies would you fight it?
Here’s the practical answer: I am not in a fund right now but an angel investor. I don’t have the heft to fight it but I am disgusted that a lot of these valuations were artificially propped up.
The market is going to speak and it is healthy. People should get an accurate view of what their valuation is, as long as the early investors are not completely wiped out.
Q: VCs often say they are looking for 100x returns because that’s what moves the needle in a fund. As an angel investor, are you looking for the same kind of returns or would you be happy with medium-sized highly profitable businesses?
That’s what everyone says, but how many 100x’s are there really? I’ve been doing this a long time and there just aren’t that many.
I don’t have the same pressures of a fund in liquidity, timing or the need for 100x returns. If I can consistently get 5x to 10x I’d take that all day long.
If an entrepreneur tells me “we are going to sell in a year, you’ll double your money,” that would truly be a great outcome in IRR (Internal Rate of Return) terms.
But if that is the only path or otherwise they are out of business, it is not okay. I want a certain amount of optionality, meaning that not only could the company be sold but maybe it is big enough to IPO or merge with other companies.
Q: Prognostications about the future. What do you believe will be big and produce great investment returns?
I don’t want to compete with everyone in virtual reality, big data, drones and health. My background is in the enterprise and I am interested in how the cloud is transforming the enterprise. I am also interested in food-tech and I am investor in Kitchen Bowl, a recipe company. I am fascinated by the convergence of technology and food and questions like “how do we feed 10 billion people on this planet?”
There’s a baseball saying, “hit ‘em where they ain’t.” I’ve been doing this long enough to know that the next big thing won’t happen as quickly as people expect. I am therefore willing to forgo those 100x returns and get 10x on things that are more certain and nearer term.
Q: What are things that turn you off when an entrepreneur or company pitches to you?
The first thing I look for when someone pitches to me is, how good of a sales person are they?
To me, it is always about selling of some kind; whether selling to raise money, to customers or to hire good people. Then of course there are the basics. You better know the market, have passion and be able to go off script if need be.
The thing entrepreneurs need to know when pitching to an investor (and I’ve been told I am more honest than most) is most investors are going to keep it open-ended. They say things like “this looks interesting” or “keep me updated on your progress.” I tend to let people know if it is a no and why it is a no for me.
Q: Do you think entrepreneurs should be more forceful about getting a definite answer in that first meeting (versus allowing the investor to keep things open-ended)?
It depends on how valuable you think your time is but I’ll tell you this. If I am the one pitching I want to know where I stand. If your time is not valuable to you, why should it be valuable to me? As an investor, I want entrepreneurs to ask me those hard questions.
Q: If you were to pick one and only one single biggest factor that determines a startup’s success, what would it be? Why? (Marc Andreessen says it is product-market fit, Bill Gross holds that it is timing and Dan Levitan believes it is the team)
Oh gosh, I actually don’t think there is one. Marc Andreessen comes from a product background so he sees it from a product lens. And what does Bill Gross do? He is in the timing business.
Other VCs may say it is about the team because they are very social or connected to people. It is literally the filter of the glasses you are wearing. It isn’t just one thing. Every single thing counts. If it was just one thing, this would be an easy business!
Q: Do you have any parting thoughts or advice for entrepreneurs?
We live in such an unbelievably interesting time. The rate of change is exploding and it has never been easier to start companies. The willingness of the world to accept new business models is also unprecedented. I would encourage more people to start companies. I am especially interested in seeing more diversity in the startup world, both in terms of gender and race. If anyone in these groups is looking for advice or mentorship, I’d be happy take a meeting.