TC50: Angel Investors Say Now Is Their Time

We’re in the middle of a wider economic downturn, there are no IPOs, funding is getting thin, but are the Angels unhappy? It looks like not. The downturn has sorted out the wheat from the chaff, the bar has been raised and they feel well-placed against even some of the biggest VC funds. Lucky, then, that working with startups remains a passion for these guys. Jason Calacanis chaired the panel. You can watch it here.

Ron Conway, Angel Investor
Yossi Vardi, Investor and Entrepreneur
David Kidder, Founder and CEO, Clickable
Chris Sacca, Investor and Company Advisor
Matt Coffin, Investor and Entrepreneur

Jason started off by asking how they operate.

Ron Conway:
I don’t meet lots of companies every week as the bar of quality is so high now. We do a lot of screening of executive summaries. Then there is a phone call, and after that then a meeting. Out biggest investments to date included Google, AskJeeves, PayPal, BrightMail and maybe Facebook – someday!

David Kidder: I raised Angel investment a few times. Angel then moving on to venture. We thought we were going to go Angel the wne venture. We were a TechCrunch 40 company and that influenced our coverage and funds that followed us.

Chris Sacca: I had involvement in Blogger and Twitter. I guess I do three things. I’m an angel with 17 portfolio companies and each one I take a formal advisory role. I also take a role in helping compaies reach a transcation. Other times I spend on working with a multibillion dollar hedge fund buying wireless spectrum etc.

Matt Coffin: I’m a Mahalo investor. I invested in a number of companies in LA like Docstock, Rubicon Project, Demand Media. Market Probability, Inadco as well as a few others.

Yossi Vardi: I’ve been an investor for a while – most famously in ICQ. I didn’t invest in Mahalo as Jason wasn’t convincing! [Joke]

Jason: Ah, but you you wanted to invest in WebLogs Inc.

Yossi: But it’s also didn’t make any sense!

Jason: So, how do startups get to you. How do they get 15 mins to pitch you?

Yossi: I don’t think pitching makes any sense if it’s long. The best way is a good reference from someone I already invested in. Someone I trust. Yes they have to make sense and project enthusiasm and honesty. I am not interested in the business model. I find that the more attractive the model, higher your losses at the end of the day!

Matt: I get to meet startups through referrals from people I trust. Ofen I see something interesting and I have actively reached out to people. You are looking for a screening process for quality referrals. Periodically I see something on a blog. But I have found a number where you think they have all they need, when actually you speak to them and they don’t. If you can bring advice not just capital, that’s also an opportunity.

Jason: How involved can you be?

Chris – I can’t help but be involved in the company. I would be a charlatan if I took stock in companies I can’t actually be helpful in. Maybe they need help on being introduced to an acquirer or something. That’s the way I like to work.

Jason: What do you think the strength of an Angel investor is? Is it possible to annoy a startup in your portfolio or meddle too much?

Chris: That’s where local comes in. I might go and sit with teams over a Saturday and work on on a start page for hours over beers. 75% of my portfolio is within a skateboard from my house in the city.

Matt: The local nature of it is really so critical. Especially when it comes to hiring when you need to get people in a meeting, say.

Ron: A good Angel will be one that every VC will talk to. They build the management team with their rolladex. When the company has traction you get some significant business development done. And also with liquidity – M&A is right now the most viable exit so introducing companies to potential buyers is always at the end of the assembly line.

Yossi: I know when I am annoying when I open my mouth!

Matt: I always say to entrepreneurs it’s your company and you have to make the decsions.

David: Whether as a consortia or individuals you get different things. No one person can solve all problems.

Chris: What’s changed is that it’s not MBAs pitching but actual hackers pitching companies now. I worked on an acquisiton with Google recently where the hackers were good at coding but couldn’t do the acquisition and that’s where I came in.

David: Valuations: The first thing I do is create a “forcing factor” in the deal. You can do self funding to a beta. So for example I worked with Fred Wilson at Union Square recently for instance. We creatied a forcing factor which is a solid beta and THEN I talked to Fred and said all people are flexible, but we believe that we’re stronger with you. It was a healthy balance. We try to drive accountability so that everyone is contributing something.

Jason: So you think one of the best approcahes to VCs it so create scarcity?

David: If you come without a track record you are going to need something which will drive the deal. It’s a different idealogy for an Angel than it is for a VC.

David: Generally a lot of good companies and there will always be one you miss.

Ron: Marc Benioff always reminds me that I turned down Salesforce.

David: As an investor you want to be with a team who has purpose and momentum. If they expect you to solve a problem, it’s not realistic.

Yossi: I’m 40 years in early stage investments. I came to a realisation that I won’t be involved in most of the great deals. It’s good enough to be in a number of good deals. It’s a portfolio play. You can’t invest in one or two companies – it’s totally random. It’s too hard to say. If you know what is going to happen then it’s not high risk angel investing. So you have to go for a number – it’s like they say, love is blind and its the same with angel. It’s blind and you don’t do rationality. Angels should be able to feel… you should comfort yourself for missing big stuff. If you develop discipline and know the stats and the stages and the marks when a company is moving THEN you can take a rational decision.

Ron: I look for sectors: Video gaming, search, social networks, UGC, cloud computing – these are billion dollar sectors – so you try to find the best companies in those sectors and interviews and pick the top 5 out of the top ten.

Yossi: We take a portfolio because its not about being scientific. it’s like they say – spray and pray!

Jason: Guys, you have made so much money that you don’t need to work for the rest of your life – yet you work very hard. What is your motivation?

Ron: It’s interesting! Meeting entrepreneurs who are interesting is interesting. They are the future of technology. Take Larry and Sergey – when I talked to them I was looking into a crystal ball. The future of search – that’s interesting.

Chris: It’s amazing to see how far $25-50,000 can go now. When I get pitched now it’s with a live URL and a view to raise 100k . I work with wireless companies looking to get $150-200,000 just to prototype. There is still lots of meetings and politics. But going back to startups coding in a back bedroom, it feels amazing.

Matt: I also do it for this. But also I had to raise money in the dotcom wipeout after 2001. That was the worst experience of my life. I had an ache in my chest every day. So having had the luck of a big exit I get a lot of satisfaction funding entrepreneurs. I want to help them make it and be part of that.

Yossi: I guess the reason I do it is I that have a Jewish mother. And all my childhood she said I was an idiot and my cousins were smarter as they weren’t contaminated with my father’s non-jewishgenes. So every day I am trying to prove this to her that I am not dumb. But I will have to do it for a very long time as she’s now dead.

Jason: How do you put a valuation on $100,000 investment?

Chris: I probably take an unusual approach. I look at the personal inventory of the entrepreneur. They are often just reacting to term sheets. So I ask them to say what “success” is for them. Then I wrap numbers around it. We put price tags on the individuals involved – will they move the needle by 900k, say? There are now some really big VC funds out there who take a different approach. They will look for something that will either moving the needle for their fund with a $30bn exit, or they won’t do anything at all.

David: I look at what is the right symmetrical outcome. So I put a lot of pressure on the terms not the valuation. You need to work hard and earn the right to get across the finish line. Always work for something clean and simple. If you raised a big A or Angel round and then can’t perform into the price and need more money then people will get hurt in their credibility. So in a recent deal we got high offers but we went for a less expensive deal. We took less money as we knew we could keep the terms intact.

Chris – The B round is where you lose your board and often that is hard. Sometimes you have to realise you will hand the reins over to another guy who has carte blanche.

Jason: What are you looking for in the person of the entrepreneur?

Yossi: Since I am doing very early investment I like to be involved where they work on the proof of concept. I am looking for agreement on valuation. I look for a few things. They have to be top talent. I am not interested in great or good, but top. They also have to be very nice people. Because many investments are not working at the early stage. I always tell my wife that if it fails then at least its a scholarship for a nice guy – I don’t want to give that to a jerk. They also have to be focused. They have to be in the space I like which is consumer facing internet. If they are fulfilling these criteria then there is a good chance I will invest. What they are going to do is less important. Business plans are a great section in the science fiction genre. They are made for the kind of people who like sausages and don’t know how they are made. I mean, how do you do due diligence on something that is inside someone’s mind?

Ron: I want it to be enjoyable in the ups and downs. I look for flexibility and the ability to admit that some ideas aren’t getting traction. You pick a number and get going – $3-5 million. I look for passion and a core intellectual property that comes with the company – that’s often an insurance policy.

Matt: I look for a really good listener in entrepreneurs. Someone who is willing to listen. I would combine that with somoene who is not BS-ing me. If I ask about competition and they’re general comment is we don’t have any competition….. That is annoying.

Chris – If I find out a startup doesn’t know their own space that bums me out. The personal traits are important. I don’t have the energy for assholes any more. I look for people who have studied or worked abroad. And also for people who play team sports – that reflects a healthy individual. I also really only like to work with people who have at one time worked in really shitty jobs. That gives you an amazing perspective on the human condition. And a certain vulnerability – we are lucky to live in a place [Silicon Valley] where you can say you have failed with no shame. That’s an important part of it. Most people who have failed don’t have that characteristic.

Q&A with audience

What does the panel think of colder callers?

Chris: It’s an inconvenience and an imposition. Never put phone calls on business. I can’t archive or search phone calls. Email does all this. So go for well crafted emails. The quality is high but there is a lot of noise out there noe so the email needs to be good now.

Jason: What makes the best email?

Ron: One paragraph pitch and a one page executive sumarry attached. And no NDA’s or confidentiality agreements.

Chris: You need to tell me why your idea solves a problem, why it will work and on what timeline. No NDA.

Yossi: Write something convincing about your background.

David: You need to understand the portfolio of the firm you are talking to. Find a person close to the angel. The strength of your network is in the edge, so use that.

Q: What will be the impact of the downturn in the economy on investing?

Yossi: It’s beginning to remind me of 2001-2004. The money is getting scarce and the industry is afraid to take decisions. This is the best time for angels to invest. We van invest at the top of the deal flow. We don’t have the pressure to release money or show performance like a VC fund. You can use sober opinion. It will be more difficult to raise money now, but the opportunities are still there. There is still a desire to conquer the world.

Ron: I invest in Silicon Valley companies. In 2001-2004 there was a nuclear winter for deal flow dried up almost 100%. Lots of people going back to business school. I haven’t seen that to date. The environment has not changed at all. Innovation in SV is alive and thriving and the deal flow is wide open. It won’t be as bad as the Winter.

David: The market is much less patient now, so if you are raising money, get to it quickly. There are many satellites but few planets. Make sure your business has a lot of planet in it. You may go sideways for years. Locking talent in a bad company that won’t exit is a bad idea. Worse than going bankrupt is nothing happens. We might see that happen in this period.

Chris: The cost of building something keeps coming down. Opportunity cost is not the biggest issue. Now it’s just about starting coding. We have seen the departure of East Coast money which came in to try and make a quick buck. The VCs that are here, with big funds, they have to continue to deploy money. So the macro argument is good but they have to keep flushing money out. There will still be deals that don’t make sense as VCs try to deploy funds.

Jason: Let’s have a show if hands, how many Angels here? Ok, there are lots of angels in the audience.

Question – What about if your startup is not in Silicon Valley?

Ron: If it’s a company I like I will ask the company to move closer to me. If you are tied to locality there are angels all over. There’s also incubators like Y-Combinator or TechStars. You can go to them and they will give you “lift-off” funding and mentoring.

Jason: Liftoff? Is that a new Term? 15-25k to get a product out? I think If you are serious you need to be in a major market. Your’e going to need to be near the investor.

Ron: SV has the entire infrastructure – PR, lawyers, conferences, SEOs. It’s not just the Angels it’s the entire infrastructure that’s impossible to produce elsewhere. Other places don’t have the depth or the amount of choice.

Yossi: Ron has split the world into two: Silicon Valley and all the rest!!

David: You need institutions, talent, rich people and nerds!

Yossi: When was the last time you were in Israel?

Matt: Majority recent – LA – There is core structure in Silicon Valley but in other markets there’s talent and rich peple in NYC and LA and crativity , but outside top 5 markets you will struggle as there is too many

Ron: I have a network of Silicon Valley VCs. Depending on what the company does and how much they are raising we will create a top 10 list. We also try for the highest VC first. Then we target the best parner in the firm who can add the most value.

Chris: The VC investment community – as a result of the current fund sizes they have a conflict of interest. So I keep entrepreneurs out of the traditional VCs. They are managing money for fees. I really try and avoid pushing startups to traditional funds. It creates a situation where you have a 20/80 split and no-one can buy you.

David: We went with people who were local who were good coaches for our company. A board member joining who has experience, has operational experience, is important. The VC needs to be comfortable with the ups and downs of the startup.

Ron: As a final word – SV loves helping the whole country. Google has 2,000 peole in New York!