Lessons for Budding Angel Investors from Y Combinator’s AngelConf: Part 1

8/2/10Follow @wroush

You’ve been a part of the startup world for a while, and you’ve had a successful exit or two. You have some money laying around that you don’t know what to do with. You feel a vague sense of owing something back to the technology community, and you want to keep a hand in the startup world. So you’re thinking about becoming part of that mysterious and elusive breed—the angel investor.

If you weren’t at Y Combinator’s AngelConf last Thursday, you should have been. Like the June Angel Boot Camp event in Cambridge, MA, the afternoon of talks by experienced angels was designed to get aspiring angels thinking more carefully about why, how, and where to invest. Successful “super angels” like Ron Conway and Mike Maples stood up for seven-minute talks right alongside newer, younger investors like Paul Buchheit, Andrea Zurek, and Joshua Schachter.

They all shared their insights on the rewards—and the hazards—of being an angel investor. If there was a common theme, it was that angels need to be ready to lose everything they invest—but that the privilege of working with new entrepreneurs and innovators will probably make it the most enjoyable thing they ever do.

Collected here are edited excerpts from the most interesting talks. There were a lot of great remarks, so I’m breaking up this post into two parts. Today I’m excerpting thoughts from Jeff Clavier, Greg McAdoo, Mitch Kapor, Andrea Zurek, and Paul Graham. Tomorrow: Naval Ravikant, Joshua Schachter, Mike Maples, Paul Buchheit, and Sam Altman.

Jeff Clavier (SoftTech VC) on the definition of “super angel”:

We have become almost a new asset class in the ecosystem. You have traditional angels, you have VCs who have raised funds, and then you have this group of about 12 to 15 people who provide the vast majority of the early-stage financing in Silicon Valley, New York, and the rest of the U.S. I would venture to say that 90 to 95 percent of the companies getting funded involve at least one of these super angels. As we were successful as angels, there has been interest in the investment world to back us to do more deals and to put more money into the companies. That’s how a lot of these super angels made the transition to be micro-VCs. For whatever reason, the press has decided that the term “super angels” is more fun. But in fact, we’re VCs. What that means is that we’re full-time, and we have funds that we have raised. I have a $15 million fund. And we have very defined investment strategies and bite sizes.

Greg McAdoo (Sequoia Capital) on the role of angel investors, and how venture firms want to interact with them:

The Valley is awash with wonderful talent and great ideas, but early stage investing is largely about investing in business plans, products, and technologies. People and ideas are? important, but you need teams and you need technology. Often the angel community fills the gap. In many cases, the check you write is the least important thing you do. It’s important, but the advice you give is often the most important thing. It creates a much greater pool of investable ideas—things that can be businesses for the long term.

We are a pretty active early-stage investor; over the last 18 months, almost two-thirds of our investments have had some amount of angel investment in them. As far as what we look for in our interactions with the angel community, the important thing is to talk to us early. Many of you may end up in companies where we become the Series A investor. Again, engage with us early. Don’t wait until three weeks before the road show. Give myself or a partner a call and let’s talk. The benefits are bidirectional. We get to see the company early and to build a long-term relationship and get to know the business, and the advantage to us is that we can very quickly give you feedback about the questions we ask when a company is ready to raise a Series A..

Mitch Kapor on why to be an angel investor:

After I left Lotus, I had the opportunity to get involved in starting a Jewish deli in Harvard Square. Alan Dershowitz and some others were starting it. I was nervous about it. They sent me the paperwork, and the general manager felt like a crook. The deal was unfairly slanted. I said, I could see doing this if I thought it would make a lot of money, even if it wasn’t much fun. Or if it was going to be a ton of fun, I wouldn’t have cared about losing the money. But if it was going to be in the quadrant of “not fun” and “losing money,” then no. There are two reasons people do angel investing: to make money and to have fun.

The opportunity to share some of your hard-won lessons, to work with people and to tell them the kinds of things I wish someone had been around to tell me, all makes a huge difference. I say that if you are going to angel invest, get involved with people you like who are doing really interesting things, because life is just too short to do anything else. The other thing I’ve found that is really meaningful to me is to find ways to be genuinely helpful. To do that you have to take a self-inventory of what you know and what you are good at and what you are not good at. Nobody is above average at everything.

…Once you get to the point that you are not starting companies, [angel investing] is a way of staying in the flow and understanding what’s new. It’s exciting to work with people on the cutting edge, who are usually in their twenties and doing crazy, risky things, some of which will turn out to be huge, some of which won’t. Being an angel is an opportunity to participate in this great ecosystem of innovation we’re creating, which is the envy of the entire world.

Andrea Zurek (XG Ventures) on five important guideposts for angel investors:

I was very fortunate to be one of the original hires at Google. We had an amazing liquidity event at Google, but to be honest we are all way too young to just retire and play golf. We feel we need to give back to the community. I personally enjoy learning, and the point that Mitch talked about was to be able to add value and also have fun.

At a high level, I wanted to talk about some useful guideposts: risk, time, knowledge, money, and people.

Risk: Even though I’m female, I enjoy some male-dominated sports, and one of them is racing cars. I’ve raced professionally for the last four years. There’s a lot of risk involved with that, but you just have to get in, and experience it, and learn by doing. Of course you are going to have some accidents, but hopefully you can walk away from them, and if you can remember what you learned that is invaluable. You can only learn by doing. XG has done exactly that. We have invested in 20 to 30 companies in the last three years. There is a lot of risk involved, but if you are making some calculated bets, you can win and have fun along the way.

Time: We’re all pretty busy. One of the interesting things about angel investing is that you can be a weekend warrior angel, or you can make it a career out of it. I have chosen it as a career. It didn’t start out like that, but I really like spending time with other investors and angels.

Knowledge. It’s important to understand what you’re investing in. If you can’t explain it to your mom or dad or uncle, you probably didn’t make a good investment. And anyone can write a check, but it’s another thing to roll up your sleeves. If you say you’re going to be available, you better make good.

Money: It’s important to decide ahead of time how much risk you are willing to take. Think of it as your Vegas money. You will probably lose a lot before you win anything back.

People: You have to enjoy the people you work with. We probably see each other at XG more than any of us sees our respective spouses. It’s the same with entrepreneurs.

Lastly, have fun, have passion. Does this excite you? Are you saying every day, “God, this day is going to be so different, I have an amazing week ahead of me?” Are you going to enjoy the journey?

Paul Graham (Y Combinator) on the increasing power of entrepreneurs in the fundraising process:

The way funding rounds used to work, as a founder you would try and find someone to lead your round…Those days, thank God, are over. The way of the future, I believe, is rounds with no fixed amount, no closing date, and no lead. There will be no manager. There will be some guy who, chronologically, writes the first check, but the startup will run the process. They will go around soliciting investors. They will say “We’re selling X amount of stock for Y dollars, are you in or out?”

The reason things are moving this way is because the old way sucked for founders. It took an inordinate amount of time, and you were hugely at the mercy of your lead. In the worst case, your lead was in collusion with other investors to drive your valuation down. And however energetic the lead, he wasn’t a tenth as energetic as the founders. So here is a megatrend for you—and it’s an idea that Y Combinator itself has been based on from the beginning. The founders are going to be more and more powerful relative to investors.

If you want to know what the future of investing is going to look like, think of what the founders would like it to be like. If you’re an outfielder and you want to be successful, figure out where the ball is going to land. If you’re an angel, act now like you’re going where the founders will be able to force everyone to be in 20 years, and you’ll be very successful.

Continue to Part 2.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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