Lessons for Budding Angel Investors from Y Combinator’s AngelConf: Part 2

8/3/10Follow @wroush

On Monday I published the first part of a double-header post excerpting the most interesting talks from last week’s AngelConf event at Y Combinator in Mountain View, CA. Attended by some 120 nascent angel investors—very few of whom looked more than 35 years old—the conference was designed to give a group of experienced angel investors a chance to talk with newbies about the basic challenges and rewards of being an angel.

Yesterday we heard from Jeff Clavier, Greg McAdoo, Mitch Kapor, Andrea Zurek, and Paul Graham. Today, I boil down some remarks from Naval Ravikant, Joshua Schachter, Mike Maples, Paul Buchheit, and Sam Altman. (Affiliations listed in parentheses.)

Naval Ravikant (Venture Hacks, AngelList) on seven things he’s learned as an angel investor:

1. Don’t move in a herd, but do be a pack animal. Not everybody has all the information. One angle might know the market, one might know the founder, one might know the customer base. Every time an angel comes into a round, they bring a piece of information. Ride on their coattails.

2. Say no early and often. You should be doing one deal for every 20 to 30 that you see. If you do more than that, you’re overinvesting.

3. You need to have a brand. The really great deals are obvious, and everybody wants in, and if you want to get in you need a brand. That could be that you have been successful with great companies in the past. And building a brand does not mean taking coffee meetings. Shallow connections do not mean much. If you have a fancy office on Sand Hill Road or Market Street, the best deals are not going to come to you. If you’re not out there running around getting to know people, then you are really just practicing the VC model.

4. Humility. When you’re sitting there all day and people are asking for money and more often than not you are saying no, it eventually goes to your head. The problem is that when a Mark Zuckerberg walks in, those guys have more offers than they have room for. If you come across as arrogant, they will drop you.

5. Your job is to be a little dispassionate. Don’t try to run the company. Don’t even take the power—if you don’t have it, you won’t be tempted to use it.

6. Filters. Every winner is unique by definition, because what they’re doing is new. But the losers tend to cluster around common mistakes, such as investing in a company with one founder. You will find you can establish filters, even one as simple as “Do what you love.”

7. There are many paths to success. You have to be very careful about taking your limited experience and trying to shoehorn your companies into it.

Joshua Schachter (Delicious, Yahoo, Google) on building intuition as an investor:

The important thing is to figure out how to build intuition. A bunch of rules that you are going to have to make up and follow. You can’t do due diligence on every single company, so you have to have some easy, top-level rules.

I don’t like deals for under a certain value. I’m terrified of the music business, because of the competitive nature of that industry. In video, I think everybody is going to have trouble outracing YouTube, so I stay away from that. I invested in a telephony company, because it’s illegal to force companies out of business there, which is the opposite from the music business.

You have to do at least 10 deals a year. You have to have diversification, because most companies don’t go big—what happens is some guy at Apple or Google or eBay or whatever falls in love and buys your company for $25 million. It’s very random, even if you have spectacular precision.

Learn to say no, and try to do clean, crisp nos. If the entrepreneur asks for a reason, and you give it, and they fix their business plan and say “Can I have my money now?” that’s not the kind of person you want.

Mike Maples (Floodgate Fund) on Thunder Lizards and builders versus buyers:

I have a particular frame of reference on the types of companies I look for. I call them Thunder Lizards. To me, finding Thunder Lizards is all there is. That’s what I am in it for—I’m addicted to the rush of when a company just takes off and surprises you on the upside. If we see a company that has Thunder Lizard potential, we say, “Let’s work on helping them to raise a certain amount,” and we fill it out with a bunch of awesome angels. I like to call these Ocean’s Eleven. We like to find a team of angels that will add substance to the company.

When I first started angel investing, I was a former washed-up enterprise software guy from Austin, Texas. So my first question was, how many deals should I be prepared to do before I get a hit? There are smart people who have told me that 12 is the minimum, so I said I am not going to do any investing unless I am ready to do 12 deals, one per quarter for three years. At that point I will decide I’m good at this, or that it’s just a hobby and I’ll do something else.

One lesson I learned is the difference between being a builder and being a buyer. When I was an entrepreneur, it was all about creating something out of nothing. When the chips were down and you almost had to trick a customer into buying at the end of the quarter, you found a way. If you’re an investor, you have to be a great buyer, which has a very orthogonal set of differences from being a builder. If you allow yourself to think, “Well, I could make that startup work,” you are falling into the trap, and you need to listen to your buyer instinct.

Paul Buchheit (Google, Friendfeed, Facebook) on what and whom to invest in:

Why are you doing this? Why are you considering throwing away your money? It’s different for everyone. For me, it’s very exciting to see products. It’s a way to be involved in 40 or 50 new products. But when you make an investment, the first step is to kiss the money goodbye. Odds are you will never see it again. It helps your mindset, so you don’t go crazy about bad news.

One of the risks for people like myself, from a successful company like Google, is that you start to think that you did it the right way. But you start to learn that there is no right way. What’s right for one company is often wrong for somebody else. Facebook is a very different company from Google, but both are hugely successful.

What are you going to invest in? It’s what you are passionate about and excited about. That needs to come from an internal conviction about where the future is going. That way, if it doesn’t work out, at least you’ll learn from the experience.

Who should you invest in? There are a lot of great people out there, but founders need to be a little more savvy. There is this force of conviction. It’s something I noticed at both Google and Facebook. The founders just don’t care what everyone else thinks. Or they care, but only in an academic way. I think that’s critical if you want to be a $100 billion company, because by definition you’re doing something the rest of the world doesn’t understand. Otherwise, you’ll get to the $100 million stage and sell. That said, it has to be the right person for the startup. I don’t think Google’s founders could have started Facebook, and Facebook’s couldn’t have started Google. It has to be the right person for the right time in the right business.

Sam Altman (Loopt) on what founders are looking for in an angel investor:

You have to pick winners, but it’s also necessary for the winners to pick you. I was curious about what the best Y Combinator founders would say—those who have been in the fortunate position of being able to choose between angel investors. So I surveyed them, and I was surprised by some the answers. It came down to the quality and reputation of the angel, clean terms, and the speed of the deal.

Quality and reputation: Every single time this came back as the number one factor. Founders asked their friends whether angels gave good advice, provided good connections, and stood by you in hard times. Don’t talk about all the value you will add if you don’t have a reputation. If you want a great reputation, just invest alongside other angels, and then work really hard for your companies. The phrase “good guys” came up a statistically improbable amount of the time. It also helps to have a brand name and a track record. A lot of founders said they felt bad because they took one more well-known angel over another, but they all said they were glad they did, because the PR was worth it, and being seen with a high-powered investor was good for them.

Clean terms: Founders said they threw out all the term sheets that were longer than two pages.

Moving fast: Be decisive. Raising money stops forward progress for a startup, so founders hate angels who take a long time.

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

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