angel by jason calacanis (summary)

About the author, Jason Calacanis

  • was broke, used to live on a $2 daily food budget

  • first job was building LANs

  • from content -> investing and advising

  • sold his blog company weblogs to AOL which he grew through SEO, SEM for $30m

  • made transition into advising serving on the board of savings.com, started to transcend marketing and move into startup motivator

  • was in Sequoia’s scout program, “carefully selected” tech founders to choose founders they know to back: search for WSJ article. brought sequoia into early stage

    • 45:50:5 returns split original scout:sequoia:other scouts

    • keep in mind sequoia only gets 20-30% of returns since they invest peoples money

  • still isn’t on any major boards (fact check this)

  • learned to play poker by wagering $40 at a time with retired women, played totally blind focusing only on his opponents reactions, lost $2-3k but learned enough to buyin to $25k pro matches in Vegas and win $200k. Applies same logic to learning Angel investing through syndicates.

  • advised 7 startups, average of 2 year term per, made $700k

    • currently only takes a board seat if the company is doing insanely well, is under threat, founders are friends or you’re really passionate

    • estimates 50-200 hours of meetings over two years, big opportunity cost

  • has billionaire friends

  • knows "all of the" longterm angels (most quit after hitting 1 big deal):

    • Esther Dyson

    • Mark Cuban

    • Stewart Alsop

    • Mitch Kapor

    • Ron Conway

  • talks a lot about FANGs

Investments

  • 3 unicorns in 50 investments at time of writing (2017)

  • First five investments included:

    • Thumbtack

    • Uber: knew it was a good investment because he loved it and estimated that it solved a problem that 10% of the population in major cities had, professionals already using car services. Got a 5k-10kx return invested $25k when it was valued at 5 million, now valued at 7 billion (add updated valuation and link). Invested at the same time that first round and cyan bannister did at an open Angel event he hosted to connect founders with venture.

  • Calm, invested early

  • Invested in cafe X which will compete with Starbucks with robots driving the price of coffee down and eliminating staffing and real estate costs

  • 1 of your investments makes 99.9% of returns. Eg review 10k deals in a decade and make 200 bets.

Why Jason wrote Angel

he wrote the book to be helpful, but also to advertise (IMO):

  • his brand

  • his angel syndicate

  • his LAUNCH incubator

  • his investments (eg use Wealthfront for money mgmt)

  • to get asked to be in the Theranos feature length film starring Jennifer Lawrence

  • his willingness to invest in big ideas (jason@calacanis.com)

Jason's 10 year plan

  • 350 startups IN SILICON VALLEY

    • center of the tech, transportation, healthcare, advertising and lodging worlds

    • 30% of us vc is invested in Bay Area (fact check)

    • over 1K vcs

    • decacorns don’t exist outside of Silicon Valley - this seems like a very short term view IMO

    • thinks there’s some possibility in China India and Japan, limited in europe because of red tape and socialism with the exception of Sweden

    • Bay Area network effects composed of nodes

      • Investors, founders, talent

  • return of $250m on a $25m investment

  • halfway in as of 2017

  • invests in 1 of 100 companies looked at. To invest in 50 he needs to talk to 5k over 5 years

  • recommendation to readers:

    • Goal of Angel investing: get money back on investment in earliest round(s) of private investing. More likely to make money as an investor/Angel than a founder or employee limited by options vesting over a 4 year period.

    • do 10 $1k syndicate investments

    • then 20 $25k bigger investments

    • then $100k top 5 double down bets invested in the best performers in your portfolio

    • in year 2, some of your early investments will need to raise again. don't fund flailing startups, figure out whether to exercise pro rata on startups raising with serious venture. companies should be performing by year 2. look at revenue, talk to customers, review nps.

    • invest in founders and the problem of startups, not markets

Example of 10 year plan

  • $2.5m net worth

  • invest 10%, $250k in $5k increments, 50 bets

    • Start by investing $1k-$2.5k through syndicates

      • SPVs: special purpose vehicals, Angel syndicates to help newer angels come up. AngelList, SeedInvest, Funders Club are all syndicates. Typically lead investor shares what they’re planning to invest in with LPs including pitch deck and writeup. Syndicates allow founders to get a bunch of small investments. Keeps it really simple and clean for founders, one signature. Reddit Angel syndicates. Recommends 10 small syndicates to build network and experience before direct investing. Syndicates to follow:

        • syndicate lead with at least 5 years investing experience and 1+ unicorn investment

        • SV startup

        • Startup with 2+ founders

        • Product/service is already on the market

        • 6 months of continuous user growth and/or 6 months of revenue

        • Notable investors

        • 18+ month runway

      • Carry: comes from 16th century merchant ships charging a 20% fee for transportation of goods

      • VCs charge 20% carry and 2% mgmt fee to LPs

  • If one company becomes worth 10 billion, you invested at 5 million, thousand x return

    • google: what is the average return of an Angel investment, biggest returns on Angel investments

  • 35 investments 0 return. Estimates that you lose 70% of the original $$250k investment since 70% of startups fail (look up cb insights), so $175k up in smoke, 7% of liquid net worth

  • 5 investments return capital, $25k back

  • 7 investments return 2x capital, $70k back

  • So really $140k lost

  • 1 investment return 5x, $25k

  • 1 investment returns 10x, $50k

  • 1 investment returns 20x, $100k

  • Expect payout ~7 years after investing if at all. Perspective:

    • 12-24 unicorns per year

      • google: how many new startups overall

    • ~12 decacorns per decade $10b

    • 1 decade acorn $100b

Pros & Cons

pros

  • he planted a lot of seeds throughout that he built on later

  • flowed really well and was an enjoyable read, Mark Manson-y vibes

  • lots of math to simply explain key terms using extended examples

  • knows that while he’s had his struggles he is a privileged white dude

cons

a bit sensational eg:

“I’m just going to tell you how a C- student from Brooklyn (before Brooklyn was cool) clawed his way into the tech industry, got lucky seven times (and counting) and made tens of millions of dollars.”

and a bit more than a bit sensational with lines like:

“This will be the best business book ever written”

Why read this book

  • Learn how to become an angel through money, time, network, expertise. Time and energy allocation is huge! Time management:

    • 10 meetings per week full time angel

    • 5 meetings per week part time angel

  • You need to know how to make money differently because the robots are coming for every job except those held by software developers / engineers.

  • Traditional routes for wealth creation are slow: ”stocks return, on average, 7% a year, takes 10 years to double money. Bonds, 2.4% 30 years.” If you like taking risks and are ok being illiquid for 10 years, put 10-20% of bankroll (total net worth) into Angel investing

  • Become an angel, make money and make an impact. Also: get to hang out with motivated, curious people, get to learn a ton.

  • Most money is dead, venture is living money backing the next great experiments.

Says he’s turned 10 million into 150 million, how is he calculating his return? Is he liquid?

Notable one liners and advice

  • think poor, stay poor: take intelligent risks, figure out a plan to scrape together a bit of money to consistently invest. Work with people who are already winning.

  • i don’t need to know if your idea is going to succeed, i need to know that you are

  • the list of reasons why a startup will fail is long and the list of reasons it will succeed is short

  • your best next question is your last question asked slightly differently (drill down into the numbers)

  • don't eat shit: other investors will try to screw you, do everything in your power not to let them. document and fight for your rights.

  • "great companies are bought not sold"

  • lucky people surround themselves with the most successful people in the world and take chances

  • “No gamble, no future”

  • Keep your bias in mind, remember that you have blind spots

  • focus on the upside of the business vs what could go wrong

when he was broke, he got into startups as an advisor, trading his network and expertise promoting businesses for equity. Made $210k from two companies he advised for. Advisors are often more helpful than investors.

Company stages: growth and funding

Startup stages

  • product/market fit: “there’s a group that’s delighted by the product”

  • scaling

  • monetization: revenue, breakeven, profitability

  • acquisition/exit

Types of businesses

  • insanely scalable ones: not just ideas or markets but founders...be able to spot talent. you’ll get better at spotting these but remember that your rules and heuristics have blind spots. Review core metrics in their deck and anything publicly available like App Store rankings, producthunt success, alexa, quantcast

  • pre-traction: very risky

  • post traction: ideal to invest in cos that have found product market fit and some angel funding

  • everything else: indie films, restaurants, bars, consulting firms, clothing lines. McDonald’s and lululemon are big but took decades to scale. Starbucks founded in 1971 took decades to reach a billion customers, Facebook released messenger in 2011 got to 1 billion in 2016. Avoid companies without vision or simply building a feature that a bigger company will eventually get to (this logic feels kind of weak but google to confirm)

Funding stages

Remember: Founders price rounds at highest possible number to reduce how many shares they have to sell to hit their funding goal.

  • sweat equity: creating something out of nothing, working for free before investors come. Jason only invests in people already building not talking about building.

  • boot strapped: sweat equity + outside help from Eg a paying customer (not investor). Maybe they sold their last company or maybe they’re a trust fund kid.

  • friends and family: if they’ve raised ff, ask how they’ve used that money to evaluate whether they’re hustlers/builders or check writers (the latter is bad 😊).

  • incubator funding: $25k-$150k in seed funding for 5-10% of startup. Most big cos don’t come out of incubators (Uber Tesla Facebook google didn’t). Airbnb is the only $10b+ co to do it, also zenefits, stripe, dropbox

  • seed/Angel funding: monitor startups coming out of other rounds of funding and pick the best. Sometimes founders who have already successfully sold a company to a Facebook or Google (wasn’t specific...) get investment with minimal due diligence since it’s more likely that they can do it again.

  • seed+/bridge round: if company needs more money to achieve major milestones Eg profitability. often comes from original funders so they don’t lose their investment. Can be dangerous, ego driven, make sure to re-vet fundamentals and not invest just because you like the founder etc. can be tempting to give specific feedback if you don’t reinvest but many VCs keep feedback general (we’re not investing right now, we don’t do follow on rounds). If it’s hard to close a bridge, you can intro “pot sweeteners” Eg liquidation preference or issuing warrants to give 2-3x value of investment in extra stock. Unpopular in SV, more common on the east coast or in Europe. If you fund a bridge round, have founders share clear goals for new capital. Remember that generally, no one hire, partnership or feature will make the company successful. If the founder thinks it will, push them to figure out how long it will take to do and impact on revenue to figure out how long the bridge needs to be.

  • series A: by pro VC (typically), introduces a board of directors focused on increasing stock price, board mgmt can take 20% of an execs time (often the CEO). Lead investor may get to approve other investors making this much harder to get in on as an Angel. VCs have to believe you’ll increase share value and/or you have an amazing relationship with the founders. If you’ve already invested, lean into pro rata. Look at who else is investing...if they're smart people double down+.

    • VCs invest other people’s money for a carry, 20% of gains eg

      • 10 million shares

      • $0.10 per share

      • if it appreciates 10x, $9m upside, they get 20%, $1.8 million, if a VC has 6 partners, $300k gain per partner

      • VCs are going to push founders to build unicorns since the upside is so much bigger later stage if growth continues

  • series B-F + mezzanine: you probably aren’t investing anymore, you’re starting to sell shares here (idiot insurance in case the startup later fails). VC might buy 10-20% of founder shares to give them a payday while encouraging them to keep going. Secondary shares allow you to dollar cost average your returns. Extending too far into the alphabet isn’t desirable, investors wonder what’s wrong with the business. All these earlier rounds can forestall some of that speculation.

  • exit: you make money through IPO (least common), selling secondary shares or M&A (most common). M&A = acquihires, appropriate acquisitions or premium sales. Acquihires are big money losers. Fight on these deals to preserve capital. Google is prolific for growing through M&A, most growth beyond search and Gmail come from M&A. M&A works in your favor when you have multiple competitive companies interested in the business.

Meeting with founders: before, during and after

Plan for 3 hours per meeting to prep, meet and post mortem

Before the meeting

  • Research: founder, product, market, competitors, other investors. ideally you can use the product first

  • Allocate at least an hour for pitch meetings and consider blocking 30m post meeting in case they drag on

In a meeting

  • be helpful, present and considerate

  • be mindful of bad habits and work to curb them so they don’t derail you or your reputation

  • be a great listener, like a detective or therapist, treat founders like you would friends

  • take notes in a book/journal

    • jot down industry terms, resources and keywords that jump out at you. ask founders to explain anything you don't know/understand to see how well they explain things and get smarter faster. always fact check.

  • never say yes in the first meeting

After the meeting

  • always make a deal memo. helpful to reflect on to see what you got right/wrong and improve over time. in the deal memo:

    • why are you investing?

    • what are the risks?

    • what has to go right for the startup to return on investment?

    • would you invest in the founder even without the idea?

    • what does winning look like in terms of revenue and return?

    • when new funding rounds are raised, review questions to see if thesis still applies.

    • Eg Roelof Botha's memo to convince Sequoia to buy YouTube

      • Intro

      • Deal

      • Competition

      • Hiring Plan

      • Key Risks

      • Recommendation

    • Jason blogs about founders/companies and has them on his podcast, increasing his deal flow

    • if you aren’t investing: why did you pass?

  • send a followup email

    • if passing, give them either:

      • 5+ points of positive feedback, let them know they don't match your investment thesis

      • give specific negative feedback tell them to prove you wrong

      • tell them "not yet" ask if you can get monthly updates before investing

  • review the deal

    • make sure you have pro rata to keep % ownership and continue to buy shares

    • try to get a copy of the cap table

    • consider a "side letter" if you're a notable investor that includes eg

      • option of a board seat if lead of seed round or have more than 5% of company shares

  • schedule 2 20m+ followups

    • 90-100 days from now

    • 1 year from now

  • add value!

    • Try to provide as much value as possible into each company you invest in

Questions to ask founders

Remember: say as few words as possible, goal to speak ~5% of meeting. if you have a hard time with this, use 3m timers.

  • setting the stage

    • how do you know [mutual connection]?

    • how would you like to run the meeting?

  • vision questions

    • what are you working on?

    • why are you building? (Trying to understand why is this founder building this business? How committed are they? What are their chances of succeeding in this business and life?) Travis K couldn’t catch a cab in paris, Elon wanted a backup plan for humanity, Zuckerberg was awkward with women.

    • why now? YouTube had plummeting bandwidth and storage costs, google was the 12th search engine, Facebook the 10th social media app

    • what’s your unfair advantage? Network, reputation, funding, rare knowledge etc

  • Tactical questions (great founders can respond efficiently and specifically)

    • tell me about the competition.

    • how do you make money? How do you acquire customers?

    • how much do you charge customers?

    • how much does your average customer spend?

    • how many active customers do you have? What did you make last year, what are you projecting this year? Make sure money has actually been formally agreed to and is collected. Good to look at contracts as a part of due diligence to backup claims.

    • what are the top 3 reasons your business might fail?

  • Personal Qs

    • what did your parents do? (can create great convo and create a bond. try to figure out if they can deal with the shitshow of founder life.)

    • ask yourself

      • will they quit when things get hard?

      • will they go without pay for months if needed and put the team on deferred salaries if/when money runs out?

      • will they waste time doing stuff that doesn't directly result in landing investors, clients or team members?

      • would you invest in the founders themselves?

  • Misc

    • how many FT employees do you have? (trying to understand their burn rate. revenue - cost of FTE - expenses) Followup: so you're burning about X per month and have Y months of runway left? Like Z in the bank?

    • why haven’t you raised? Do you already have money? Or are you trying to validate your MVP before getting outside funding?

    • what have you spent money on so far? Why? (trying to understand money left in the bank)

    • are you going into debt to self fund? If so, why not learn to code or invest through sweat equity?

    • how are you planning to execute on your vision? What’s your go to market strategy

    • how did you arrive at your valuation? Is it set in stone?

      • could be driven by lead investor

      • good answers: we make 50k/month in rev" or "we have 25k DAUs and we've grown 50% MoM for the last 3 months"

    • is your startup a vitamin or a painkiller? (are they really solving any major pain points? eg inflight wifi sounded like a great idea but most consumers don't want to pay for it and they can read sleep and watch movies without it)

  • visit founders at their office, see how they’re spending money.

Questions to ask yourself

  • for follow on rounds: “what has changed since I made my original investment?”

  • for founder followup: “what’s going on? Is there anything else i should know?” encourage founders to share mistakes.

  • are you cool with random blind intros? if so, let founders and other investors know.

Questions to ask angel investors and/or venture capitalists

  • what do you invest in? Why?

    • Indirectly: what’s your investment philosophy?

  • what value do you bring to startups?

    • Indirectly: how do you help your founders succeed?

  • Share what value you bring

  • Have you seen anything interesting lately?

    • Indirectly: what company are you the most interested in or excited about right now?

  • Pay it forward

    • I’m really excited about ACME Corp. Can I intro you to the founders?

  • Post-meeting followup

    • send a prompt thank you highlighting a key point from the convo

    • include a list of investments with links to websites and founders

    • ask if they’d like an intro to any of the founders

    • if you’re asking for an intro to a founder, include what value you can offer that person and be specific

Advice to founders for fruitful investor relationships

Disconnect between founders and investors: communication, execution and prioritization

  • be honest about where you're at, investors want you to succeed. tell investors how their investment is doing, especially when it isn't doing well.

  • send monthly updates, it creates discipline and is a useful feedback loop with investors. Ideally include key metrics (cash in the bank, burn rate) + wins and losses.

  • Investors should respond celebrating positives and asking how they can help with negatives.

  • know what part of the portfolio you're in (20% doing well, 80% struggling)

  • ask angels how their portfolio is doing

Mistakes

Remember: failure rates are high, normalize frustration

  • was screwed by a founder who wouldn’t take his advice, was very influencer-y on Instagram (private planes, champagne) and who canceled a deal with Jay Z to invest based on a technicality that the author did not at all agree with. Founder made a bunch of bad deals it turned out and a VC partner was there to clean up his messes including canceling the author’s advisor shares for “not holding up his end of the bargain”. Advisor shares are not guaranteed.

  • passed on Twitter. Didn’t get the concept as a blog platform founder. $50m mistake.

  • due diligence: almost invested in a co that said they closed facebook and google but couldn't produce contracts when pressed. almost invested a company but while doing due diligence found out they said he'd already invested, using his name to get other angels onboard. due diligence proved the co hadn't run product test as they said they had. round fell apart when the truth came out.

  • press: avoid, they aren't your friend and can/will twist your words. Don't get a wrap for being the investor that throws founders/companies under the bus. Only comment with blessing of company.

Systems

Build a deal sharing angel investing network

  • make a list of all co-investors from your first few deal inc their social media handles

  • Connect on LinkedIn (hey, we’re co-investors in X)

  • Take note of how other investors present themselves

  • Make a private Twitter list called “con-investors”

  • Intentionally favorite and respond to their tweets

  • Email all syndicate leads/big deal investors to ask for 30m of their time

  • keep a spreadsheet of all founders you meet, rate them ok, good, great, explain why you’re passing or investing. Revisit the sheet every 6 months to see how each company is doing.

  • participate in incubators

    • go to a demo day

    • put all startups into a spreadsheet and rank likelihood of success

    • reach out to 5-10 highest quality

    • generally good to wait 6-12 months post incubator to invest, YC is exception

Angel Investing Cold Email Responses

  • what's your revenue by quarter

  • how long has your product been on the market?

  • i've seen a couple of other businesses in this space fail over three years, why will it work this time?

Portfolio management

  • build a tracker with company names in column a and months in columns b, c and onward.

  • put a 1 for every month each company sends an update and a 0 for each month they don't. Make 0 cells red and 1 cells green.

  • could automate email to companies that don't send updates for 2 subsequent months. "did we miss your monthly update?"