. . . Thursday September 23, 2010

A Few Thoughts on Angel Investing and The Ego Bubble

I’ve been investing in start-ups since the early days of the first internet boom. I’ve seen or read thousands of pitches. I’ve had a few winners and my share of losers. I’ve seen trends come and go. I’ve been on the money giving side, the money-taking side and the entrepreneur who took no money side.

Since the topic of angel investing is hot these days, I thought I’d share a few reflections from my days as a part time angel investor. It’s probably worth mentioning that I almost always co-invest with a friend and colleague who is a lot smarter about these things than I am. I hate reading term sheets. I’m all about the products and the personalities.

And in all candor, I’m probably not what you’d call a great investor. But I’m a decent and pretty smart guy, and I’ve been investing in, building sites on, and writing about the internet since the blink tag was in its heyday, so it can’t hurt to check out these reflections from my own personal angel island.

1. Taking Sides
I’ve always seen myself as being on the same side of the table as the company founders. That makes sense to me. I’m investing in the person, first and foremost. Sure, I’ve seen the occasional start-up Powerpoint presentation manifest itself in real life (I was lucky enough to be along for the Open Table ride, for example). But that’s the exception. Usually a successful product or business ends up looking a lot different than it did when it was first drawn on the whiteboard. The start-up world is about reacting and adjusting. You want to go into that battle with someone with whom you have an adversarial relationship?

2. Term Limits
I’ve seen thousands of hours spent on detailed seed round terms. I’ve never seen these details matter. Never. If it goes, me and the founders win. If it doesn’t, the details go into the incinerator along with the stock certificates.

3. Stop Vesting
When I first started in the business, I’d keep my feedback close to the vest. I was worried that I might give a founder an actionable idea or two and then they’d have no reason to include me in the deal. I would have already blown my advising wad. Later, I realized this was crap. If I added value in a meeting and a founder tried to block me from a deal, then I wouldn’t want to be in the deal anyway.

4. Car Salesmen
The best advice I’ve ever given a founder during a pitch is: Don’t take any outside investment from me or anybody else. Most of the start-ups that are really products being built to flip to one of the big web companies are better off bootstrapping it than taking on outside money and all the hassles and headaches that come with that decision. If you can swing it without investors, do it. Especially early on. There are of course many exceptions, but if you only need a few grand, it’s better to sell your car than your soul.

5. Let’s Get Small
On a related note, there is nothing wrong with having a successful small business on the web. You get to wear t-shirts to work, you often have a flexible schedule and you can make money while you sleep. Once you take outside money, you can’t have that small business. If you do, your investors will have little choice but to shut it down and write it off. Then you’re back to dressing like an adult, and no one wants that.

6. Vision Quest
Most investors will have a boatload of opinions, even on parts of your business that have no overlap with their areas of expertise. It’s always good to listen to input. But ultimately, the investor is making a bet on you. Stick to your gut and vision. You may think every investor wants to hear that you’re going to take all of their advice. But sometimes you’re better off saying, Fuck you, I’m doing this my way. Then the investor will know he’s going to make some money.

7. Lose the Cape
Although I occasionally throw on a cape in the privacy of my own home, I’m not a Super Angel. Angel investors who have personal brands that are bigger than the brands of the companies in which they invest scare me. When I see certain names on a term sheet, it increases the likelihood that I’ll skip the deal. I also worry about the trend of angel investors machine-gun spraying cash out of their checkbooks. Like my old colleague Jon Callaghan explained, we’ve all seen this movie before. To the extent there is anyone who can be called a super angel, his name is Ron Conway. And what made him super are the same things that have made people super in business for years. He’s a straight shooter, he supports entrepreneurs, he remembers everyone he meets and treats them well. He’s about helping folks build super companies. And drumroll please … He’s a nice guy too.

8. Your Eggs are Done
I can see the benefit of incubators. I’ve even considered starting them over the years. But I generally see a greater benefit in a founder who doesn’t want to be part of someone else’s club. Again, there are lots of exceptions. I’m just giving you my immediate reaction to the issue. You have a vision. I have some dough. I’m guessing you can figure out the chair and desk part on your own.

9. The Glengarry Leads
All talk of collusion, etc, aside – the best lead generators for any investor are the entrepreneurs in whom he has invested in the past. Put that in your term sheet and smoke it, brother.

10. The Ego Bubble
I don’t care which side of the table you sit on. It’s hard to find a mensch in this business. That might be more true now than ever. The last time this industry suffered from growing pains, it looked the final scenes of Scarface. But in our case, these corrections don’t just include one dude in a bad white suit. We all suffer together. So why don’t we all let a little air out of the bubbles – the internet bubble and the more quickly growing ego bubble – before we’re forced to party like it’s 1999 again.

Now I’m going back to posting at Tweetage Wasteland – Confessions of an Internet Superhero


Concentration is important!