How to Angel Invest, Part 1

Hey, this is Nivy. You're listening to the Naval Podcast. We haven't published an episode here in a while, and that's because we've been publishing on another podcast called Spearhead. What we're discussing on Spearhead is how to be a good angel investor. I've collected the first 10 or 12 episodes of Spearhead into one long episode, and that's going to start here in about a minute. We decided to put this info into a different podcast because we want to stay focused on health, wealth, and happiness on the Naval podcast. Spearhead is a project of ours where we give founders million-dollar funds to invest into startups. If you're interested in applying for one of these funds, applications are open until November 21, 2019. I'll put a link to the application in the show notes. Here we go with a sample of the Spearhead podcast. If you like it, you can find a link to subscribe in the show notes. Enjoy. to resonate the most with people who are in a technology hub and have started investing but are not yet pros at investing. So brand new angels, VCs, and founders who are dabbling in it. Let's say you're living in Silicon Valley, or you're in Shanghai, or Beijing, or you're in Bangalore, or you're in London, or you're in New York, and you get access to a lot of interesting tech companies. You're in the tech business. You have some extra money that you've made along the way, or you've raised some money, how do you learn to be a good investor? This assumes that you have some familiarity with investing. It's not going to be a cold start. There are some resources we can point you to for the cold start. Paul Graham wrote a piece called How to Be an Angel Investor. There's How to Be an Angel Investor Part 2 on Venture Hacks. There's a course called Future Investor. You can look at all of those for the basics. We're going to focus on some more advanced topics in this conversation. We're going to talk about things like how to figure out what a fair valuation is, what are the pitfalls of bridge rounds, how proratas work, how can you squeeze into a round when their VC is leading, when a co-investor is providing a valuable signal versus when they're just talking their own book, how to size up markets and startups quickly. Should you specialize in a single vertical or should you diversify it into multiple verticals? This podcast is open sourcing some of the knowledge that we teach at Spearhead. Spearhead is a fund that we built that trains the next generation of angel investors. It takes founders, gives them small checkbooks, and then teaches them the skill of investing and mentorship for building something that'll be valuable to them for their entire lives. Now, this is the internet and this is America, so we got to give you some disclaimers. Angel investing is a great way to lose your money. There was an old quip, how do you become a millionaire, start as a billionaire and start investing? This is a good way to lose money if you don't know what you're doing or if your timing is bad or you're just plain unlucky. This is not investment advice, but if you're already in the profession or in the hobby of angel investing, you may find this useful. There are tons of important exceptions to everything we're going to talk about. Technology itself is changing very rapidly, as does the investment ecosystem. A decade ago, Y Combinator was brand new. AngelList didn't even exist. The first round capital platform wasn't there. Andreessen Horowitz wasn't there. You didn't have a lot of late stage investments by hedge funds. You still had companies going public earlier. So the market was very, very different. This is really one unique approach to angel investing. The things we're going to talk about might work for us from time to time, but other people might take the exact opposite approach or completely different strategies and have similar or better results. We're very focused on early stage technology startups in San Francisco and Silicon Valley. A lot of this may not translate to other locales and almost definitely will not. We'll also be discussing startups and funds that we've personally invested in and have a financial interest in. And we're constantly changing our minds and learning. That's what intelligent people do. We hold contradictory and opposing thoughts in our head at the same time. We have a multitude of opinions that often contradict each other. This is not math or science or equations. And we're always changing our opinions. As Marc Andreessen says, strong opinions loosely held. The best way to make money in the technology industry, like any other industry, is to be an owner of a piece of a business. You're not going to get rich renting out your time. You must own equity, a piece of a business, to gain your financial freedom. So how do you gain substantial equity in a business? The classic models are you start a company and you become successful. This works as a founder. You own a big piece. It's high stress, very grueling, very few companies succeed. You may have to get back up at the plate and take a few rounds at bat. It may take you a while. A second way is you can be an extremely competent execution person who gets recognized so that when the next successful company is scaling, whether it's an Uber or Dropbox, then Travis or Drew call up their favorite investors and say, hey, who are your 10 best engineers that you'll work with that I can recruit right now? Who are the 10 best designers you've worked with that I can recruit right now? And someone who's done a great job at other companies for investors and entrepreneurs before will get paid a fairly large amount of equity for joining a company that's already solved product market fit and is a rocket ship. Then finally, you can do it as an investor. And as the hits become bigger and bigger and the returns become more and more nonlinear, it makes more and more sense to play as an investor and a little bit less sense to play as a founder. The reason for this is because the upside is nonlinear. When you invest in a startup, you could in theory make 100x, 1,000x, a 5,000x, a 10,000x return if you were in a Facebook seed round, for example. And your own company, you may own a lot more of it, but you may only make a 10x or 100x return. The human brain is not wired to understand nonlinearities. But the people who do, people like Paul Graham and Peter Thiel, end up becoming billionaires as investors rather than through companies that they had themselves directly started. Now being a founder is a lot more fulfilling. Many of the investors, they wish that they were building something because it does give you a deeper sense of purpose. There is that sense of teamwork and really being involved. On the other hand, it burns you out and it ages you quickly. Being a founder your entire life is a very tough road to go and most people do not have the constitution for it. Angel investing is something you can be doing when you're 50, when you're 60, when you're 70 years old. It's something you can do part-time. It's something you can do if you're partially retired or if you're in maternity leave or paternity leave. It's something that you can get better at even if you're not devoting yourself completely to that field. And it's something that can make you money when you're too tired or too big of a family or have some kind of a health issue. So you can't just be cranking as an entrepreneur. Warren Buffett is one of the richest self-made people on the planet because he's been compounding for a long, long time. He started reading annual reports when he was 10, 11, 12 years old, and he's been going strong. If he'd started after college instead of starting when he was 10 years old, he would be nowhere near the top 400 lists on Forbes because the magic of compounding wouldn't have worked. There's a famous line, know something about everything and know everything about something. So in that sense, it's great to have been a founder and then also to do some investing. We're living through a very unique time when, as Andreessen says, software is eating the world. We're undergoing a phase shift where technology, rather than just being adopted by knowledge workers, is being adopted by everybody. This transition that we're going through means it is a gold brush era in technology. If you happen to be living in one of the technology hub cities, There's only a handful of those. And if you have to ask if you're in one of them, then you probably aren't. Usually it's obvious when you're living in one of them, there'll be hundreds of startups, at least within that city. There'll have been some exits. There'll have been some people who got rich off of it. If you're living in a tech hub and you're in the tech industry, you're already halfway there. That's half the battle. You are well positioned to angel invest. And if you're in the tech industry and you're not living in the tech hub, then you should consider moving to a tech hub unless there are strong lifestyle reasons that keep you way, such as family or quality of life, which often is higher outside of the technology hubs. So getting into the tech hubs to do the angel investing is half the battle. You can do it remotely, but the odds are stacked against you. You don't have the trust networks. You don't see enough of the deal flow. So then it's better to work through a proxy, like investing in a trusted friends venture fund or going through AngelList or coming in for YC Demo Day and so on. You think this is just for people in Silicon Valley or does this apply in New York? Does it apply in Seattle, Austin, China, Bengaluru? I think it applies in probably about a dozen, two dozen cities around the world. The thing that's hard here is that some of these cities are emerging and some are not. Seattle is probably pretty stable. Austin is pretty stable. You can probably find good deals there, but you really have to see everything and you have to have access to everything and realize that maybe there's one or two great ones that'll be created there every year. Silicon Valley is a little more forgiving in that there's maybe 20 or 30 great companies being created every year, and you just need to get access to one of those from a larger pool, of course. Some place like Bengaluru or maybe even Kuala Lumpur, these might be up and coming cities, but then timing is hard. Is this when the city breaks through? Is this when the tech industry there breaks through? You're in Australia, if you invested in Canva, great, or if you invest in Atlassian, great, but if not one of those two, then there's not as much of a pool. So timing becomes a lot harder. But at the same time, your returns can potentially be a lot higher because there's less competition, the valuations are lower, the risks are higher. What you don't want to be doing is sitting in a city that doesn't have a history of producing good startups, where you only see one or two startups a year, you invest in half of them, and you're paying Silicon Valley prices because they're looking at Y Combinator Demo Day and keying off of the valuations there. It's certainly much safer and easier to get started in San Francisco or New York or Beijing or Shanghai or Bengaluru. If you're a pro, you can play in London, Austin, Seattle, Denver, Boulder, Chicago, et cetera. Anything below that and you better know what you're doing. We definitely have seen this phenomenon on AngelList where angel investors have been investing locally in a city that is not producing good tech startups will basically surrender and then start investing through AngelList into Bay Area startups. They just see the quality and the returns are so much higher. What's the best indicator that a startup hub is working? Is it exits? Is it a thriving community of other angel investors? Unfortunately, it's exits. The normal angel investing dynamic starts with founders start a company, company does well, founders and early employees get rich in the IPO or the acquisition, and then they start investing money in their friends and engineers and designers and marketers who work with them at their company. And they feel a lot more comfortable doing this early investing because that's how they made their money. They made their money through tech startups. So they want to put it back into tech startups. There's a lot of false starts where you'll have a lot of angel investors pop up in an area and they'll invest in a bunch of companies. But then those companies get stranded because there's no series A or series B VCs there to invest in them. Or because there's only one or two series A or series B VCs, when they come in, they pay low valuations, they wipe out the early investors. They convert them to common, they cram them down, they put warrants on top. So funding markets to some extent develop in reverse. The least risky investments are mezzanine rounds right before the company goes public. The next least risky investments are Series Ds and Series Cs. Then more riskier, Series Bs, even more riskier, Series A, and the most riskier, angel investing. So in a weird way, angel investing is the thing that should develop last. That's not always the case because if a company can break out with just angel money, then later stage money will find it almost no matter where it is, or that company can move to a later stage hub. But now you have a big gap between your investment and then when the next investor is going to show up. And that means the company has to get really, really far and very little money. The returns in angel investing are kind of interesting. There's this meme that goes around that angel investors lose all their money and that VC is a terrible business. This is somewhat true and somewhat not. It's true if you start aggregating VCs and angel investors from all across the world. But if you stay focused on technology hubs, it's largely not true. A competent angel investor in Silicon Valley who's plugged into the network and knows what they're doing and has a broad portfolio can expect to make somewhere between three to 10 times their money over a decade. That's quite a return, although there is a very high specific knowledge and labor that goes into each investment, which is not being counted. Also keep in mind that these are capital gains, which are usually taxed at lower rates and income, partially because it's a secondary tax on corporate income. It's already been taxed once at the corporate level. And also there are tax breaks for angel investors, ranging from the qualified small business stock exemption in the US to some very favorable tax investing breaks in the UK and other countries. From a tax advantage basis, if you're willing to tolerate the high risk and the illiquidity, it's very hard to look at any other asset class where you can make as much of a raw return on your money as you can as a patient, diversified, plugged-in angel investor. One way to think about it is the less efficient the market and the more wealth the underlying asset is creating, the better off you're going to do. For example, art doesn't really create that much wealth. It's more of a tax haven slash speculation instrument. Same with wine. The asset itself is not that wealth generating, but the underlying market is very inefficient, so you can make money more easily. Gambling is wealth destructive. It actually destroys wealth. So it's not a great asset class to play in unless you're the casino owner, in which case you have an edge on everybody else. Angel investing is odd in that very few people complain. Very few people have the know-how, the geographic access, the capital, and the risk horizon, and the patience. But at the same time, the underlying assets that you're investing in are changing the world on a daily basis. I see a lot of people on Twitter who could be good angel investors who are sitting in Silicon Valley, who have access to deal flow, who are in the tech industry. And I see them spending a lot of time thinking about macroeconomics, what if the Fed's going to cut interest rates, what's going to happen to the trade war in China, or they're out shorting stocks, or they're investing in special economic zones, or they're buying and selling real estate and flipping that. Or, you know, I have a very good friend of mine who's a great VC who's also running a rental business on the side. and I would scratch my head a little bit. You're living inside the gold mine. There are people literally digging up gold next to you. The returns in this industry are higher than anything else. You understand it so well, you have specific knowledge, but there is this contempt that you have for investing further into the industry that just comes from your own familiarity. And if you're in the tech industry, you should be doubling down. I don't know of a better industry on the planet or a better place on the planet to be investing for today. the technology industry is becoming the place where wealth gets originated and then it can get spread out but increasingly the wall street finance tiers are coming to silicon valley to invest in companies before they get to wall street by the time a company goes public you can pretty much bet that anybody who had any connections who had any appetite who had any capability got a bite at it so if you're buying a tech company when it goes public you are literally last in line. It's not to say you can't make money, but the odds are way down because this fruit has been picked over many, many, many times. The last bunch of financiers who were sitting in the right place at the right time, we call them Wall Street. These were the people where you used to get capital for your startup. There was no other market for fundraising until you had the metrics to go public. Now, Silicon Valley is turning into the new Wall Street, except it's not as formalized and organized and segmented as the traditional Wall Street. The JP Morgans haven't popped up and the NASDAQs haven't popped up yet. This is going to fly in the face of conventional wisdom. For the average person, you should be saving for your retirement. But I never set out to save anything. I reinvested everything. In economics, there's the identity S equals I, savings equals investment. So even if you save into your 401k, it's actually just getting reinvested, but it's getting reinvested into some very quote-unquote safe but very unproductive parts of society, such as the government. You're investing in the DMV, the Defense Department, and their returns to date have not been spectacular. It's essentially just whatever money they can take at gunpoint from both taxpayers and foreigners. Generally, it's probably a better bet if you're in the tech industry to invest back in the tech industry, especially if you're young, and especially if you can get diversified. Invest in the smartest and best and brightest people that you know around you, as opposed to faraway people in faraway lands with faraway motives, who are frankly just not as motivated and have trillions of dollars of capital flowing into them. $50,000 in your IRA isn't going to make much of a difference to the US government when it gets put into a T-bill, but 50 grand invested into an entrepreneur down the street is going to make a huge difference to their lives. And if you can find 10, 20, 30, 50 investments like that, at least one or two of them will pay off, assuming that you listen to us and build up some skills along the way. Most of my net worth is illiquid and lying in startup companies, but I sleep well at night knowing that I literally have hundreds of teams of brilliant entrepreneurs who study at the top schools and are leveraged through code because they have engineering degrees, great designers. They're leveraged through capital because they've raised venture money after I invested. They're leveraged through products that they're building that have no marginal cost of reproduction and using the most modern methods of distribution. All of them are working very hard to build things that could be massive and change the world. And it's just going to take a few of them work out for the entire portfolio to balance out. If you have a 1000x return in your portfolio somewhere, which is not that unheard of in angel investing, you could have made 100 investments to get there and your overall portfolio will still be a 10x even if the other 99 go to zero. The three things that it takes to get into the investing business are deal flow, judgment, and capital. Capital is the hard one. Either you made some money before or other people trust you enough to give you capital. Many of the top VCs are related to, married to, or come from families that have an enormous amount of capital. Sometimes you look at those people and you scratch your head and you say, how is this person in the venture business? Well, they had a lot of family money, or they married into money, or they were managing money for somebody else, or they were friends with a billionaire, or had access to some large fund. And that access to the capital is what got them in the business. If you join Spearhead, we actually give the Spearhead leads, who are founders who we're training up to be investors, we give them million dollar checkbooks, and then we help them raise more money from limited partners later on. So that is another way to get capital. You can always raise it from friends and family, but this is both the hardest and the easiest depending on who you are. The second is judgment. As they say, good judgment comes from experience and experience comes from bad judgment. Often it just takes time to build up. Judgment can often be about applying your highest standards and your taste in the things you know the best to other people. Very often as a founder, you have a very high bar for yourself. You only want to recruit the absolute best. You only want to do your best work. You're constantly into self-improvement. You're always the worst critic of your own business and your own product. Every little thing in your product that's wrong bothers you. But then you meet somebody else and they're raising money and you fall in love with their idea and you ignore the fact the person doesn't seem that smart or it's not someone that you'd actually work for or even hire, or their product is only half-baked or half-finished or they're executing slowly. You just look past all that. You'll lower your judgment because you start fantasizing about all the things that could go right. So it's very important when you're investing in other people that you keep a high bar. You have to have taste. Some of the best investors that I know are incredibly difficult people. It's very hard to please them, and they see the problems a lot more cynical or pessimistic than a good founder. A good founder has to be a rational optimist, whereas a good investor sometimes will bounce maniacally between being optimistic enough to see the future and get into the deal and being pessimistic enough to see all the downsides and pass a nine out of the 10 that look at. If you're doing more than one out of every 10 deals that you look at, you're probably being too optimistic. If you keep stumbling into all the great deals all the time, that says more about you than it does about your deal flow. There are always exceptions, of course, if you're sitting in the latest YC batch and you're getting to see everything good that's going on early, or if you're running the Stanford Entrepreneurship Club and you've seen tons of deals go by, you may have a unique advantage to your network. The last piece, though, the deal flow and the access, that's what we're going to focus on, which is how do you get deal flow? How do you get good access? Deal flow and access are not the same thing. You can get deal flow by going on AngelList. You can get deal flow by going and sitting at Y Combinator Demo Day. You can get deal flow by going to any technology conference bake-off. You can get deal flow by watching Shark Tank. But that doesn't mean you have access into those deals. It doesn't mean that you have the ability to invest in those deals when you want on the terms that you want. When the deals get really hot and you get cut out, that is a sign to you that you're going to perform poorly as an angel investor. You need to do whatever it takes to up your access. Why is it so important to get allocations in the deals that you want to get into? What happens if you don't? Isn't there just a lot of deal flow out there? Almost every angel investor, if you look at their portfolio, the majority of the returns come from one deal. And then if you look at the remaining returns, once you take that top deal out, the majority of those returns come from the second deal. So it's extremely nonlinear. If you were to take the top two to three deals out of every fund's portfolio, you'd basically have a negative performing fund as opposed to what would normally be a 4, 5, 6, 10x fund. One company out of 100 or one company out of 1,000 accounts for all the returns every year. So it's all about adverse selection. When you get cut out of the deals that you wanted to get into, the odds of that being one of those big winners goes from, let's say, 1 in 100 to 1 in 3 or 1 in 5. What will often happen is you'll meet a company, you're taking your time deciding, And then all of a sudden, the top branded investor rolls in, writes a big check. Next thing you know, everybody piles in. There's a strong signal. And now the entrepreneur says, sorry, the round's closed. We only have 10K left for you. These are times when brand makes a difference. I partially started AngelList because I was cut out of some very big deals early on that to this day, I have some qualms over. These are career-defining deals. If I had been in, that would have made tons of money. But my brand simply wasn't strong enough. Even though you want to be non-consensus right, there does come a point at which consensus has value. When the Sequoias of the world show up, when the statistics become more baked, when the founders are better known, when there's more information on the table. And to some extent, Sequoia investing is a partially self-fulfilling prophecy because it takes away some future financing risk and it gives the company the ability to stand out when it's recruiting or going for PR. This is why it's often better to back another great angel investor and pay them their carry than it is to go and try and be one of your own. A lot of people balk at this idea that, oh, I'm going to pay you a management fee or a percentage of the upside. Frankly, in angel investing, it's a steal. The old 2 in 20 model was put in place by KKR, which was a big private equity for managing billions of dollars. the fact that you can get someone who's managing a million dollars to charge you the same two in 20 when their labor as a proportion of the invested capital is far far higher it's dirt cheap go to yc and tell them you would like them to invest your money at the same time they put in their own money at the beginning for two in 20 and they'll laugh you out of the room to get into good deals you need to build a brand typically by adding value to the startup in some unique way Why don't we talk about 101 different ways to build a brand? This is the meat of it. This is the heart of it. We'll get into how to develop good judgment. We can get into the ins and outs of raising capital. All of those are secondary. The single most important thing is having the ability to get into a deal that you want to get into, and that is access. And the way to get access is to have a brand. A brand in this context is an authentic reputation that you have with the founders and other investors that tells other people around the table, yes, let's let this person invest in our round, even though it's scarce and everybody wants to get in now that the signals are there. So how do you build a brand? The classic brands in the venture business have a reputation for having made great investments. Sequoia was built this way. Andreessen was partially built this way, where you pay up for deals in later rounds on companies that already have product market fit. You associate with their brand, and then you use that to get into earlier and earlier, hotter and hotter deals. So the best way to build a brand is almost a tautology, which is to invest in the winning companies. And then that gets you into the winning companies. Okay, but that's circular. It doesn't help that much. Another way to build a brand is to provide something that's pro-founder that the environment does not yet already offer. This could be a stance. For example, Andreessen Horowitz is a famously founder-friendly stance. They want to see their founders run the company. It could be content. I've built a brand through Twitter. Elad Gill built a brand partially through the high growth handbook that he wrote. Reid Hoffman has written some books, of course, although he's got many other reasons to have a good brand. Paul Graham wrote amazing pieces that attracted everybody to YC and Hacker News when he was getting started. Fred Wilson still maintains the most popular blog and venture capital at ABC. Brad Feld laid out a lot of the mechanics of ABC investing that allowed him to run a fund out of Boulder, which is unusual. So you can definitely build a brand through blogging. David Hornick and Andrew Anker and I started VentureBlog, one of the first venture-related blogs back in the day. Should have stuck with it. A lot of the great brands in recent memory have been built by being extremely founder-friendly and by providing either content or networks or software or platforms or access for entrepreneurs that did not exist before. Number one was being a good investor to begin with. Number two is by creating content that helps entrepreneurs. A third one is you can build infrastructure, a platform that helps entrepreneurs. Paul Graham can get deals because of Y Combinator. Navey and I often can get into deals because we started AngelList and that helps entrepreneurs at scale. Ryan Hoover can get into deals because he started Product Hunt. The first round capital guys have the platform which helps them win deals against other VCs. And Dresden Horowitz has its famous platform of people who are helping out companies left and right. That's another example of a way to build a brand by helping founders. You could also start a conference. Jason Lemkin did this with a Saster conference. Tim O'Reilly and O'Reilly Media Ventures have both publishing and conferences. Stephen Lurie is great at recruiting. So he started Team Builder Ventures. He put it right in his brand name. So now when he goes to companies, they know what he's good for. They know why to give him a piece of the round and what he's going to help them with. There are nuances to this, though. A lot of times a VC will say we need to build a brand, therefore we need to have a blog. Let's hire a content writer and write a blog. Or man, I better up my Twitter game. Let me get over on Twitter and start telling entrepreneurs what my investment criteria are. The truth is you're not going to build a brand because you want to build a brand. The brand is going to be an authentic expression of who you are. So whatever your unique insight already is into the technology ecosystem, the venture business, investing, and startups. You have to express that in the most authentic way possible. So if you're good at Twitter, get on Twitter. If you're good at blogging, get on blogging. If you're good at writing books, get on writing books. If you're good at speaking, go to conferences and speak. If you're good at talking, do a podcast. But you're not going to be successful by aping somebody else. It's going to have to be authentic to you. Also, the media airwaves are now crowded. So you have to create top quality content and you have top quality distribution. The work that Nivy and I do in this podcast, even though it's an amateur effort, we cut things up into snippets, we clean up the voices, we create transcripts, we create highlights. We're staying at the leading edge of the curve. Sure, other people will copy us and catch up, but by then we'll be somewhere else. We may be off to writing a book or we may be doing a roadshow or running an incubator or building another software platform. But because we're always tinkering at the edge and we enjoy that tinkering at the edge, it's easy for us to stay ahead of the competition. Whatever your brand is, it has to be clearly articulated. It has to be messaged. It has to be authentic to who you are. It should be differentiated from what everybody else is offering, and it should resonate with entrepreneurs. The worst strategy you can take is to take a lot of coffee meetings or say, oh yeah, I'm a good passive, hands-off person. I won't bother you, and I'm always available to help. It's too generic. You can build a brand through your advisors and limited partners. But if you have a small fund and many of the investors and advisors to your fund are, let's say, professors of computer science at major universities, then entrepreneurs will want you as an investor because you have access to these people who can bring in grad students or help technology diligence or solve hard algorithmic problems. You may come from the real estate industry. So all the real estate tech plays want you in because you have a deep understanding of real estate and your real estate investors and your real estate contacts and your real estate properties. You could be the world's expert on helping the startup raise its next round. You can build software for startups like AngelList. I think there's still 5, 10, 100 different things in the world of software to help startups that haven't been done. You can be an expert on raising money from international investors, raising from China or Brazil. You can break into a new market by backing the scientists and the technologists in a new market. You can be a world's expert at scaling. You could build open source tools for startups. There's extremely little innovation in the venture capital business. It's actually quite easy to stand out. You just have to be willing to do something that other people haven't done before. In other words, you have to be willing to take on accountability and the risk of being wrong. Do you think someone will try to build a brand around buying common stock from entrepreneurs at some point instead of purchasing preferred stock? Some people have already done that a little bit. Andreessen Horowitz started to do that in the sense that they became registered investment advisors so they can do secondaries. You could argue that's actually a core part of YC's brand. They buy at a very low valuation in that first round, but they used to buy Common, so they were completely in the same boat as you. There is no branded firm or angel investor who's writing large checks that is buying Common. I think it's the very clever strategy and something that we may yet see happening. And it does have the problem where the company can shut down and keep your money. But there are clever ways around that. You could say, okay, I'm buying preferred stock, but after two years, it converts to common stock. So you're running your company for a while. When you burn through my cash and you raise somebody else's cash, at that point, I'm no longer sitting on top of you in a liquidation preference overhang. But at the same time, my money has already been spent. So it's not like you can shut down the company and run off with my money. My original brand started out, strangely enough, growth hacking, where I co-built a Facebook app that got 20 million installs pretty quickly. I used that as my calling card when I was going and talking to entrepreneurs. This was back in the early growth hacking days before growth hacking had a bad name. A friend told me about Twitter and I tried it and I liked the product. At the time, it was all text message based. This is a pre-app. I tracked down Evan Williams and Evan had just given back investors a bunch of money for a failed podcasting venture called Odeo. He'd kept Twitter, which was the one thing out of that studio that looked interesting, but it's still very much a toy. I went to Ev about investing. At that point, his round was done. He had a little bit of allocation left, and he basically was posing the question of, well, why should I let you invest? I got up on the whiteboard, and I laid out what little I knew at the time about growth hacking. This was before Andrew Chen blew it open for the world. He did that for about half an hour while he and his deputy watched. And at the end, he said, this sounds great. We're not going to do any of it because it's against our ethos, and I respected him for that. But he was impressed enough that I cared and I thought about it that I got a chance to put into Twitter. And that was my first major angel investment that worked out. Are there any new angel investors that you think have done a good job of building a brand recently? I don't know if they necessarily build a brand to invest, but I think they'll have a brand through their natural activities and then that will give them the ability to invest. The rest of it, the judgment, the capital and so on is still up to them. I think Ryan Hoover has a great brand. His Twitter game is among the best I've seen in the world. He's always community building on Twitter just by the side effect of breathing. He's going to have a good brand as an angel investor, especially into consumer-ish things. Another good brand is Patrick Friedman. He's basically investing in startup countries and sovereign individual projects. It's a unique enough thesis and unique enough angle that all the libertarian types and all the free state types are going to flock to him. Just by being the first one to put down a stake in the ground and saying, I'm going to fund these kinds of activities means you'll get to see all of the limited deal flow in that space. And at the same time, there are lots of other projects, especially in crypto, that aren't necessarily about starting a free state, but they overlap. And the people who start those companies have sympathies towards free state projects and are themselves sovereign individuals. These are people who signed the petitions to free Ross Ulbricht and Julian Assange and so on. And I'm one of them, by the way. So they're going to be naturally inclined towards letting him invest. There's probably some ways to build a brand that are going to get you stuck in ways that you don't want to be. For example, you don't want to build a brand around just a specific market thesis, right? You don't want to have a brand around the transition from X technology to Y technology, because when that transition is complete, so is your brand. You also don't want to have too narrow of a brand or a brand in a space that doesn't materialize. materialize. If you have a clean tech brand that's focused entirely on solar and solar doesn't arrive on schedule, then your entire area of expertise is shot. When you're first starting out, because of your expertise in your network and because you want to raise capital, there's a pressure to specialize. But if you look at the top VC firms, they're actually rarely specialists. They're usually generalists. And even when they specialize, they'll specialize in being weird, like Founders Fund. They specialize in a lot of deep tech deals and weird deals, but they don't specialize further than that. They don't say we're sin bio only or we are AI and machine learning only. You have to resist that urge because very often these trends don't materialize. I'm old enough to remember when clean tech was a wave that cost Kleiner Perkins a lot of money or when Java was a wave that cost investors a lot of money because those never turned out to be massive markets or took a lot longer than people expected. You could argue in clean tech if you've gotten Tesla or SpaceX that forgave everything. But it also means if you didn't get into Tesla or SpaceX, if you weren't in the Elon Musk mafia and you were in clean tech, you missed everything. So you don't want to be too narrow. At the same time, if you're too broad, then it's hard to stand out. Then you're back to, I'm a good person who does coffee well, let me invest. It's better to build a brand around your unique capabilities and your unique platforms and assets, but not around verticals. The best deals tend to come out of your network. There tends to be people that you've known and trusted for a long time. It's notoriously difficult to invest in one of Elon Musk's companies. Even in very high-priced rounds, trying to get into a SpaceX or into a Neuralink is nearly impossible because all the people that Elon has made money for in the past all swoop in, get first rights, and they always take up the full allocation. If you're getting invited to one of Elon's rounds and you've never met him and you've never made money with him before, you almost have to wonder if he's run out of all the other friends that he had. The urge to go out and hunt for deals will actually lower your returns. Some of the best angel investors make their early wins by investing in people and spaces that they know really well, that are tightly and closely within their network. And it's only when your network is exhausted, but now in exchange, you have a reputation and you have more capital because you've made some money and been successful investing in your network, that it makes sense to start branching out because now you have reputation, capital, and know-how. Without those, it's very dangerous to start going investing in spaces that you don't know, in people that you don't know, and most dangerously into deals you're invited into by strangers. Because you can bet that if they're inviting a stranger, they've already exhausted their network of close allies and comrades. Do you still think there's an opportunity to build a brand at the pre-seed stage before the accelerators or simultaneous with accelerators? Accelerators exist to give advice on how to start a company at scale. The accelerator round isn't really there because they're giving you the capital. They're not giving you that much, but they're giving you important know-how, how to put your company together, how to recruit, how to rev your idea, when is it ready for investors, how to get your MVP out there, how to measure customer growth, how to approach the first customers and all of that. The training wheels until you're ready to go raise money. And the truth is an angel investor can do this. they just have to put in the time. And I actually think this is the best place to play because the valuations at the so-called seed ranges are where A round used to be. If you want good valuations and the best deal flow, the best way is to create it yourself by allying with entrepreneurs early on, becoming their shadow business co-founder. Technical entrepreneurs today, builders, when they start out, they often have to give up half or two-thirds of the company to a seller to put the company together before them and raise the money. You can be that shadow partner. You could help them put the company together. You could put in the first little bit of money. You might even be able to get common equity in addition to your investment or favorable investment terms. And then you can help them recruit the seller later on for 5 or 10% of the company as opposed to 50% of the company. If you're investing at the pre-seed stage, you can back great teams, you can set the terms that you want, and you can get pro-rata rights. Pro-rata rights are the ability to invest in later rounds. Let's say that you own 5% of a company through your original investment. That means every round they raise in the future, your prorata right would give you the right to invest another 5% of that round. Even though you already owned a lot to begin with, and you may not care as much about the dilution, the cash on cash returns for later investments tend to be much better because the amount of money you can put in might be $30 million instead of $3,000. Once the company is more proven, limited partners and big funds will fight for prorata rounds and pay you carry and pay you management fees to invest that prorata for them. And you're not waiting 10 years for liquidity. The later rounds, it might only be two years away from liquidity. So prorata can be quite valuable. It also keeps you more plugged into the company. You keep a closer relationship with the management team. They have to let you know what's going on. And if there's a down round or a washout round, it lets you have more senior stock that can at least protect some of your holdings in a wipeout scenario.