In the interview, Elad Gil and Cory Levy talk about:
- How Elad got started as an angel investor
- The three keys to startup survival
- How Elad works with the companies he’s invested in
- How to exit a deal
- And a lot more!
- Cory begins the interview with Elad Gil by asking him about his history as an investor and when he first decided he wanted to become an angel investor (1:29)
- Elad shares what his first five investments were, a list that includes Airbnb (2:16)
- Starting out as an angel investor, it’s often difficult to get into investment rounds. Elad talks about how he was able to do this at (3:12)
- “…be as helpful as possible, and to put the company’s interests over your own.” (3:40)
- How Elad approaches exiting a position, and why a company succeeding can actually turn into a problem for an angel investor (3:55)
- Elad shares the three things that an investor should be aware of that are required of a startup to avoid failure (6:09)
- Each investor approaches working with and helping the companies they’ve invested in differently. Cory asks if Elad is proactive with reaching out to companies he works with or reactive at (7:52)
- Elad discusses the most impactful ways an investor can help a company they’ve invested in (9:17)
- Looking to expand your network? Hear how Elad approaches cultivating his network as an investor at (10:27)
- Cory asks, “How much time do you spend with entrepreneurs on average, before making a decision on whether or not to invest?” (11:56)
- The markets that Elad is focusing on as an investor (13:30)
- Elad places priority on a company’s market before investing. He also asks specific questions to every startup team he’s considering investing in. Hear them at (14:10)
- What Elad would tell his younger self in order to become a better investor (16:35)
- Elad discusses his book, High Growth Handbook, and what he learned from Marc Andreessen, Ruchi Sanghvi, and Naval Ravikant (21:07)
- Cory and Elad conclude their talk by discussing the best piece of advice Elad has to share with a founder getting into angel investing (25:27)
Cory Levy: Thank you Elad for joining me on the show today.
Elad Gil: Thanks for having me.
Cory: I’d like to start by asking about your history as an investor. When was the first time that you decided you wanted to become an angel investor?
Elad: My investing started very organically. What was happening was, I had a few other friends who were starting companies right around the same time that I started my first company Mixer Labs, which ended up getting acquired by Twitter. A lot of my friends just started coming to me for advice in terms of their own fundraises, or as they thought about how to sell their company, or do other things. People just started asking me since I was helping them out, whether I wanted to invest in rounds as they came together, and I just said, “Okay, sure. That sounds fun.” It really happened organically based on me just sort of helping out either friends or other people that I met in entrepreneurial ecosystem, and then that turning into investments.
Cory: In what year was that?
Elad: I think I made my first investment sometime around 2009, I’d have to double-check.
Cory: Do you remember that first investment? What was it?
Elad: My first five investments, basically included a company called Green Patch that ended up selling to Playdom, Optimizely, Airbnb, Foodzie, and I think Beautylish are my first five, although I’d have to double check that.
Cory: Cool. Were these all friends of yours? Or how did this come about and how did you decide to say yes?
Elad: A subset were friends, and then a subset were people that I just met through either the entrepreneurial ecosystem, or I’d work with at Google or other places. For example, I’d work with Optimizely founders at Google. The Airbnb founders I met originally at Kemper, it was for Sequoia event or just through sort of the social scene that existed around founders back then. Then I helped them out a bit as they were raising their series A, and that’s how I got the opportunity to invest there.
Cory: Back then you were just starting out as an investor, how did you get into different deals? Were you ever kicked out of deals? Did you ever have to convince the founders, “Okay, you need to take my money and here’s why?” what was that like when you’re just starting out?
Elad: I think when you’re starting out the most important thing to do is be helpful. I think that’s also true later, but some people forget that. I think if you’re really helpful, people will generally try and make space for you. Especially if you’re a small angel, your check size isn’t going to be very good, and very large, and you’re not going to be really impinging on a round. If you’re writing a $25,000 check into something, you’re not going to be a threat to somebody writing a multi-million dollar check in for example the series A. You can still sometimes find room.
I think ultimately, the key thing for somebody starting out is to be as helpful as possible, and to put the company’s interests over your own. In other words, you should really be focused on helping the founders and doing what’s right for them and for the company, versus swapping deals with other investors or doing other things that are really optimizing for you over the company.
Cory: On Airbnb, you invested in their series A. How do you think about now as they’ve grown to incredibly amazing large company, do you think about exiting your position? Do you think about just holding it until the IPO? Do you think about something comes and selling it to another investor or selling some of it? How do you think about liquidity?
Elad: Airbnb is pretty transformative in terms of the travel and accommodation market. I think it’s going to be one of those fundamental generational companies and so that is an example of a company that I just wouldn’t want to sell a share of even after they go public. In terms of how do I think about secondary in general, traditionally I have avoided it. In part it’s because I wanted to continue to say that I’m voting in favor of the founder, and supporting them.
In part, I think I hadn’t been as sophisticated about thinking through it as I should have been. Because I do think there are instances where it’s 8, 9, 10 years into you working with a company or having been an investor. Maybe you haven’t been involved for a couple years as things have gotten later and later, or alternatively maybe there’s been changes in terms of the founders, and the CEO, and management team. Unlike a public stock where it’s very easy to exit, with private companies it’s a little bit harder. All sorts of funds now go by secondary, but I think going forward, I may want to be a little bit more thoughtful about when does it make sense to sell a stake if I’m no longer of use to the company, and founders or other people have turned over where I had the relationship and it just makes sense to move on either to regain liquidity or for other reasons.
Ultimately, many angels I know started to get kind of tapped out, because if you’ve been investing for 8 or 10 years and you haven’t had anything exit which is usually a good sign. It means these companies are growing and thriving, then you actually end up with a bit of a liquidity crunch, because you only have so much capital depending on how much of your own money you’re putting into things. Since I’ve been investing a lot of my net worth into startups, eventually you start to wonder when liquidity will ever come. I know a few angels who’ve stopped investing entirely because of that. I do think that there’s just pressure on people from a light perspective or other perspective to eventually sell a subset of what they’re holding in a certain company. I’ve avoided it to date.
Cory: How do you help companies close the investment?
Elad: It differs a lot between an early-stage company and a late-stage company. For an early-stage company, honestly you really just need to do three things so that you don’t die. Number one is, you can’t run out of money. Number two is, you need to find product/market fit, which is really a proxy for not running out of money because if you have product market fit, you can either raise more money or your customers are paying you. Then number three is don’t fight with your co-founder, because then your company will tend to blow up. If you just do those three things, you’ll be successful, and the hardest of those is actually finding product market fit.
Really, for an early-stage company the key things that you can help with are things like hiring and firing, setting culture early, thinking about the product or the market, thinking about pricing, introductions to customers. Those are the things that somebody really needs help with early on and there’s a few others raising future around the financing, dealing with M&A offers. Those are add-on things that are also ones that I tend to help people with.
For late stage companies it’s dramatically more complicated. If a company’s breaking out and if it’s going, for example, from 50 people to 500 or 1000 people over a couple years, then the surface area — the issues that you’re facing grows dramatically. Then you have to start thinking about things like raising late stage financing rounds, hiring executives, how should you actually be spending time as a CEO, How do you start buying other companies and what arguments do you make to founders about how to buy them? How to do reorgs, how to think about culture as your company scales, how to build a scalable recruiting organization, how to think about internationalization, the list goes on and on. The types of ways that you can help a late-stage company are actually much more varied.
At the same time late stage companies tend to have more help around them in terms of the investors who’ve invested over subsequent rounds, or eventually the executives they hire in who often are world class operators at a specific function. I think for late-stage companies, there’s actually dramatically more things to help with than with early-stage companies.
Cory: Are you proactive with your investments or reactive? What I mean by that is, do you reach out to your portfolio and say, “Hey, how can I help?” or just wait for people to come to you?
Elad: Early on, I was extremely proactive and I would schedule in my calendar times to reach out to founders to make sure that I ping them to see if I could help. Now it’s a bit more mixed since I’ve gotten really busy. Lately I’ve been trying to free up more time so that I could be increasingly proactive and there are some companies where I have a regular one-on-one or other times set up with founders so that I make sure that I can keep helping them.
Cory: When you were just starting out how frequent were those?
Elad: About once a month. If you ping founders more frequently than that, you start to be kind of a pain. It’s finding the right balance and it depends on the founder too. There’s some founders who will ping me every week with something and then there’s some founders that I don’t hear from them for three, four months and then they ping me.
The key is really being as responsive as quickly as possible and I try to set expectations with founders now, in terms of how we all respond, which is basically the email. I’ll get back to them usually same day, if not, usually within 24 hours, a phone call I can definitely get to them within a couple days. I try to do better than that but it’s almost like setting an SLA or something for how are you going to help the founders over time?
Cory: Got it. Do you have any other systems that you put into place early on, whether that’s spreadsheet with people that you meet and companies that you meet? What systems did you put into place?
Elad: There’s three or four ways that you can help companies. One is helping them raise money in the future. Every founder ultimately needs help with that and getting to know the venture community as an angel is important because it means that you can then refer your companies to the right person at the right firm. It’s really important to make sure you actually do that and we can talk about that later if that’s of interest. The second area is M&A. Most companies don’t work, and many of them eventually want to exit. Knowing the people who run an M&A, the major buyers is actually also very valuable for companies that you’re involved with. Going out and getting into those people proactively is helpful.
Then lastly, having a pipeline of people that you can refer to them for hiring be it an individual engineer or be it an executive is really valuable. As a company gets later and later stage they’ll have an on boarded recruiting team that can help with individual contributors. Really the key area that people have gaps is in hiring executives to lead functions for which the founder has no prior experience or context. For example, it’s probably harder for a founder to hire a great CFO or a great GC than it is to hire a great VP engineering. A, because they may not have those people in their network and B, they just don’t know how to assess those people and often those are places to help companies later stage.
Cory: Got it. What would be your advice for expanding or cultivating your network? Let’s say, you picked out your smart friends and the people that you would like to back, what happens next? How do you kind of grow from that?
Elad: I think a few things happen organically. One is if you end up being really helpful to people, then they’ll refer other people to you. The best founders that I’ve met over time tend to be referred to me by other founders that I’ve just been very helpful to. The second way is, if I see somebody working on something cool I tend to just reach out to them and say, “Hey, do you want to meet up and talk about startups or do you want to meet up and talk about this thing you’re working on?” It’s honestly more driven by me just thinking it’s interesting than me thinking, Oh, my God, I’m going to try and invest in this thing.
For example, the way that I ended up meeting the Stripe founders was Stripe had just launched or was about to launch and I checked out the product and thought it was really cool. I just pinged Patrick Collison and asked, “Hey, you’re working on this really cool platform and piece of infrastructure. I just sold a company to Twitter, this sort of infrastructure company, do you want to meet up and talk about it?” We just went on one or two walks. Then when they were raising their series A, Patrick, just pinged me over and asking if I wanted to do invest. That was a great example where I wasn’t chasing the company, I just thought what they were working on was exceptionally cool and it was something that I would have used as a founder. I thought it’d be great to get to know somebody. I think many of the best investments I have ended up doing haven’t been very calculated, they’ve been more driven by interests and an attempt to help somebody versus can I invest in their company.
Cory: How much time do you spend with entrepreneurs on average, before making a decision on whether or not to invest? Is it one meeting? Is it five meetings? Is it somewhere in between?
Elad: I generally prefer to meet with somebody a few times if I can, before investing. Optimally, I’d want to meet with them and their co-founders just to see that dynamic and see if people creating space for other founders to talk, and for their co-founders to participate and how do they interact and what’s the vibe, and is their tension or people arguing.
I remember there’s one company that I was helping out informally a couple years ago where I met with one founder and he just seemed great. Then I met with he and his co-founder together and it was clearly a terrible situation in terms of two founders who just didn’t really respect each other. So I think actually meeting a person’s co-founders is important.
The other thing that I do that a lot of angels don’t do is actually try to diligence the product, play around with the product a little bit to see how it works. If it’s a later stage company, talk to some customers. I think just figuring out whether what people are telling you is their own optimism or whether it’s reality as well as the product itself is good is important to do as well. I think a lot of investors don’t do that.
In general, I think one of the biggest differences between myself and most angels is, I think the market is the single most important determinant in the success of the company. I think many early stage investors instead focus on the team. Therefore, they don’t do as much product diligence, they don’t do as much market diligence, but I think the market when all said and done, it tends to determine whether a company will do well or not, even though the team is important, the market tends to triumph.
Cory: Do you have different markets right now that you are like, “Here are the markets that I’m super interested and where I would go on the different teams”?
Elad: There’s a set of core markets. Crypto obviously, has an enormous amount of really exciting stuff going on in it. I think Core SaaS is still interesting in terms of– Companies like AChecker where they just took something that we had to build internally over and over again and turned it into an API. I think companies like that are still very exciting. I think the semiconductor level for machine learning is really exciting. It’s a way to effectively index to market by investing in chips or custom A6. I think there’s a few really promising companies there. I think those are some of the markets that are pretty interesting right now.
Cory: Once a founder checks the market bucket, are there any particular questions you ask founders during a meeting?
Elad: Yes, and to clarify a little bit. The market checkbox is more driven by what the founder is working on versus my own thesis. I may be inclined to think certain markets are really interesting, but I think founders in general are going to come up with way more interesting ideas globally than me just saying, “You know what? I’m going to be a real estate tech investor, and that’s all I’m going to look at.” I do think that the entrepreneurial community tends to come up with the best market organically almost like crowdsource right away. Real estate actually is one market that’s interesting right now in terms of new things happening between Opendoor and Mosaic and a few other companies.
There’s a few sets of questions that I tend to ask founders. A lot of them tend to be about how they view the market, what’s your distribution channel? What product are they building? Why are they building that product? Where are they in product development? What milestones are they building against? How much money are they raising and why are they raising that much money? What milestones will it get them to? Who their co-founders are? How do they split up decision-making with their co-founders? What team do they want to hire? What are the big holes on the team? Really, it comes down to marketing, competition, product and product roadmap, team and team holes, co-founders and founder dynamics, distribution and then one or two other areas.
Cory: I imagine when you’re asking these questions, these companies aren’t perfect and there are a lot of holes. How do you make the decision? Do you make the decision on the spot? Do you make it based on gut? Do you sleep on it? Do you have any processes for making decisions?
Elad: It depends a lot on the stage of the company. If it’s truly two people without anything built, it’s honestly usually a bad sign if they’ve truly not built anything because I think if somebody shows up with even the worst jankiest simplest demo, it suggests that their product centric or that they’re building centric. If they show up with only a slide deck and they’ve never actually built anything and they’re just raising money on the side, unless it’s somebody that I already know or there’s some regulatory reason or issue that will cause it to take time to actually build something, it’s usually a negative sign if they’re raising money before they have anything at all, unless it’s a true pre-seed where you’ve been working with somebody on an idea and you’re excited to fund that idea.
In general, I think that there tends to be a little bit more in place for the best companies. Some companies will only raise once they have a live product which is a little bit dangerous because raising on hope is often the best time to raise money. But then you have a really clear view in terms of whether something that’s even extremely early as getting some usage and some retention.
Cory: If you could go back to your younger self, what would you tell yourself to make you a better investor?
Elad: I think there are the things that would make me a better investor and then there are the things that would increase my potential financial return. In terms of a better investor, I guess better investor to me has three or four components. Component one is, are you helpful or not? I think that focus on viewing investing as a services model, in a sense you’re there to help the founders is really important to keep in mind. Number two, there is investor in terms of financial return. What are the things that allow you to make the most money? There’s a few of those. Then number three, there’s an investor in terms of how can you pick well. I think there’s a set of things I’ve learned of that.
In terms of services, I think we talked about that a little bit earlier in terms of really prioritizing the company and the founders before you’re own interest and being available to help, being proactive when you can be. Again, there may or may not have the time to do that. Then, figuring out what are the areas where you can really be valuable to a founder and focusing on those areas and building out networks like M&A or capital networks or other things I think are really important.
The second area which is how are you good as an investor or how do you make more money? I think the biggest takeaways for me are one, don’t throw good money after bad. Treat each round as an independent financing event and if the company isn’t working, it may not make sense to re-up into it. Then, on the flip side of it, if a company’s working, you should really double down in a big way because the biggest companies tend to be really massive these days and get there faster than anybody thinks. I think a lot of early-stage investors don’t double down along the way. They don’t invest in the A or the B or the C or later, and if you take a fresh look at every company at each stage and ask is there still a 10X left, there may be companies where it’s really worth continuing to invest even though they are not seed investments.
In terms of the things that would make one a better picker, there’s three or four things that I’ve learned overtime. Number one is this notion of if something’s compounding at an organic rate, 15%, 20%, 30% a month, it tends to be a good investment. Assuming that the overall market size is big enough because things that tend to compound organically, even if they’re half broke, suggests that it’s actually a really good product/market fit.
Second is focus on people who have built something at least partially tends to be a very positive sign because it’s selecting for people who are builders versus we’re just going to talk about an idea or wait for money to build something. I think that’s a strong early sign. Third thing which I was really surprised by which is a more recent learning for me is that while a positive reference check on a founder is a positive signal, a negative or neutral reference check on a founder isn’t a signal.
I’ve seen a lot of founders or friends of mine who passed on founders who were very mediocre in the context of their company and ended up building very successful companies and by mediocre, I don’t mean they fought with their boss or all the things that people talk about as for the founder profile. I mean, they just weren’t very good. They were lazy in the context of their prior job. They spent a lot of time hang out in the hallway talking. They weren’t very productive. That sort of mediocre. And some of those people have gone on to build really big companies and I think sometimes that’s driven by the fact that if you’re in a good market and you’ve built a defensible product or distribution channel, you actually can end up building something truly outsize even if in the context of the prior job you just weren’t that great. For me, that was a big surprise.
Cory: Do you have an anti-portfolio? People that you met with but you passed or didn’t invest and that if you had a time machine you would go back and write a check?
Elad: Yes. There’s a bunch of stuff that I missed. I think Lyft was probably the biggest company that I missed. It was at their Series C round which Founders funded and I didn’t invest in that. Obviously, in hindsight, I absolutely should have.
Cory: Are you data-driven when it comes to investing? Do you track every person you meet with? Do you track back when Lyft was raising a Series C? Why you said no so you can go back and reflect on your thinking and then course correct?
Elad: I don’t track those things that I passed on. I do track the things that I’ve invested in. I tend to remember why I didn’t invest in certain companies. The other one that I missed was Robinhood. That was another one that I missed at the time. I think it was a seed extension or something like that back in the day or some add on to their seed. There’s a few different companies that I’ve missed. I haven’t really tracked the reasons but I remember them particularly for the companies where I got it wrong. That gets burned into you.
In terms of companies that I did invest in though, I do track a few different metrics around what did I think of the founders or the market, et cetera. Then, I go back and look to see does that map up with how things played out.
Cory: Elad, you have a book that just came out High Growth Handbook. You interviewed a lot of amazing people like Reid Hoffman, Marc Andreessen, Sam Altman, Naval, and many others. What did you learn from Marc Andreessen?
Elad: Marc is this amazing technologist, innovator, and investor, and in addition, he’s a brilliant marketer. He’s one of those people who I think is constantly looking for new things, reinventing how he thinks about the world. He has this great saying, he says that he has strong opinions loosely held. I think number one is he goes really big in the things that he believes in. Some of the early investments that Andreessen Horowitz made in Skype or GitHub actually made very large investments. Then second, I think he really understands the power of the technology wave in the future and the macro level of things. He marries it to a really deep, detailed understanding of things like the power of pricing and how you think about sales channel and marketing and all the rest. It’s just this amazing combination of macro and micro insights.
Cory: How do you think about that in marketing?
Elad: It’s talked about a bit in my book in part with a conversation with Marc in part elsewhere where I think most companies don’t realize that initially they really start off as a product-centric company in most cases, at least if they are founded by technologist. If you build a 10X better product, you end up getting distribution for it and you build out a big distribution channel. You hire a sales team, ads working really well from an LTV basis or whatever channel you decide to engage in. Then what happens is that you– The most successful companies shift from being just product-centric to being both product and distribution-centric.
You start to realize that not only is your product the core asset that you have but your distribution and your channels are now basically a mode that you can use either defensively or to push new products down. For example, Cisco started off early with a certain class of routers, but then they started buying up different businesses or building products that allowed them to get into the ATM switches and other aspects of telecom infrastructure and what they did is they reused their distribution channels to distribute some of these products. Similarly, Microsoft initially won via an OS but then they started wearing out and are bubbling other things in terms of the Office Suite of products and they bought a subset of those and they built a subset of those.
I think the biggest companies in tech start off very product-centric and then they realize eventually that they also have to be very distribution-centric. Google, for example, was spending few hundred million dollars a year on distributing toolbar and distributing search. They bought the home page on Firefox and other things. That was because they understood that not only as they’re a search engine and a great product but the untold story of Google as how aggressive they were in terms of distributing their products.
Cory: What have you learned from Ruchi Sanghvi?
Elad: Ruchi has done some really interesting things with both Facebook and Dropbox. I think she’s really shown the power of community relative to the company formation and investing in terms of what she’s doing with South Park Commons.
Effectively, she’s created this really cool and interesting model for not just the co-working space but events, funding model for companies that are working out of the space and other things. I think she’s done some really interesting things in terms of just innovating on how do you help early stage companies form.
Then in parallel I think as an Angel investor, she’s very sharp about thinking about things from a very fundamental basis. What are the building blocks of this product and business, and what’s interesting about it? She’s definitely somebody that I really enjoy working with on companies.
Cory: What do you think the most interesting things she’s done at South Park Commons?
Elad: Some really interesting companies coming out of there. I don’t know how public some of them are. I want to be a little bit cautious since it’s still a recently new program. I know that there’s one company, for example, that was already acquired by Coinbase and I think there’s a really cool one in the email and security space that’s just coming out of there. There’s all sorts of really interesting things bubbling out of South Park Commons.
Cory: What about Naval?
Elad: Naval is always five years ahead of the rest of us. He did one of the very first Angel funds before that was a giant trend. He really started investing in crypto heavily around I think 2013 before most really focused on it. Things like syndicates are now being mimicked or copied with funds that are dedicated to during distributed angel network. I think he’s just one of those people who’s always extremely far ahead of the curve and always thinking about the next thing that’s coming. He’s also I think extremely savvy in terms of how you think about venture structures, financings, that sort of thing.
Cory: If you have one piece of advice for a founder starting to get into angel investing what would it be?
Elad: I would say do three things if you were starting out investing. Number one is be as helpful as possible for the companies that you’re involved with or just the companies you need. I think there’s a lot of reputation that gets going just by helping people even if you don’t get anything out of it. I think word spreads for the people in the circle. Second, if there is a company you’re really excited about, reach out to the founders and tell them you want to help and see what you can do and that may lead to an investment opportunity. Then lastly, I do think content and writing and blogging really helps people establish themselves as investors.
If you look at the biggest venture brands, it’s people like Fred Wilson, it’s people like Marc Andreessen and Ben Horowitz, it’s people like Reid Hoffman. It’s people who built these content brands for themselves. You see other people now producing really interesting books or content. Hemant Taneja, General Catalyst just published his book on scale. I think writing if you’re good at it, is actually a key component in some sense of both communicating ideas, but also attracting founders to you versus you going to them. I think building a brand is important.
Cory: Amazing. Well, thank you again Elad for taking the time. I really appreciate it.
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