Keith is a Partner at Khosla Ventures and early investor in YouTube, Yelp, Yammer and Airbnb. Below are some investing lessons from our session with Keith.

Invest in deals that are uniquely suited to you

Investing is generally an efficient market, so you should focus on deals where you have a proprietary advantage. Whenever Keith is considering an investment he asks himself “why am I uniquely situated to lead this deal over other VCs?”

Your advantage can come from having superior insight into the market, being able to conduct better diligence or from selling your value-add more effectively. Because of his experience at PayPal and Square, Keith has an edge investing in heavily regulated industries.

Look for companies where if you don’t invest, nobody will

Sometimes the most interesting companies are ugly ducklings. As an angel, the issue is that your capital alone isn’t enough to get the company over the hump. So you need to recruit friends to invest in ugly ducklings, which is a lot of work.

As a VC, investing in ugly ducklings is easier because your capital alone may be sufficient. You still need to recruit investors for the next round, however.

Spearhead is a program that funds and mentors founders so they can start angel investing. Founders get exclusive access to masterclasses from investors such as Keith Rabois. Spearhead is currently accepting applications for the 2019 cohort. Apply by Oct 31.


Tony Conrad on Being a Founder and an Investor, Vetting, and Deal Flow

“The best investors I know are people that have actively founded something themselves.”

— Tony Conrad

Entrepreneur and investor Tony Conrad has had success on both sides of the table as an investor and a founder. “I was kind of part of both of those roles. It was very, very fluid. Some people saw me as a venture capitalist, some people saw me as a founder,” says Tony. Having built About.me and Sphere from the ground up and as the co-founder and partner at True Ventures, Tony knows what it takes for a founding team to succeed, and he has applied this knowledge to lead True Ventures in over 200 deals.

Tony joins Cory Levy in this week’s episode of the Spearhead Podcast to discuss his approach to investing, tips for new angel investors, deal flow, and what he looks for in fellow founders.

Like all investors, Tony misses opportunities and bets on companies that eventually fail, but this isn’t something that keeps him up at night. “Where I get really upset is when I feel like we’ve made an investment into a founder, which is what we do, and we got that wrong,” says Tony.

When looking for an entrepreneur to work with, Tony tries to connect with them on a deep level. “I like to really try to make a human connection, and try to understand what makes a person tick, where they’re from, what they’ve been through, what’s their journey here, and why they’re doing the particular idea,” says Tony. While Founders are focused on their presentation and trying to convince Tony that their business is worth investing in, Tony focuses on them. “At times I’ve very politely leaned over the table and closed their laptop, and just asked (them) to take a step back to give me their context and for me to understand how we got there. It changes everything when you can get into that.”

Building Out Your Network

When it comes to Tony’s deal flow, he considers every company he’s worked with as a possible source, and constantly works to strengthen his network. “I think if you are a little bit patient and you carefully build out your networks, in addition to your own experience, you put yourself in a much better place to have top-of-funnel deal flow that is going to be of higher value, higher quality, and higher chance of succeeding,” Tony says.

To cultivate a valuable network, you don’t need to always look outside of it according to Tony, who met WordPress Founder Matt Mullenweg from friend Om Malik.

“I think it’s really, really important that you tap into your existing network as opposed to trying to always looking outside of it. If you do within that network of great founders and entrepreneurs, you’ll get an enormous amount of deal flow. It’s always the best deal flow because founders, they have an intuitive sense of what’s appropriate for me, for us at True Ventures. They’re just going to do a prescreen in a way that’s much more effective.”

Tony says a “hack” that he would recommend to young angel investors is to “Get to know people in the network when you don’t need anything from them and make sure that you keep a list and you do check-ins, and that you’re proactively generous and that you’re sharing deals.” Tony recommends short check-ins and phone calls, even if 5-7 minutes for a cup of coffee or stopping by the office for a brief chat, which can make a big impact when building out your network for partnerships.

Don’t miss the rest of this conversation with Tony Conrad of True Ventures on the Spearhead Podcast. Listen here

In the interview, Tony Conrad and Cory Levy talk about:

  • How Tony got his start as an investor
  • Determining whether or not Tony will work with a founder
  • Saying no
  • The difficulty and benefits of being both an investor and a founder
  • And more!

Show Notes

  • Cory Levy and Tony Conrad start their conversation by talking about Tony’s first investment, which was in a company called Danger (1:23)
  • Cory asks, “If you could go back to Tony Conrad 20 years ago, what would you tell your earlier self about investing?”
  • Tony discusses first meeting Matt Mullenweg, Founder of WordPress (3:01)
  • “I think it’s really, really important that you tap into your existing network as opposed to trying to always looking outside of it” (5:45)
  • Investors rely on having “high-quality deal sources.” Tony discusses who his sources are at (6:29)
  • Tony isn’t a traditional investor due to his involvement on the operational side of companies as well, but that’s changing. Tony discusses what he’s learned from being both a founder and an investor (8:18)
  • “There’s just so many real-world small lessons I’ve learned along the way by being an operator or being a board member that applies to the other category” (11:30)
  • Savvy investors learn and adapt as they grow in their craft. But when Cory asks if his decision-making process has changed over the last 20 years of investing, Tony says no. Hear why at (13:26)
  • How Tony decides if he wants to work with a founder or not immediately (15:19)
  • Cory and Tony discuss how to conduct diligence as a new angel (20:32)
  • How Tony says no to founders (23:16)
  • “Generally, they are fairly well thought out opinions on our end and we share the top line rationale around that” (24:00)
  • How new angel investors can get in on deals with True Ventures (24:22)
  • “The best investors I know are people that have actively founded something themselves” (27:47)
  • Cory and Tony discuss diversity in entrepreneurship and investing (28:30)
  • “What’s the last weird thing you saw or invested in?” Cory asks Tony (33:24)
  • Show close (34:52)
Tony Conrad on Being a Founder and an Investor, Vetting, and Deal Flow

A Few Things We Learned From Jared Friedman

Jared is a Partner at Y Combinator and early investor in Cruise, Instacart and Parse. Below are some investing lessons from our session with Jared.

Diligence doesn’t tell you what a business will become

You can infinitely diligence any company: calling customers, researching competitors and so on. This is problematic if it causes you to lose sight of the future potential.

Jared recalls a deal he researched exhaustively, and passed because of gaps in their product offering. The company later fixed these gaps. He regrets passing.

Sometimes you should invest in great teams, even if everything else is terrible

Investors look at a number of things when considering a business, including the idea, team, market and traction. The default instinct is to weigh all of these equally, although Jared believes that team is most important. Even if the idea, market and traction are all terrible, Jared will still invest if he loves the team enough.

Spearhead is a program that funds and mentors founders so they can start angel investing. Founders get exclusive access to masterclasses from investors such as Jared Friedman. Spearhead is currently accepting applications for the 2019 cohort. Apply by Oct 31

A Few Things We Learned From Jared Friedman

Apply To Spearhead 2 For A $1M Fund

Today, we start accepting applications for Spearhead 2, a program that gives startup founders their own fund, so they can start angel investing.

Founders start with a $200K fund. If they make promising investments, they receive up to $1M to invest over 2 years.

Nine months ago, Spearhead 1 accepted 19 founders from companies like PillPack, Handy, and Clearbit. These founders have now invested over $2M in 50 seed and pre-seed companies. They’ve co-invested with Founders Fund, Greylock, and Marc Benioff. And they’ve been mentored by investors like Keith Rabois, Elad Gil, Cyan and Scott Banister, Daniel Gross, Lee Linden, Jared Friedman, Nick Chirls, Ann Miura Ko, Naval Ravikant, and Jeff Fagnan.

Applications for Spearhead 2 are due by Oct 31.

Founders backing founders

Founders already help startups with advice–they’re probably the most helpful advisors. They also have access to the best startups. Spearhead gives these founders a fund so they can start investing in the companies they advise.

These funds let startups raise money from their most helpful advisors. They compensate founders for their advice. And they create more high-quality opportunities for downstream VCs.

Collaboration between AngelList and Accomplice

Spearhead is a collaboration between AngelList and the venture capital firm Accomplice. AngelList provides the technology and back office (lawyers, accountants, et cetera). Accomplice is the largest investor in Spearhead.

Spearhead funds are independent of Accomplice and investments don’t require their (or anyone’s) approval. Founders are also encouraged to get additional investors for their fund.

AngelList’s co-founder, Naval Ravikant said, “This is the first program that is trying to turn you into a capitalist, and not a laborer. Unlike a traditional scout program, we are not training scouts, we are building full-fledged VCs. The founders are not getting a slice of carry in a fund, they are getting carry in their own funds. This is really about teaching, learning, and scaling the craft of investing.”

Wealthy founders have been investing in startups since the dawn of venture capital. Now any founder can apply for their own fund.

See the FAQ and podcast to learn more about Spearhead. Also see this in-depth report from Techcrunch.

Meet Spearhead 1

These 19 members of Spearhead 1 are now running their own funds with millions of dollars of dry powder.

Alex Yampolskiy, Founder of Security Scorecard

Alex MacCaw, Founder of Clearbit

Alice Zhang, Founder of Verge Genomics

Amrit Saxena, Founder of Stella.ai

Andrew Bialecki, Founder of Klaviyo

Ankur Nagpal, Founder of Teachable

Evan Weaver, Founder of Fauna

Grant Miller and Marc Campbell, Founders of Replicated

Jay Desai, Founder of PatientPing

John Capodilupo, Founder of Whoop

Laura Behrens Wu, Founder of Shippo

Nikhil Srinivasan, Founder of Cleargraph (acquired by Coinbase)

Noah Ready-Campbell, Founder of Built Robotics

Oisin Hanrahan and Umang Dua, Founders of Handy

Prasanna Sankar, Founder of Rippling

Preethi Kasireddy, Founder of TruStory

Roger Chen, Founder of Computable Labs

Tiffany Zhong, Founder of Zebra Intelligence

TJ Parker, Founder of PillPack (acquired by Amazon)

Apply To Spearhead 2 For A $1M Fund

Tom McInerney on Investment Thesis, Saying No, and Valuations

“Be authentic to your abilities, your expertise, and your world. You should start with what you know and then you can expand from there.” — Tom McInerney

In angel investing, there are no overnight success stories. Proven investor Tom McInerney from TGM established himself over the course of making 70 deals in the past 12 years, specializing in early-stage internet companies. Tom calls investing “the get rich slow business,” and says, “best case, your winners take years and years and years to mature.”

Despite how difficult succeeding as an investor is, Tom knows that to others, it looks easy. “As an investor, I think entrepreneurs probably don’t realize investors have a hard job. It looks easy. I think if they understood fund returns they would be wildly disappointed. You just naturally read about things that work,” Tom says.

Tom joined Cory Levy on the Spearhead Podcast to talk about his experiences as an investor and to share his advice for fellow angels. Among the long list of successful investments he’s made over the years are missed opportunities in now large tech giants, including Thumbtack and Airbnb.

A tactic used by angels to prevent missing investments that match their criteria and beliefs, turning those into an investment strategy, is an investment thesis. Cory asks Tom if he has an investment thesis. “I think thesis is for suckers because the world changes so fast and (it’s) very hard to predict the future.” Instead, Tom takes leaps of faith based on conviction. “One thing I took away was, as I continue to do well — take risks. As an investor, you have to take risks,” says Tom.

Tom takes risks on founders he believes in, regardless of the other angels or firms involved in a round or if he’s the first check or the last. “One thing I would say is just because a bunch of great folks are in a round, doesn’t mean that it’s going to work. I probably overvalued some, like ‘Goldman Sachs and Excella are coming into this round, so it’s got to be good.’ That’s not necessarily true. You still got to believe in the company yourself I think to write a check.”

Writing a check, for Tom, has significance over and above the capital it provides to the company. “When you invest in a company, as an angel, you should think about it as lending your credibility.” By signing a check, you’re putting your name and the name of your investment group publicly on a company, and by lending your credibility to a founder, you’re helping them leverage your name and brand to help accomplish their goals. When you’re not willing to endorse a startup and back them with your name and money, you need to give a “no.”

“Giving good no’s as an investor is hard but it’s really important,” Tom says. Tom explains that he tries to give the best no possible to help founders understand why he’s passing on them. Despite the importance of giving a good no, Tom also cautions founders from taking them as a sign that something is wrong with their business. “Founders shouldn’t over-read a no, and investors should make it clear that just because they’re saying no doesn’t mean that they are right.” However, if a group of founders is consistently hearing no for the same reasons from different investors, they should address this concern.

In the episode, Cory and Tom also discuss the current state of the market. Valuations are high, which could scare investors who are looking for good deals. Asked how he takes the investment climate into consideration when making deals, Tom says, “if you’re betting on a good team that’s creating an innovation, then they’ll still be successful. They’ll have to manage their cash more efficiently, but it’s what good teams do.”

Listen to the full interview between Cory Levy and Tom McInerney here on the Spearhead Podcast.

In the interview, Tom McInerney and Cory Levy talk about:

  • How to start as an investor
  • Cultivating a network
  • Negotiating terms
  • Investment thesis
  • How Tom says no to founders and why he takes this approach

Show Notes

  • Cory and Tom begin the episode by discussing his history as an investor and the biggest investment that got away (1:29)
  • How Tom met the founders of Airbnb and when he realized he should’ve given them a deal (2:37)
  • “I still think most fundamentally you’re betting on the team at that point” (5:10)
  • Cory asks Tom when he’s certain that he wants to invest in a founder (6:43)
  • “Often times I’ll see something and I’ll think right team, wrong idea, wrong space, wrong market” (7:15)
  • Tom’s advice for brand new angel investors, including how to stand out from other investors (7:54)
  • Cory asks, “How do you say no to a friend or a former colleague, what is that like?” (8:16)
  • Tom shares a story of how an investor who said no to a founder was later hired by them, and explains why (8:30)
  • Tom discusses Thumbtack, a missed investment opportunity (10:50)
  • How to manage tracking the entrepreneurs you meet with and keeping in contact with them as an investor (11:50)
  • “Is now a good time to be investing?” Cory asks Tom (12:45)
  • Cory and Tom discuss the importance of being the first check in an investment round (14:22)
  • Cultivating a network is key to the success of an investor. Tom believes it happens “organically over time” (17:10)
  • What Tom would tell his younger self to help him become a better investor (18:08)
  • Tom has strong beliefs about investment thesis and if you should have one. Listen in at (19:09)
  • How to negotiate terms as a new investor (20:11)
  • Not every part of being an investor is enjoyable. Cory asks Tom what parts of his job aren’t fun (21:15)
  • Show close (23:08)
Tom McInerney on Investment Thesis, Saying No, and Valuations

Jeff Fagnan on Cultivating a Network, Focus, and Conviction

“It’s the most important thing to go out there and really build a network of trusted people that you believe in, and that are going to introduce you to other trusted people that they believe in.” — Jeff Fagnan

Cultivating a deep network as an investor is a vital aspect of your potential success. However, putting a significant amount of time and effort into building a strong network won’t turn any investor into a success overnight. “It’s not going to translate into an immediate opportunity, but what it’s going to do is it’s going to raise an ecosystem or it’s going to raise a network. That network has long-term pay-off implications,” says Accomplice Partner Jeff Fagnan.  

Before Fagnan left Seed Capital for Atlas Venture early in his career, he took interviews with several VC firms. During an interview, Jeff was told, “We’re going to make you an offer, but the thing that sucks is we’re not going to know if you’re any good, for 10 years.” After responding that he could potentially have an exit in five years, the interviewer replied, “Anybody can get lucky.”

Jeff believes that analyzing an angel investor requires looking at what they are doing rather than only how they are doing. “If you just continue to focus on the nucleus, the how will come,” says Jeff, who is also a strong believer in the importance of being intellectually curious and patient. “I think that you can only be an investor in technology companies if you’re intellectually curious, if you’re people curious, and if you’re really patient around seeing those results,” Jeff states.

In this episode of the Spearhead Podcast, investor and entrepreneur Cory Levy speaks with Jeff about the keys to surviving as a tech angel investor, mistakes Jeff has made along the way, and why he doesn’t pay attention to the investment climate when funding companies.

Amidst many successful investments, Jeff, along with every angel investor, has also missed out on investing in prominent tech companies, including Dropbox. Once-in-a-lifetime investments are often missed because as Jeff puts it, “you can talk yourself out of every single investment.” When you have partners and others working closely with you on deals, the consensus opinion on an investment may rule out companies that became successful outliers.

Instead of relying on the investment climate or what others are saying, Jeff relies on conviction. “I’m only going to invest when I have super strong conviction. When I know I have super strong conviction, I’m not really that interested in what other people think,” says Jeff.

For more advice from Jeff Fagnan, listen to the full conversation here on the Spearhead Podcast.

In the interview, Jeff Fagnan and Cory Levy talk about:

  • Jeff’s start as an investor
  • What he’s learned about investing over the past two decades
  • How to cultivate a network
  • What every investor needs to have in order to be successful
  • And a lot more!

Show Notes

  • The show starts with Cory asking Jeff Fagnan about the first entrepreneur he ever invested in (1:50)
  • Cory asks, “What are some of the biggest things that you’ve learned investing over the last 18 years? Has it changed?” (5:01)
  • “I don’t get too caught up in market sizing because a lot of the things you do, you’re actually creating the market” (5:35)
  • Jeff discusses things that he’s learned recently about investing, including how he believes every investor can talk themselves out of a good investment (7:46)
  • After Cory asks Jeff what he would change over the past 18 years as an investor, Jeff reflects on a missed opportunity to invest in Dropbox (9:00)
  • Jeff shares how to cultivate a network as a new investor at (12:15)
  • “I think that you can only be an investor in technology companies if you’re intellectually curious, if you’re people curious, and if you’re really patient around seeing those results” (14:50)
  • Hear why Jeff believes in giving his friends a check if they are talented and working on something interesting, regardless of the industry, at (15:39)
  • How Jeff goes about saying no to founders (18:09)
  • Jeff has benefitted from utilizing mentors along his journey as an investor. He discusses the most impactful mentors he’s had and what he’s learned from them (19:39)
  • Cory and Jeff discuss the importance of developing an investment thesis as a venture capitalist (23:32)
  • The price of investing has risen over the past decade. Is it still a good time to invest? Cory asks Jeff at (26:35)
  • Show close (28:00)
Jeff Fagnan on Cultivating a Network, Focus, and Conviction

Spearhead Podcast – Elad Gil Show Notes & Transcript

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!

Show Notes:

  • 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)

Related Links:


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.


Spearhead Podcast – Elad Gil Show Notes & Transcript

Elad Gil on the Spearhead Podcast

“When you’re starting out as an investor, the most important thing is to be helpful.” — Elad Gil

When you don’t have a large check to write, or even if you do, you need to find creative ways to add value to a project. “People will make space for you if you’re really helpful,” says Elad. “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.”

On the first episode of the Spearhead Podcast, entrepreneur and angel investor Cory Levy speaks with serial entrepreneur, Elad Gil. Gil is a serial entrepreneur, author and investor who has helped companies from Twitter to Airbnb grow. In this episode, Cory and Elad talk about how Elad got started as an investor, how to help companies post-investment, proactive vs. reactive investing, how much time to spend with a team before investing, advice for founders who are interested in becoming angel investors, and more.

Elad became an investor after working with early-stage founders who would ask if he wanted to enter a round of funding. It can be difficult for an angel investor at the start to find their way into deals. For new investors, Elad recommends that each take three steps:

  • Be Helpful

Elad says that the top thing each investor should do when first getting started is to be helpful, even if there may not be an initial return tied to their investment of time and effort. “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.”

  • Reach Out

Successful investors find creative ways to make connections with companies they want to invest in. Elad advises new investors to reach out to offer help to companies and founders they want to work with. “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.”

  • Write

Elad believes in the importance of building a brand, and part of that effort is creating content that engages and provides value to a target market. In other words, Elad suggests blogging and creating content that showcases you as an investor worth working with. “I do think content and writing and blogging really helps people establish themselves as investors,” says Elad. “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…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.”

After establishing relationships with founders and being invited to enter a round, there is still a lot of work to be done for an investor. In the interview with Elad, Cory asks how often Elad meets with a founder before investing. In addition to meeting with the founder and CEO of the company several times before investing, Elad learned the importance of meeting with a group of founders at the same time. “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,” says Elad. “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.”

Before analyzing the founders of a startup, Elad carefully evaluates the market, which he believes is the single most important aspect of a potential investment. However, he doesn’t restrict himself to a single market. “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.”

Keeping an open mind has helped Elad enter into many profitable rounds of fundraising and learn from leading high growth tech companies. Elad recently published High Growth Handbook, which is a repeatable playbook that details the common patterns of the most successful tech companies he’s worked with.

For more insight from Elad Gil, listen to the full interview here on the Spearhead Podcast.

Elad Gil on the Spearhead Podcast

Say no to early liquidity

“Compound interest is the eighth wonder of the world; never interrupt it unnecessarily.” – Charlie Munger

Summary: Say no to secondary offers to buy your investments unless you can return your fund for a small piece of the stock. Instead, consider doubling down with your pro rata. Offers are a signal to hold onto the investment—not sell it. Selling early eliminates the startups at the head of the power law.

If an investment is doing well, people will try to buy it from you. Say ‘no’ unless you can return your fund for a small piece of the stock.

The market wants to steal your winners

The market doesn’t want your dogs, it wants to steal your winners before they’ve realized their potential.

Inbound offers are often from insiders with more information than you. Recently, investors in a unicorn got an offer to buy their stock at a $2B valuation. But the people making the offer secretly knew that the company was closing a round at an $8B valuation.

Offers are a signal to hold onto the investment—not sell it. The market thinks there’s upside in the stock.

Don’t kill the power law

Your strategy is to create a portfolio with a power law distribution. Most of your returns will come from a few outsized winners. Selling early eliminates the startups at the head of the power law.

The goal is to get one 1000x return in your portfolio. Getting a 20x return from selling early isn’t the plan. It’s okay if this startup goes to zero; there are other ones in your portfolio.

This strategy is ‘risky’. But that’s how you make money: with concentrated risk. You protect money with diversification in a large pool of safe investments—but that’s not how you make a lot of it.

So don’t sell on the way up. You don’t know how high it will go.

Sell if you can return your fund

You may want to sell ~20% of your stock if:

  1. You know the price is fair because you know a lot about the company,
  2. Other good investors are selling at the same time, and
  3. You can return at least 1x your fund and make your LPs happy in the process.

Learn more about this in Taking Money “Off The Table” by Fred Wilson.

Another strong reason to sell is if you’re going to take the returns and invest in more compelling startups.

If you’re tempted to sell because you want life-changing cash right now, consider waiting. If the market wants the stock now, it will probably want it later too. And they’ll pay more later if the company keeps doing well.

Double down with your pro rata

Instead of selling, consider doubling down with your pro rata. If you don’t have the money, you can always raise it with an SPV on AngelList if the company’s a winner.

You didn’t start investing to make a quick return, you’re investing to build monster franchises that help society and spawn new investment opportunities. Supranormal returns in venture capital are built with conviction and a steadfast grip on your winners. Hedging results in industry standard returns. Be bold.

Rebalance your portfolio at exit

You can rebalance your portfolio when the company goes public. Sell all your stock or hold on to some if you think the company is still undervalued.

If the startup is acquired by a breakout company, convert your stock into the acquirer if that’s an option and the price is right. The price is often right because it’s anchored on the breakout’s last round valuation, which is often undervalued in the first few rounds. Congratulations, you just got a free ride on a rocketship.

Disclosure: This is not investment advice—don’t blame us if you lose all your money with this strategy.

Thanks to the Spearhead team for feedback and ideas.

Say no to early liquidity

11 Angel Investing Lessons

In the words of Charlie Munger, investing requires a latticework of mental models. Here are 11 lessons to begin filling out your angel investing lattice:

  1. If you can’t decide, the answer is no
  2. Proprietary dealfow means ‘they want you’
  3. Investing takes years to learn, and longer to see returns
  4. Valuation matters
  5. Back $0B companies
  6. Judgment is important but overrated
  7. Invest only in technology
  8. Some of the best investors have no opinions
  9. Incentives make for bad advice
  10. Play fantasy football
  11. Power beats contracts

Details follow. Apply to Spearhead by Jan 26 to learn more about angel investing and get up to $1M to invest.

1. If you can’t decide, the answer is no

If you can’t decide on an investment, the answer is no. For practical purposes, there are an infinite number of investments out there, so pass.

That doesn’t mean you won’t regret it. But the next investment is just as good a priori.

Also, your experience and judgement is only going to get better by the time you see the next deal.

2. Proprietary dealflow means “they want you”

Nobody thinks they have a shortage of dealflow. The hard problem is getting your money into the startups you want. That means the company wants you over other investors. Without “‘they want you,” you will get cut out of good investments and end up with adverse selection of weaker companies. It’s okay to pass on investments, but you don’t want them to pass on you.

Missing out on a few investments can mean losing all your money because of the power law returns of investing. The top deal in a good portfolio of N investments returns as much as deals 2 through N combined. The 2nd best deal returns as much as deals 3 through N combined. If you miss out on the top deal because they didn’t think you were good enough, you’re going to miss out on most of your returns.

You never want to hear, “I will come to you if I don’t get money from Sequoia.”

3. Investing takes years to learn, and longer to see returns

Get started with angel investing now. It takes years to learn and longer to see returns. You want to invest in 30 companies at a minimum–that takes time.

You will start with small investments because your later ones will get better as you gain expertise and brand. That means your returns will take even longer.

It takes a long time to learn, but investing is one of the few professions where you can improve until the day you die.

4. Valuation matters

Valuations for pre-traction companies between 2005-2010 were $1-5M pre-money for the first non-friends-and-family round. Funds that invested during this time period made 4x-100x returns.

These valuations moved to $4-6M pre-money after 2010, with some demo days in the $8-10M range. This likely cut returns by 2/3 or more.

You can’t build a portfolio of pre-traction investments at $8-10M pre-money and expect to make a venture return. On occasion, you can make an exception, but you can’t do all of your investments at this price.

You will have to pass on great teams because the valuation is too high. You will have to pass on future iconic technology companies because the price is too high. But passing on a future iconic company at a $40M pre-money gives you the capital to take 10 shots on goal with unknown companies at $4M pre-money.

You can’t negotiate valuation unless you’re putting in one-third to one-half of the round. Or you’re the first check into the company. In this case, say “I like you but I can’t make the valuation work, but I would invest if the valuation were X.”

Despite high valuations, it’s still possible to make money in angel investing. If you can’t make money in tech, you can’t make money anywhere.

5. Back $0B companies

To quote Vinod Khosla, invest in “$0B companies that are worth $0B today but could be worth $1B tomorrow. Focus your attention only on companies with the potential for a 100-1000x return. Otherwise, pass.

Without these large exits, your portfolio will not achieve a venture return.

6. Judgment is important but overrated

Some markets are obviously bad and should be avoided. But judgment about markets is less important than you think, because there is so much luck and randomness involved. For example, companies can do hard pivots into new markets like Twitter, Slack and Instagram.

Judgment is not about doing a lot of research, digging and homework. By the time you figure it out, you will have missed the deal.

Instead, learn a few markets really well. Of course you will learn about new markets over time. But learn a few markets really well.

Buy all the products and try them. Find the best scientists in the market and invest in them. They can help you with research on your next set of investments. This is an unfair advantage.

You can’t read about new markets unless you’re reading research papers. Waiting to learn new markets by reading about it on TechCrunch is too slow. Start with research papers and then call the grad students who wrote them.

7. Invest only in technology

The best returns come from investing in technology companies. Avoid companies that don’t develop meaningful technology (either software or hardware).

The 5 largest companies in the S&P 500 (Apple, Google, Microsoft, Amazon, and Facebook) are all technology companies. The largest private companies are also technology companies.

There are exceptions like Dollar Shave Club. Their early investors had good returns. But you should only invest in technology as a rule of thumb.

8. Some of the best investors have no opinions

“I have no idea what’s hot. But I’m certainly always listening. Big Dumbo ears. Just listening.” – Doug Leone, Sequoia

Some of the best investors on the planet have no strong opinions about a particular business. They try not to project into the future, so they can listen intently in the present.

Almost any entrepreneur will be smarter in their market than an investor. The investor’s job is to listen and have intuition about whether the founders are smart, honest, and hard-working.

These investors don’t fall in love with the business. When it comes time to do a new round, they re-evaluate the business from scratch and ignore sunk costs.

If you’re thinking about all the great things you could do if you were running the business, you’re going down the wrong path. You’re not running the business.

If you are telling the entrepreneur what to do, don’t invest. Thinking like an investor is different than thinking like an entrepreneur who is determined to make a business work.

9. Incentives make for bad advice

Incentives influence the advice you get from VCs, lawyers, incubators, and us. Everyone serves their own interests first. The best source for angel investing advice is other angels and founders.

People are generally well-meaning but, in the worlds of Upton Sinclair, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

10. Play fantasy football

Build your instincts by looking at startups without investing. This will build up your instincts, which are what you use to make investment decisions. And you need a lot of data to build up your instincts.

In the old days, you had to work at a VC firm to see dealflow. You had to make a few investments and lose money before getting good judgment. John Doerr famously called this “crashing a fighter jet.“  First you lose $25M, then you have some judgment.

Now you can get judgment without crashing the fighter jet. You can see dealflow from your friends, your incubator, demo days, and AngelList. Write down what you like and dislike about each deal and see how your judgment develops over time.

11. Power beats contracts

Contracts can be renegotiated. You will be pressured to renegotiate your investment if you don’t understand power.

Contracts are written for worst-case scenarios, so people can’t outright steal your money. You’re not going to sue someone over a contract because suing people is bad for your dealflow. Real-world decisions are usually based on power.

If you’re the only seed investor in a round, you can get screwed. There aren’t enough co-investors to make a ruckus if the company wants to:

  • Recap the company and start over
  • Raise the cap on your convertible note
  • Give your pro rata to a new investor

If you’re alone, you don’t have the power to fight back. The startup and their new investors can pressure you to renegotiate. So don’t be a herd animal when making an investment decision, but move with a pack when you do.

Apply to Spearhead

Apply to Spearhead by Jan 26 to learn the craft of angel investing, get up to $1M to invest, build a network of angel-founders, and get mentorship from top angels like Yanda Erlich, Tom McInerney, Elad Gil, and Naval Ravikant.

11 Angel Investing Lessons