How to Invest in Technology Startups, Jason Calacanis (8/10)

A comprehensive playbook for anyone looking to invest in early-stage companies

How to Invest in Technology Startups, Jason Calacanis (8/10)

Rating: 8/10
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🤔 Pre Read Exercise: What Do I Know About This Topic/Book?

I’ve been investing in start-ups for quite a few years now - either directly or indirectly through the companies I’ve worked for or that I’ve advised. The early-stage start-up investment landscape is one which I am therefore relatively well-versed in and familiar with. I’m also a longstanding fan of the author, Jason Calacanis, who is a serial investor in early-stage companies. He’s got a few podcasts that I love listening to, and feel I already know a lot of his perspectives and strategies to business, angel investing, and investing in general.

🚀 The Book in 3 Sentences

  1. A comprehensive playbook for anyone looking to invest in early-stage companies
  2. The author, Jason Calacanis, is a serial angel investor and shares his personal strategies and advice for anyone looking to start angel investing
  3. While the book is targeted at novice angel investors, there’s a lot of advice for more experienced investors too

🎨 Impressions

I didn’t initially expect too much from this book. I thought a lot of the value might have been drained by virtue of the fact it’s designed for the mass market. But I stand corrected. The author, Jason Calacanis, outlines a very comprehensive playbook for anyone looking to invest in early-stage companies. The chapters in the book seamlessly lead into one another, each one building upon the last, to create a step-by-step guide on how to become an angel investor.

Each chapter contains a trove of actionable tips backed by Jason’s real-world experiences. The book isn’t just for those looking to make their first angel investment; it would also be valuable for someone who is experienced and has a large portfolio of investments. The tips, therefore, apply throughout the investment life cycle.

Jason himself is a straight shooter. He’s the kind of guy you’d be happy to grab a drink with, and this is reflected throughout the book. His unique sense of humour shines through, clearly influenced by his New York roots, and makes this a light and fun read.

This book ins’t similar to a typical business book. It doesn’t try to explain any theory or management or business strategy. It’s more of a crash course in why you should start investing in early-stage start-ups and how you should do so.

I found the book entertaining and insightful, and a useful framework to begin investing in more start-ups myself. It also painted a clear picture to me around just how much time and effort must go into the angel investing process if you want to be successful. The potential gains you could generate through angel investing, which are superior to the gains you would expect by investing in an index fund, only come through hard work, grit, and some luck.

🔍 How I Discovered It

I’m a longstanding fan of the author, Jason Calacanis, and have been subscribed to a number of his podcasts for years. It’s also highly rated on Goodreads and a few friends of mine have read it and recommended it to me.

🥰 Who Would Like It?

If you have any interest in start-ups, how start-ups get funded, want to be an angel investor, are already an angel investor, or want to start a company and understand how angels invest their money, this is an excellent book.

đź“’ Quotes + Notes

Startups will also eliminate millions of jobs in which humans get paid to stand behind a counter and repeat back your seven precious little instructions on how to prepare your morning libation, before pressing one button and masturbating a milk-frothing pitcher for two minutes.

If you learn anything from this book, it’s that you must take risks as an angel investor and in life if you want at least the chance of an outsized outcome.

I’m going to reveal every unfair advantage I have developed in the coming chapters so that you can deploy your money intelligently, or perhaps just more intelligently than everyone else, which, if you’ve ever won at poker, you know is the key to success.

If you’re not able to get along with a wide range of people or find it uncomfortable to hear people drone on and on about how they’re going to change the world and everyone else just doesn’t get it, then this is absolutely not the job for you.

As an angel investor, you’ll have to deal with people who are passionately stubborn and insist that the world change to fit their unique vision.

Some folks call these people visionaries, but that’s only after they’ve made a ton of money and launched products that people can’t live without. When you meet them, they’ll be just starting out and people will refer to them as assholes, narcissists, and nutjobs.

We live in a world full of network effects. The nodes in the network here in the Bay Area are the investors (angels, incubators, and venture capitalists), founders, service providers (colleges, lawyers, headhunters, and banks), and the talent pool (developers, designers, and marketers).

The number of folks rooting for and directly helping the startups you invest in will be a thousand times more in the Bay Area than anywhere else. The greatest product Silicon Valley ever built was Silicon Valley—which, generation after generation, reinvests in and propels itself to ever greater levels of efficiency.

Bootstrapping has its origins in nineteenth-century America, when people talked about using the straps on the back of their boots to pull themselves over a fence.

When I meet someone who is going into debt to self-fund their startup I get worried—especially if they have a family. In my mind, if you have a family to take care of and you put them at risk to pursue a startup that you can’t build with sweat equity, bootstrapping, using your friends’ and family’s money, or raising money from a professional investor, you are, in all likelihood, insane.

I mean, if you’re only investing in your own startup because the hundred other investors—who are more experienced than you and do this for a living—passed on your vision, and you’re willing to risk your entire family’s future, you’re basically saying that everyone in the world is wrong.

As an angel investor, your job is to provide a combination of money, time, network, and expertise to startups in order to “get on the cap table.”

You can pay me back for sharing all these secrets, collected over years and written over six months, by taking these techniques and delivering massive returns. If just one of you becomes a billionaire, centimillionaire, or decamillionaire because of this book, it would please me to no end. When you do, invite me on your private yacht and let’s eat some expensive surf and turf and toast to the fact that you were too scared or oblivious to allocate your time correctly until you read my words.

Carry is short for “carried interest,” and it’s defined as the share of profits that go to the fund manager—in this case called the syndicate lead. The term dates back to the sixteenth century, according to the Wikipedia entry, where captains of ships would charge merchants 20 percent of the profits from cargo that they took the risk and effort to “carry” around the world.

That’s why I advocate that new angels do ten small angel syndicates before they start doing direct investing. Beyond the very real chance of getting a positive return on your investment, if you do this hack, you will build your reputation, have a chance to prove your worth to founders, and jump-start your network—all for the bargain price of $25,000. That’s only 20 percent of the cost of an MBA and you can do it in a month!

When you visit the various sites offering syndicates and browse the deals, I suggest looking for these basic characteristics:

  1. A syndicate lead who has been investing for at least five years and has at least one notable, unicorn investment
  2. A startup that is based in Silicon Valley
  3. A startup that has at least two founders (with two, you have a backup in case one quits)
  4. A startup that has a product or service that is already in the market (you’re not qualified to invest in startups that haven’t released their products—and frankly you don’t need to take this risk)
  5. A startup that has either (a) six months of continuous user growth or (b) six months of revenue
  6. A startup that has notable investors
  7. A startup that, post-funding, will have eighteen months of cash remaining, commonly referred to as runway (ask the founder and syndicate lead how many months of runway they will have post-funding)

For all ten of the startups you select, you need to write a “deal memo” explaining why you’re investing, what you think the risks are, and what you think has to go right for the startup to return money on your investment.

You will review these deal memos every time the startup raises a new round of funding so that you can test if your original thesis still applies. What you’ll undoubtedly learn is that no one knows exactly how or why a startup breaks out, but there are trends—especially in how you think.

For every startup you didn’t invest in, write clear notes on the reasons why you passed. You will look back on these notes and learn exactly how bad you were at this, and over time see how much better you’ve gotten.

Even when you are investing in a startup via a syndicate, I recommend you meet in person with the founders at least once—if not twice. Visiting their office, even if it’s a dump, is advisable.

When I get an email, I never go straight to the meeting. I ask how many full-time employees they have, how much money they’ve made, their funding history, how they acquire customers, and why they are building this business. The FTE and money-raised answers tell me what their burn rate is and how much they have left in the bank. Most founders think I’m psychic when I tell them these numbers, numbers they haven’t shared with me!

You want to have big ears and a small mouth in these meetings. You want to ask concise questions that take no more than a couple of seconds and then listen deeply to the answers, considering them with every fiber of your consciousness as you write your notes on paper—just like Columbo.

You want to be Dr. Melfi, Tony Soprano’s therapist, sitting patiently while the passion and pain pour out from the boss you’re meeting with.

It’s your job to understand just how much crazy a founder should have. It’s sort of like being a rock star, where you need to be punk rock and take a ton of drugs and trash a bunch of hotel rooms, but not so much that you OD and die or get arrested. Just watch Aldous Snow in Get Him to the Greek and you’ll understand.

In my experience, getting in too early is the cardinal mistake of new angel investors. Here is what I see in the market—back of the envelope—and it should give you pause:

  • 99 percent of people who write an idea on the back of napkin never do it.
  • 95 percent of people who write a business plan never execute on it.
  • 90 percent of people who build a prototype never build an MVP.
  • 80 percent of people who build an MVP never do a beta test.
  • 80 percent of people who do a beta test never incorporate.
  • 95 percent of people who run a successful beta never raise money.

Now, put all of those percentages against an 80 or 90 percent mortality rate of startups that do raise money and think about whether you want to give your cousin’s friend $25,000 to build their prototype or MVP.

The easiest way to understand what a deal memo is, and why it’s important, is to discuss the greatest deal memo ever publicly released: a young Roelof Botha’s passionate, and well-reasoned, plea to invest in a video startup that was burning money, had come after a dozen previous failures doing the same thing, and had massive legal risks.

Like snowboarding, poker, kiteboarding, and love, there is a ramp-up time to understanding that the long-term payoff comes from going through the pain. The greatest love story of your life—I’m going out on a limb here—probably had its ups and downs, but the people who stick with it are often rewarded the most.

I believe that angel investing 5 or 10 percent of your net worth is a worthwhile pursuit, perhaps even 20 percent if you’re a younger person with a steady income stream. The key is to deploy it intelligently.

If you’re worth $5 million or $10 million and plan on putting $1 million into angel investing, that’s 10 to 20 percent of your net worth. If you lose it all or make back half, you’ll be fine. If you go five or ten times cash on cash, you can double your net worth—all while learning a lot.

However, remember that we want your first ten investments to be $1,000 syndicate-level swings at bat so you can learn at the low-stakes table, where mistakes aren’t devastating. After that, in this book, we talk about making twenty $25,000 bets and quadrupling down on the winners with a $100,000 follow-on investment. In this model, no one investment is more than 12.5 percent of your angel investing portfolio, which in turn is only 10 to 20 percent of your overall net worth. That makes no one investment more than 1.25 to 2.5 percent of your net worth.

You don’t need to win every pot. You don’t need to win every day. You do need to win in the long term. Think about angel investing as a decadelong pursuit.

Angel investors have been able to access these deals much more easily and I have taken advantage of the opportunity to diversify my holdings from time to time. If you have a winner and it’s surging, it’s tough to sell knowing that your equity is likely to grow. But taking 10 or 20 or 30 percent of your winnings off your table at a high-enough price and putting it back into your portfolio will almost always help you sleep better.

There are dozens of theories about why startups succeed, from “It’s all about timing” to “You’re investing in founders” to “It’s the market that makes the startup. It’s essential for us humans to build unifying theories for complex and random systems because we’re scared little bugs counting the days before our death while sitting on a random rock orbiting one of a trillion suns in a random universe that we know so little about. We create frameworks for everything from the meaning of life (“It’s all a big nothing.”—Livia Soprano). Remember, we have more blind spots than we do clear vision, so you must unlearn what you have learned to be a successful angel.

Even the OJ jury, after doing tequila shots for hours in the hot sun, wouldn’t side with the investors—unless they were presented with massive undeniable fraud. So, the only motivation a reasonable investor would have to sue a startup they invested in is if they felt they were intentionally duped. This is why due diligence is important, especially in later stages when there is actual data that can be verified.

Make an x axis and y axis and name them “intensity of pain” and “frequency of people experiencing that pain.” In the top right, you have things that are very painful and that you experience all the time; in the bottom left you have things that are not painful and that don’t happen that often. Then there are things that are very painful and infrequent or not very painful but very frequent.

There is a simple tool for figuring out how delightful a startup’s product is. It’s called NPS and it stands for Net Promoter Score. You’ve probably taken an NPS survey before. An NPS measures the willingness of customers to recommend a company’s products or services to others. Smart founders use the feedback from NPS surveys to improve their services and maximize their growth

Lucky people surround themselves with the most successful people in the world and take chances. It isn’t hard or impossible. It just takes work. Do the work. Trust me, just do the work.