How to Angel Invest Like the Best featuring Jason Calacanis

Jason Calacanis joins Nick to discuss his new book and his secrets to successful angel investing. We address questions including:

• Why Jason wrote the book
• What drives him to continue angel investing after all his success
• His thoughts on angels that make large investments during their first year of angel investing
• His focus on finding 5,000x returns and his response to those that say he is discouraging innovation w/ this approach
• How he thinks about the economics and business model of early-stage businesses in nascent markets
• If he takes a contrarian or adversarial approach with founders
• His thoughts on the original Sequoia scout program and the many similar programs today
• How he does such high volume of investments when he insists on spending hours with every startup founder that pitches
• If he’s really investing at the angel round when it seems that he’s been targeting post-seed
• His response to those who claim that VCs get access to all the best deals
• His strategy with his angel list syndicate and the types of deals he’s looking for

Below are key takeaways from the interview…

1- Wealth creation in the 21st Century

Conventional wisdom in the 20th century, for those that grew up in the 70s, 80s, and 90s, was that the best way to create wealth was to get a white collar job. Become an attorney, a doctor, an accountant or an IT specialist and make a salary of $100k+. Then one should buy a house and save their money. Don’t go out to eat, pack your lunch, don’t buy your coffee and retire with a few million dollars. But, in Jason’s estimation, this formula no longer works. He cited the changes in real estate value. In the 20th century, homes were 1–2x your household income. Now, if you live in a nice area, the home prices are often 5–10x of one’s household income. Using one’s personal real estate to create wealth is no longer viable.

And Jason mentioned the conventional wisdom from books like rich dad poor dad and secret millionaire on the block, approaches that just don’t apply anymore. According to Jason, the method for creating real wealth in the 21st century will look much different. He believes that wealth creation will come from investing in early-stage tech. And Jason himself came from a lower middle-class upbringing in Brooklyn. He hopes that others can get smart on angel investing, like him, and can move from poor to rich, from middle-class to rich, from rich to ultra-wealthy.

2- No Gamble No Future

It’s important to mention that angel investing is not for everyone. Most people’s brains are not wired to take this type of risk. This is not a normal pursuit. The majority of investments often fail. However, if you are wired for this and you want to learn, Jason recommended to make small investments in 10–20 startups. What was not previously possible is now possible via syndicates. Angels can find these syndicates on Angel List, Funders Club or Seed Invest. He suggests that new angels only invest via syndicates. And to start out w/ four-figure investments but act as though they are five-figure. Amass a diversified portfolio in the first couple of years and get involved. The most successful angel investors, figure out a way to drive value for the startups they invest in. And he reminded investors not to sweat the small stuff. If you’re angel investing, you understand that a high percentage are going to fail… so you need to let some investments fail and then you move on.

Finally, Jason called attention to Access. We’ve discussed this on the podcast before in the tip of the week, Access is Everything. Jason said that getting access to the best deals is one of the major challenges. How can an independent angel get into Robin Hood’s seed stage round? From his standpoint, they can either build their brand and earn access to the best deals or they can invest via syndicates where the lead performs that function and provides access to their members.

3- The Columbo Approach

When evaluating startups for investment, Jason likes to ask very basic questions and listening intently to the answers. He prefers short, open-ended questions. And looks for incredibly considered, intelligent, passionate and thoughtful. In Jason’s experience, founders must be super thoughtful and tactical these days to be successful.

So, pre-investment, Jason has a small mouth and big ears. Examples of questions include:

What are you working on?
Why now?

Every founder should be able to answer the Why Now question. What technology and market factors currently exist that are creating this opportunity. Leo Polovets wrote a fantastic article on simple, open-ended questions called Why you? Why this? Why Now?

And some red-flags that he looks for include:
-If a person can not tell you about their customers, there is something seriously wrong.
-Also if a founder lists eight different ways they’re going to make money, he thinks it’s unlikely that they’ll make any money

Now, after he’s made an investment, his interaction changes. He now insists that founders sends a monthly update. And he asks one or two questions per update. Jason is careful not to tell founders what to do, rather ask them how they’re approaching X.

It’s really a matter of asking the right, thoughtful questions. If Jason is confused or curious about their location strategy, he will ask how they decided to launch in certain locations.

Other question frameworks include:
“Have we thought about _____?”
“How are we approaching ______?”
“Have you considered ______?”

There’s a smart way to call attention to a focus area. And giving directives is the worst approach. There are many ways to run a business and he doesn’t want entrepreneurs appeasing investors instead of focusing on customers.

4- The Goldilocks Zone

Jason has witnessed a growing opportunity at the Seed+ or Post-Seed stage. Startups that have raised a pre-seed/angel and seed round but are not yet ready for A. They’ve eliminated a ton of risk. In many cases, these companies have hit $50k-100k in MRR an amount that’s no longer high enough to trigger a series A. In Jason’s estimation, there are not enough Series A firms out there to serve the number of strong companies. So the bar has been raised for an A and the gap between seed and A has widened.

This is the definition of the Series A crunch and it’s created a major gap in the market. It’s allowed firms like Bullpen Capital to carve out an interesting niche, specializing in the post-seed round. Because there’s so much opportunity here for de-risked companies at favorable prices, Jason is now seeking out investments in the “Goldilocks Zone,” as he calls it.

5- Expanding Scout Programs

For those that aren’t familiar, Sequoia launched their scout program in 2009. In this program, they provided capital to angels and encouraged them to make investments. These angels would find the early-stage startups to invest in and split the economics with Sequoia. This provided Sequoia and inside-look into many hot, emerging startups. And they’d be positioned to lead the A or B round in those that showed the most promise.

Jason was the first scout for Sequoia when they launched the program. And it was a program that worked well. Their only requirement was that Jason write deal memos for each investment… a practice that becomea valuable exercise.

Today, a large number of firms are launching their own scout programs. Some via lead angel investors, many by taking LP positions in early-stage VC funds. Jason said he learned a lot from the program and thinks it’s not only wise, but maybe their only strategy for getting involved early.

When a firm has $500M under management, how can they deploy 50k checks? Large firms are not equipped to do high volume, small investments. It’s far too much work and it won’t move the needle. But, they can get involved in early opportunities by investing in the funds that specialize in early rounds.

There is even a parallel in the LP-GP market. Many LPs that typically invest large check-sizes are beginning to take pilot positions in small funds. Their goal here is not ROI. Even if these funds return 5x, it won’t move the needle for a large Fund of Funds. Rather, they are buying an option. In a way, this is their own scout program. They can monitor emerging fund managers and secure their spot in future, larger funds.

To hear the answers and the full interview, check out The Full Ratchet