Startup Investing in the Golden Age of Fraud

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I believe we are in a tech bubble. The Nasdaq, driven primarily by 5 companies (FAAMG), is up more than 209% ahead of the increase in the Dow over the past 5 years. By comparison, in the 2000 tech bubble, the Nasdaq only ran about 100% above the Dow at the peak. Big tech multiples aren’t quite as high as near 50 during the 2000 bubble, but they are 80% above recent historical multiples at around 35 times earnings. We have the return of day trading by retail investors similar to 2000, driven by Robinhood and social media influencers like Dave Portnoy.

We also have case after case of multi billion dollars frauds being exposed from WeWork, to Luckin Coffee, to Wirecard. They make the Theranos fraud look small by comparison. We haven’t seen so many large frauds exposed since the last bubble burst and Enron, Worldcom, and Healthsouth collapsed. Famed short seller Jim Chanos, who won bets against Luckin Coffee and Wirecard recently, has called this the Golden Age of Fraud. All the warning signs are there. So why invest in early stage startups, which are the most risky type of tech investment.

That seems crazy. But it’s not. Here’s why. When you invest in early stage startups, you are investing with a long time horizon into the future. You are also betting on management to execute for many years in the future. What’s happening today in the markets for later stage and public companies has a lot less impact on early stage startups than many people think. The public frenzy and high valuation of exits increases investor interest, but it isn’t going to change much about the long term value of these startups. Most of them will fail because management couldn’t execute, not because the markets changed. They will succeed because they have outstanding management. Google was founded in 1999. The timing couldn’t have been worse. But it was the greatest startup success story of the past 20 years.

It’s true that a crash in the tech bubble would make large exits in the short term less likely. But it would also make it harder for competitors to get funding. Many companies that are poorly run and kept alive with dumb investor money will disappear, clearing the field for better run companies that can survive with less outside investor funding. Great employees will be easier to hire and retain. Dropbox was founded in 2007, right before the 2008 crash. Uber was in March 2009, the month that markets bottomed after the crash. Their timing, which was terrible for exiting, was actually great for scaling their businesses. They had an open field to execute.

Having said that, the worst part of startup investing is the lack of information and the high uncertainty. As an angel investor, you can reduce both of these by working with great people, now often called syndicate managers. Though I did well with my own startup investments before shifting to investing through syndicates, I spent way too much time on it and did not have anywhere close to the same quality of deal flow or information as working with a great syndicate manager. But all syndicate managers are not equal. Most of them are not up to the job. They are not experienced or not qualified to understand what’s involved with taking investor money as a fiduciary. There are several thousand syndicate managers out there in the startup world right now. Like in any distribution, most of them are not very good. You want to pick the few that are the best of breed. Track record is one thing. But in startups one lucky investment can make your track record look better than it really is. Also, sadly, many people lie about their track record because it’s hard to verify.

So you have to look at the syndicate manager process, not just track record. A good process to me is more important than a track record because it is a leading indicator, as opposed to a lagging indicator, of success. Track record tells you the past. Process tells you the future. Startups are about the future.

A good process is transparent. The syndicate manager gives you full access to the startup management, the metrics of the company, their vision and road map. Conflicts and legal issues are disclosed up front clearly and in writing. Investors receive updates from the companies or the syndicate manager on how they are doing at least a few times a year. Reasonable questions are answered. Also there is discipline about what companies are selected. My rule is not to invest in anything that doesn’t have strongly defensible, proven technology, such as in health tech, has at least a $500K recurring annual revenue run rate, or if it’s transaction revenue at least $1 million of net revenue (this is different from bookings).

I’ve made 48 angel investments since 2012. I’ve only had three deaths so far. I possibly have one unicorn. 20 investments exited profitably. One of the best syndicate managers I’ve found, both for track record and process, is Jason Calacanis. His Launch syndicate is outstanding in all respects from my experience. I’ve made 11 investments with Launch so far. Jason and his team are diligent, thoughtful, professional, responsive, and super smart. Everyone knows Jason invested in Uber, but not everyone knows he has the best investment selection and management process in the syndicate industry from what I’ve seen.

I also want to shout out to a lesser known, up and coming syndicate manager, Bioverge, run by Rick Gibb and Neil Littman. They focus entirely on health tech investing and have a similarly strong process in the very tough space of health tech investing. It’s a specialized field. So I don’t recommend investing in it unless you are doing it with experts who have a solid process. Bioverge is the best I’ve seen so far.

Be careful out there. Investing is always risky. In a bubble, it’s riskier. Startups are always risky and most of them fail. But working with the best people, who have the best process, can improve your odds of success dramatically.

Christopher Grey is an active angel investor, co founder and COO of Caplinked,, tennis player, and dad.

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