How Dave Eisenberg earned an allocation in PayJoy’s USV-led Series A

Inside the Deal is a series where we interview the syndicate leads and entrepreneurs behind some of the most high-profile, invite-only deals on AngelList.

In this interview with Dave Eisenberg, CEO of Floored and co-founder of Red Swan Ventures, we go inside his investment in PayJoy, a consumer finance platform for the next billion, to learn:

• How he earned an allocation in PayJoy’s Series A with Union Square Ventures
• Why he’s investing with AngelList instead of raising a new fund
• Four reasons founders should consider working with syndicate leads

Julie Ruvolo: PayJoy just closed an $8.5M Series A led by Union Square Ventures, and another $9.5M in debt vehicles. You had an allocation in that round, but also led PayJoy’s prior round in December 2015 through Red Swan, your VC firm with Andy Dunn. How did you get into the deal?

Dave Eisenberg: PayJoy was a referral from a fantastic investor on the East Coast named Spencer Lazar of General Catalyst. He said it was an incredibly strong team — and a really big opportunity to bring modern, digital devices, starting with smartphones, to the low-income, unbanked part of the population, by extending credit lines for people to pay down their smartphones. PayJoy makes a very expensive purchase affordable with a pay-as-you-go plan. They can beat these short-term loan shark types by an order of magnitude in pricing.

Mostly, we invested in PayJoy because of the team. We came up with this framework at Red Swan that we run through with every team we meet called MATE, which stands for:

• The Magnetism of the entrepreneur to recruit people and capital
• The Authenticity they have to the mission of that particular business
• Their Tenacity
• Their ability to Evolve the idea as they learn more or as their fundamental assumptions are questioned

The PayJoy team was off the charts in all those dimensions. There was never a doubt that I would participate in PayJoy’s following rounds, because I’ve seen them operate for the past 12 months. And to see a tier-one investor like USV invest, even when the data is still early about the business, was just awesome.

How did the you pull the round together on AngelList?

[PayJoy CEO] Doug Ricket called me when he was thinking of raising a Series A, and we made some introductions to all the funds we thought would have a fit with mobile, fintech and mission-driven founders. He got a term sheet from one fund, then he got one from Union Square Ventures.

Once that happened, I knew that there would be tons of demand. In this case, the whole round was meaningfully over-subscribed. You’d have to ask Doug. It was possibly 2X or more over-subscribed.

That’s awesome.

Yeah. Basically, at that point, the founder is in total control over who they want to let into that round. It was a bit of a reward to get an allocation in the A. I think Doug was keen to get me involved because we had been a really strategic partner during the first year or two of the company, in the seed/building stage.

PayJoy is a really interesting deal, because they are clearly going after the next billion, which a lot of Silicon Valley investors would reject up front as an “unattractive demographic.” They are helping the next billion get online by extending them credit lines to pay down their smartphones.

Then again, I’m not surprised that USV invested, because of Fred Wilson’s views on the second smartphone revolution in emerging markets. In Latin America, for example, where half the population is offline and unbanked, fintech is the biggest category of VC investment, and it’s hard to find a deal where there isn’t also some kind of impact on social inclusion, inadvertent or direct.

There’s a direct line that you can draw from just putting the internet in the hands of PayJoy’s customers, to them being able to create economic opportunity for themselves.

The internet is an incredible economic transformation engine. PayJoy is all about bringing mobile internet, the smartphone, to all the people in the world who don’t have it. To do that in an economically viable way is something that’s attracted the attention of all the major carriers [telecom giant Orange invested in PayJoy’s Series A].

Doug spent several years bringing energy to some of the poorest parts of Africa before he started PayJoy with Mark Heynen and Gib Lopez. The idea was born out of seeing how transformative it was for entrepreneurs to get a smartphone and get online.

His vision is absolutely to take this worldwide, and to take it to products beyond smartphones. That is something where, given the technical expertise of the team, coupled with their life experiences and their vision for the platform, even if a competitor were to emerge who was formidable, I’d still bet on this team versus any other team in the world on this particular problem.

Even if a competitor were to emerge who was formidable, I’d still bet on this team versus any other team in the world on this particular problem.

Speaking of teams, you and Andy Dunn go back to the early days at Bonobos, and you’ve been investing with him since you started Red Swan in 2010. How did you guys decide to start investing together?

One of the interesting things that had happened at Bonobos was that we started getting pings from other really talented people who were thinking of starting ecommerce companies in New York. We were like, “We can help these people out, because we’re learning it as we go, and we can help them avoid our mistakes.”

We said, “What if we present interesting companies deal by deal as they come along, back to a group of angel investors who we know? And each of us put in a few thousand dollars ourselves?” That was a stretch for us — Andy was in a bunch of student debt, and I had no savings whatsoever.

Our first few deals, people were like, “If you guys can keep bringing this to me, I’m going to keep investing with you.” Little did we know that the syndicate structure pre-AngelList was going to cause huge amounts of legal and operational complexity down the line. So I was very primed to understand the value proposition of their syndicates product, because I’d already done it pre-syndicates, and I knew how many pain points there were.

I was very primed to understand the value proposition of their product, because I’d already done it pre-syndicates, and I knew how many pain points there were.

This idea of entrepreneurs who are actively practicing the CEO or founder role and see other entrepreneurs who they would love to back became the thesis behind Red Swan, which went on to be a series of dedicated funds — almost $20M AUM over the period of about five years.

The reason I moved my investing activity to AngelList syndicates is that our last fund was doing extremely well, but one of the challenges of being a CEO and doing investments out of a fund structure is that, if you do well, the expectation is the fund will grow. Our fund was a $10M fund, so the expectation was that it would become a $20 or $30 or $40M fund. That becomes unsustainable from a time split: we were splitting a fund across three part-time CEOs and one full-time junior guy. It was plausible that we could do what we were doing, but to expand from there was really going to be a really tough sell.

With Red Swan we tried to average about $250K into every business. With the syndicates product, I can go as small as an $80K or $100K investment, or I recently scaled up to a million dollar investment into a late stage Red Swan portfolio company. That’s the type of deal that would have been impossible for me to participate in from the dedicated fund structure, but the syndicate structure gives me a ton of flexibility.

I think I’ve done four deals in the last few months.

And now you’re basically syndicating the deals you would have done out of a Red Swan fund IV on AngelList.

Red Swan was my primary investment vehicle for about six years — we invested in over 50 seed stage companies. And I continue to manage Red Swan, even though we are now in maintenance mode.

I’m excited that I can now migrate my new investment opportunities to my AL syndicate. I did my first syndicate in a deal Thrive Capital invested in last year. That was the first time I actually ran the process. I think I’ve done four deals in the last few months.

How are you using the syndicates product?

I’m not dogmatic about who can or can’t get into a syndicate. What I’m trying to do is match the urgency of how fast the round is coming together with the size of the allocation, the business and the right investors. I’m perfectly happy to pull together people who want to do $5 and $10K investments, if they intend to participate in more than one investment over time, and if they’re passionate about what the company is doing. AngelList makes that possible now for every single startup.

But I’m also not trying not to bother folks who deploy capital over fewer bets that are more concentrated, or like to invest in funds directly. I went out to those folks when I had a much bigger syndicate, for the $1M investment I made in Modern Meadow.

Have the AngelList affiliated funds gone in on any of your deals?

The funds have gone in on most of my deals.

What is it like working with them?

I really enjoy working with the funds because they’re sophisticated. They move very quickly, and they’re very clear about — The one time they did not participate in my deal, they were very clear about why.

That is powerful, as a syndicate lead, because it’s something that you consider when you’re talking to the company. If you know the funds are not going to be participants, you need to know that you’re going to be able to fill the syndicate with your other backers.

The one time the funds did not participate in my deal, they were very clear about why.

I definitely don’t believe that it’s a “zero effort” sort of thing to be a syndicate lead on AngelList. You have to cultivate your backers a bit, and sometimes, you actually have to hustle. One of the reasons why I like having the AngelList funds look at the deal in front of my backers is that sometimes I need to know how much I’m investing within 24 or 36 hours. It’s hard to give people that short of notice if you’re going to open it up to a broad audience.

The people who are used to making decisions that fast have their own set of criteria. Those are the people who I go to when I need a super-short turn around, because I want to fill every allocation I get. I never want to fall short of that. I like to pre-vet the deal with the funds as to how much demand there is, so I’m not in the situation where I’m guessing what I’m going to be able to fill.

How do you explain AngelList when you’re talking to other founders? What are some of the challenges around explaining how you use it?

To founders, it’s a pretty simple pitch from me:

One — This allows me to invest in your company in a way that I couldn’t before. I either didn’t have the funds, or it was out of the fund’s mandate, so this is a way for me to get involved.

Two — This is a way for me to get involved very flexibly, whether this is the last $100K that you need filled, or whether you need an early commitment for $250K.

Three — AngelList allows some scale. To the degree that I’ve got pro rata in most of the investments, as companies continue to grow and to scale, this is the only vehicle that allows me to easily scale up and participate with them.

Four — You can use AngelList as a marketing platform, to market yourself to high profile people who are on the platform, and to funnel small angel investors who you would not want bloating your cap table. Let’s say you have 10 people, each of whom wants to put in $5K. It’s really hard to do that without someone gathering and organizing those people, so there’s all the logistics that AngelList simplifies.

As far as disadvantages go, just explaining AngelList, a lot of people think that they have to put all of their information out there publicly, which is a total impossibility for most founders. Just explaining the syndicates, how it works and how the deals are done where you don’t have to expose any confidential information — I think that’s the major challenge, and the opportunity, in explaining AngelList.

Originally published at blog.angel.co on July 12, 2016.