TWiST LAUNCH Incubator series #3 — Gil Penchina & Steve Huffman get down to brass tacks from both sides of entrepreneur/investor table

Gil Penchina, Steve Hoffman

On the third show from the LAUNCH Incubator series (links to audio, video) we have two exceptional, well-known guests in the industry.

The first is Gil Penchina, who runs the largest AngelList Syndicate & a multitude of investments, providing colorful insights on how to deal with investors, how to get meetings and why he won’t probably meet up with you, unless you’ve put in the work. Always a pleasure to listen to Gil.

The second guest is Steve Hoffman of Reddit fame who reveals how the landscape for startups has changed over the years, his top tactical challenges today, what he looks for in funders before investing, and much more.

Quote of the episode by Steve Hoffman: “You must be arrogant enough to be willing to succeed and humble enough to give up when it’s failing and it’s time to move on”.

Forget to subscribe to the ThisWeekInStartups podcast on Itunes at your own peril.

Gil Penchina and syndicates

• Gil Penchina is one of the most successful angel investor and the #1 syndicate leader, his syndicate has more followers than Jason’s
• He started his syndicate cause Navel from AngelList told him he should do one
• He now runs a dozen syndicates, the biggest can raise 5 million dollars (he invests 25k dollars in every startup)
• He has several themed-ones: late-stage, SAAS, bitcoin, fintech, adtech, launching marketplaces ones
• In 2014 they put 8 millions in it, 2–3 millions a month
• His great vision: building a “Fidelity meets Andreessen” (like 50 Andreessen: each of them will be competing with any other VC fund out there and they will be sector focused, stage focused, personality focused and if you want to start your syndicate they’ll help you manage it)

Differences between syndicates and VC

• Syndicates are more transparent, people find out about you since you have to put out enough information for people to believe it’s not a bad idea — with VC money nobody necessarily knows it unless you broadcast it
• Syndicates have some limits, they may not be able to raise as much as they want (VCs are bigger and have more money)

Upsides of syndicates

• Investors can add more value than just the capital
• Al Gil’s they are trying to replicate the value VCs can give founders through software and crowdsourcing
• He has 1500 backers in his syndicates base: when you need help for promoting your product, hiring talent, you have 1500 people to reach out and ask for help
• When pitching founders, he can offer more than money

Board seats philosophy

• He doesn’t take board seats, he doesn’t want to be involved unless it’s a rare temporary thing for some reason
• He doesn’t want to be in control of you, he wants you to be in control of yourself
• Board seats have two purposes:
• Fiduciary responsibility to control and keep the person to do crazy things with the money — in that case he invests in some crazy people only if he gets to be on the board
• Desire of adding value and give advice
• If he gets a seat, it’s only for the purpose of getting the company to the next round of investing and give that seat to somebody else
• He loves crazy people

Best WOW investment

• Somebody pitched him a “Twilio for gambling”, everyone can start real money gambling on any app in the world and make money off any game
• It’s risky, crazy but if you have to do it, make sure it’s a long shot
• He loves serial entrepreneurs that would do something nobody else would do
• Entrepreneurs are storytellers: you are constantly selling to investors, customers, employers the reason why they should stick with you and you are all going to make it together

Incubators

T- here are about 100 incubators between Europe and the US cranking out thousands companies every year + plus other companies = 6–7–8k companies every year all going after 300 A round (not pretty)

• Getting 5–10 million dollars A rounds in SAAS takes 200k/month in Monthly Recurring Revenues (MRR)
• For consumer apps, 10 millions is the new 1 million (everyone has 1 million, 10 is where it starts to be interesting)

On decks

• Snapshot are uninteresting: he wants to see a trend line, don’t make it hard to understand the numbers
• He’s not stupid, he’ll get to them and you are just making it harder (not nice of you)
• It’s not a good sign of transparency, are you trying to fool your investor/potential investor? (If you are trying to involve him, it’s a bad approach)
• You are showing you are not the kind of person you can have open conversations with, candid and straightforward shooters
• When he was a founder, he had a 50 pages deck, so wrong on many levels that it was making investors cringe but had one good thing: he showed numbers and that’s what keeps investors interested
• The core of anything successful is a simple idea that works: if it works and grow despite the obstacles, investors will believe even a B team can pull it off
• Spend only on what’s necessary: he would never pay bills until he would piss the utility company, he was afraid the landlord would change the locks because he wasn’t paying the rent
• But he paid payroll taxes: if it can send you to jail, you must do it
• If you can get away with it, don’t — there is a 90% chance it’s gonna be a train wreck, make it a bigger one
• He’d make sure to show how cheap they are when talking to investors: if you give him a dollar, he’ll spend it only on stuff that matters
• When talking to investors, he’d also note down what they offer (e.g. introductions to people) and follow up on them by email: 8 out of 10 would never respond, 1 would say yeah and maybe do it, 1 would do everything he said and be amazing at it.
• All money is good money until it’s too much: at that point he filters by emotional involvement
• The more you are involved and ready to help, the better

Monthly updates

• He’s impressed with the founders that send out monthly updates on how they company is doing, maybe too much work for them and he doesn’t want to put more work on them than necessary
• A report every two or three months would still be good
• You should keep at the top of these reports “Things you can help with” and put your requests there (they may not get to see them if you put them at the bottom)
• At Fastly they share a daily revenue update with the team and the investors (it remembers them you exist and they may want to help somehow)
• Jason suggests to also had how long is your runway going to last and you when you expect to be out of cash (investors can help with that)
• If founders reports percentages without specific dollar amounts, that’s a big tell the company isn’t doing well

Feedbacks

• Everybody shies away from giving negative feedbacks cause they don’t like doing it, it makes them feel sad
• As a founder, it’s your job to ask for feedbacks and force investors to give them to you
• If a founder is doing something stupid, he’ll be candid and say it

How to get meetings

• Normal investors are interested in referrals expecting a warm intro, an elevation speech and a bio (who are you , what are you doing, why should I take a meeting)
• At Gil’s they take lot of inbound but he has lots of people filtering it
• When he gets to meet somebody it’s almost always already decided they want to invest in them and it’s Gil’s time to sell those founders why they should take money from him
• As an entrepreneur he would never send a deck to someone because if they don’t have the time to meet, you are just giving up confidential info
• As a syndicate leader he asks for it all the time and you won’t likely get a meeting until you send it (they get a lots of decks)
• If Jason tells him he should meet with somebody, he meets with them, but it’s an exception
• The why you should meet it’s important, you can’t just ask for a meeting with Elon Musk, Mark Cuban or Travis Kalanick
• Put thought into why it’s a fit: “I want to meet with X because he was an investor in Y and Z in this other marketplace and I have another marketplace so I think it would be a fit”
• Jason wants to know everything about the people he meet with
• He wants to meet with specific people and talk about specific things and everything he does is very tailored to those people
• When he wanted to raise money for Mahalo, he went after who funded Google and who funded his last company, Mark Cuban (3 people, 1 of them invested)
• He wasn’t as known and reputable as today, this is the email he sent:-
• “Dear Micheal, we met very briefly 2 years ago at a conference. You probably don’t remember me. I sold my last company after 18 months for 20 million dollars to AOL. I have a new idea that I think you’d be very interested in. I can meet anytime for 15–20 minutes, any day of the week. Let me know”
• Michael called him back on 2 lines, left 2 long messages and he was at his office 2 days later
• Keep a list of people you want to meet and reach out to them periodically sending something relevant, an update and build a relationship with them by email
• There aren’t lot of people that keep doing it for months, most important people will take 3–4–5 touchpoints
• Stalking them on social media is also good: liking what they post on Twitter, leaving a well-thought comment on their blog, writing a post quoting and linking to their posts
• Jason’s super trick: on Twitter, for the people he cares he turn on mobile notification so when they post, he’s the first to like them
• Gil set all his emails for stalking to be sent on 4 AM so they are the first ones they’ll see when they wake up

Best pitch he’s heard

• He’s invested in STAND, a fundraising app even if they didn’t send no deck, had no data
• It was a father whose 10 years old daughter wanted to raise 100k dollars to help Syrian kids with a lemonade stand
• They helped her and she went out every day and sold lemonade
• At the 51st day, the New York Times picked it up and she raised 100k
• They then wanted to help everybody raise money with their app
• After a story like this, he had to invest

• Steve Hoffman is Founder of Reddit and Hipmunk

State of the startup game

• It has changed, everybody is smarter now
• When he got in the game, he was in his early 20, not he’s in his early 30
• Now he’s more tactical about what he’s doing and why he’s doing it (it’s not enough anymore to just do something fun or that you want to exist like)
• It’s important to know how you’ll exist as a business very early on
• You may focus on user acquisition first and monetize later, but the monetization plan must be there from the get-go
• It’s unlikely you’ll succeed building the next Reddit or Snapchat

Top tactical things he spends his time on

• 2 things

a. Optimizing the user acquisition (how you are going to acquire users, how much is it going to cost, how can you do that better than your competitors)

b. Conversion funnels on his site: organic user, paid users, Yahoo users all have different behaviors and you need to know who are the most valuable, who convert the best, who are the cheapest to get

• They test everything they can at Hipmunk and leave no room for opinions, if it’s possible
• When you can’t test and measure, it’s guts-driven

Net Promoter Score (NPS)

• You ask a user on a scale from 0 to 10 how likely they are to recommend that site to a friend
• Who votes 9 or 10 is a promoter, 0–6 is a detractor
• Percentage of promoters - percentage of detractors = Net Promoter Score (range can go from negative 100 to 100)
• 60ish is their average NPS and it’s not bad
• In a lot of experiments they look at how NPS is affected
• After 10 seconds you’ve been on the site a survey pops up to 5% of the user base every month (half of them are new users, half are returning customers)

Fundraising

• It’s overall a lot easier than it was when he started, people are more comfortable investing in startups
• Money required to start is less so when you get to a seed round, your product is more mature
• Investors are savvier in the questions they ask
• As a result, founders are savvier in the answers
• Overall, the ecosystem is healthier: more money spend on good things

Things he looks for when investing

• 2 things he looks for:

a. If you are working on something he’s emotionally attached to, problems he would work on if he wasn’t working on Hipmunk — he wants to have influence on the people working on it

b. Competency: is the founder a winner?

• When he’s interviewing he wants to know if the founder is smart, have thought about the problem and how to respond to adversities
• He always try to say something negative to see how they handle the rejection
• You must be arrogant enough to be willing to succeed and humble enough to give up when it’s failing and it’s time to move on
• If they are too malleable and change ideas quickly, it’s not a good sign
• Nervousness, lack of confidence, stuttering through things, not having anticipating the questions he would ask is not not good neither

Best growth mechanism

• At Hipmunk they didn’t appreciate the value of emails and push notification for too long
• Email addresses are so valuable
• You can craft good emails and send them and it’s free marketing

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