Shared Chat
How to choose your investors

When choosing your investors, there are several factors to consider:

  1. Look for investors who are patient and understand the timeline of startup growth. Impatient investors who have unrealistic expectations can become difficult to work with .

  2. Professional investors often evaluate startups based on growth rates and market opportunities. Your financial model should be thoughtful and demonstrate your understanding of your market and revenue potential .

  3. Consider investors who have positive track records and are known for investing alongside reputable venture capital firms. Being invested alongside well-known VCs can provide credibility and increased chances of success .

  4. Be cautious of high valuations without sufficient traction or due diligence. A lack of data in the deal memo or overly optimistic valuations can be red flags for investors .

  5. Evaluate the character and reputation of potential investors. Look for those who have a history of being helpful, providing value beyond just capital, and maintaining a good relationship with other founders .

  6. Focus on building relationships with investors before seeking their funding. Engage with potential investors through cold emails, warm intros, or connections made through founders and other professionals in the industry .

  7. Avoid being solely focused on valuation. While it is important to negotiate a fair deal, prioritize the relationship and long-term success of your business over maximizing the valuation .

  8. Consider the capital allocator's perspective when pitching for follow-on investment. Understand that they are seeking the best return on their capital, so highlight your company's growth potential and demonstrate your ability to acquire customers profitably .

Remember that while these factors can guide your decision, the ultimate choice of investors will depend on your specific needs and goals as a founder.

Jason Calacanis: From the YouTube live chat. Here we go. We're cooking with oil now. from a founder's perspective, what are the red flag personality types to be aware of when courting angel investors assuming the angel is relatively new? Okay, great. So what are red flags with investors? We see investor bad behavior all the time. What are some early red flags? I mean, sometimes we see it with co investors. Who are the people that you should avoid?
(someone): I think there's two that I'm really scared of, having dealt with them myself a lot. One is the, I'm doing this angel investing thing to get rich. Folks, they tend to be very finance-oriented. They're going to talk a lot about valuations and portfolio construction and they're thinking about it like it's... They're on Wall Street and they're making bets. Unfortunately, those people get impatient very, very rapidly.
Jason Calacanis: Ah, yes. That's true.
(someone): And this is a business where it takes forever, and you have to be patient. And forcing things to happen doesn't work in this business. And those folks can become really painful to deal with if... Okay.
Jason Calacanis: So category one, the impatient folks. They get rich.
(someone): They think they're going to get rich doing this.
(someone): And the professional investors are using your growth rates as a proxy for how big is the total market opportunity. How fast do you think you can grow? What kind of multiples can we get on this company eventually? And how much capital this company is going to need in the future. Every venture capitalist, even seed stage or angel investors are thinking like, I want to build my ownership position. help the company have enough cash to build something that's really valuable and attracts other investors who will then kind of fuel the company as they go. And so, if your model isn't thoughtful and kind of professional, your market opportunity might look too small, or your revenue run rate might look too small, or you are burning way too much cash and they It's not the end of the world because a good investor, again, isn't going to expect you to be a Goldman Sachs analyst. They're going to talk to you and ask you these questions. But showing them through the model, through that map that you put the work in, you really thought about it, and probably there's something you understand that they don't at that moment, is really the basis for that collaborative conversation that builds trust and gets them interested in the company in the first place.
Jason Calacanis: And a really good model really is a proxy for your thinking about the business and thinking about a business as a strategy that's what the word strategy is is how you think and plot about your business i was on a call and one of the key things that comes in is the margin. and the market size, and your numbers are going to start to tell that story. You're telling the story of your startup and its potential through numbers. And in this case, it didn't add up.
Jason Calacanis: And you know, it's important for founders to keep their investors up to date. And the audit is like the ultimate backstop of that we have no choice but to get information from you. When we ask you for that information, make our lives easier, please. All right, here are the questions. First question comes from Omar. Omar asks when reviewing an angel a syndicate startup investment deal. what should we consider as red flags? Okay, so when you're being invited to a syndicate, what are the red flags you should look for? Okay, now, if it's one of Zach's deals, and it goes out to his syndicate, or one of my deals at the syndicate calm, I'm no longer on Angeles, we do it ourselves. But Angeles is awesome. What are the red flags in deals?
(someone): Red flags are tricky. Okay, explain. So one of the things that most investors on AngelList do is they'll go in and they'll look for deals that are being led by well known VC firms. So Sequoia, or Andreessen, or, you know, Greylock or Benchmark is leading around, right. And so usually, if you were to be an LP in one of those funds, you'd be very excited to be an LP in one of those funds. And so being able to be invested alongside them is, you know, historically has been a very good deal.
(someone): It's public and permanent, and you do a deal. And 10 years from now, people are going to be like, why did you do that stupid **** deal? Why did you do that **** deal? And so that sets up your career as an investor to basically be... To use AngelList as a source of capital, but to be very careful about your record. The other strategy, which a bunch of people, unfortunately, have done is a effectively just a spray and pray do a ton of deals and get deal by deal carry because you don't care about the losers and the winners will pay you and just so every year is about who cares about your reputation or track record, you're just going to put as much you know, as much food on the buffet as possible.
Jason Calacanis: And it's up to you to figure out if it's good or not. You being the syndicate member. These are really important red flags for people to notice and over time people have learned to know the difference one red flag, I'll point out is, you know, high valuations, and not a lot of traction, or, you know, a deal memo, and we really put a lot of care into our deal memos, but a lack of due diligence and a lack of data in the deal memo. So you got a high price, they want 25 million 35 million, but they don't actually have, I don't know, quarterly, monthly revenue spend, charts in there.
Jason Calacanis: That's high growth, they have the sort of medium growth, you know, when you have a big base 3040% year over year, and then you have the five to 10% growth. And there are outliers, obviously, like Amazon and others, that can have incredible growth on big numbers. But typically, as the number gets bigger, it's harder to make that percentage growth go up. So you get a premium on your valuation when you have high growth as a small company. You have a discount when you're low growth on small companies. And when you have high growth on a high number, you're Amazon. Okay, I think we all understand that. This is an interesting one because a lot of people have pointed out a red flag in a firm. I don't consider this a red flag. I consider this just an alarm, like I do with my siren. Like, oh my lord, there is a major company out there that is 28% of a firm's revenue for 2020, according to research. and that is peloton now people are like oh my god this is a risk factor it'd be listed in the risk factors in the s1 and i don't read these s1s anymore because god i invest in the companies you know before they even have a cap table so reading the s1s to me is like reading somebody
(someone): There's other just Google get a free template. You're going to save yourself a tremendous amount of time. Now, if you are going to, if we could talk about the second audience for a second, Jason, those investors, and to kind of use your airplane analogy, you are Airbus or Boeing, and you're going to sell the fanciest, newest version of your airplane to all the defense administers. You want that model to be souped up. You need the airplane to be souped up. And that's when you probably want to hire a professional to help you start building it. And the reason for that is your financial model becomes a map for your startup's journey. And while internally you're worried about cash and runway, the investors are worried about that too. But they are starting to think in terms of revenue scalability. in things like customer acquisition costs and LTV as a multiple, long term value of the customer as a multiple of customer acquisition costs. So you're going to need... And this usually happens at Series A or Series B, you'll be able to raise a seed round with the simplified internal financial model. But as you start moving up market into investors, everything becomes more of a financial calculation until you get to late stage where they are literally like,
Jason Calacanis: I'm going to give you a 20 million and I need you to turn that into 200 million kind of right, it becomes it becomes a financial, it's just like the financial model is the determinant of if they invest. In the beginning, you're selling the promise of a startup, you're selling, hey, what could this be?
Jason Calacanis: Now, these are not series A companies. This is when we have very little information on a company. But what are some of the early signs that we've identified as potentially driving future success and the future success of a founder university company would be getting into Y Combinator tech stars launch accelerator, or even doing a seed round of 500k that would be success coming out of founder university. So what do we look for?
(someone): Yeah. So, a couple of things that are super important is even if they haven't started a company, like previous projects that they've built. So, this can be a simple website that does a specific task or just any prior building experience. And the reason we look for builders is because you've mentioned this a bunch of times, Jason, but it's like the founder without any funding can work on this project and build it themselves. And they aren't reliant at the very early stage to use capital because the capital that they're using is essentially just their time. So builder-founder is very important to the program. And then the other thing is just early signs of traction. If they can maybe even build a waitlist, any signs of people wanting to use the product, that's going to be another tell and what we're prioritizing.
Jason Calacanis: Kelly, other than they built previous products, and they have some signs of customer attraction, what else do we look for? What are things at this early stage that would make us interested in making that 25k bet?
(someone): But I do think that for anybody who's interested in potentially starting a micro fund, that could be an interesting option. Kate asks, what do you look for in a standout startup specifically? How can I attract investors interested in what I do and who will find it rewarding to invest in me besides providing raw numbers and projections? So I think every investor is different, unfortunately. And so what I tend to gravitate towards is very different from other investors. But I would say just as a general thing, a lot of very early stage investors tend to either be in what I would call team founders and the other is team market. Obviously, you need to be able to convey both that you're an awesome team and also that you have an awesome market. But people tend to feel fairly strongly about one camp or the other. And for me, I tend to feel more strongly about team market, but not in a way that you might think. I'm not looking for TAM calculations, like total addressable market. In fact, I don't care about that. I'm actually looking for something that I call market pull, which is How easy or hard do I think this customer acquisition will be? How long or how fast will this sales cycle be? And so those are the kinds of things I'm looking for. And for me, it's more of a gut feeling based on having done a lot of customer acquisition before for my own failed startups or the one that I ended up growing out. just from having tried a lot of customer acquisition, I just kind of make a gut call on that. So I'm actually not even looking for numbers there.
Jason Calacanis: We are going to look at other signals, not just my gut, but Well, who are these people who are building the product? Did they work at a SaaS company before? Were they the number 17 person at Asana? Were they the 27th employee at Slack? Do they have any bona fides? Do they have any related experience? Are they a developer, designer, UX person, a sales executive who sold Salesforce for 10 years? Like what do they do in their life that makes them qualified to do this? And we as a collective of angel investors, can take more risk. So here's my thinking. If we give you that first 500k check for five or 10% of your company, you haven't launched, but you're like J cow, I'm building the SAS product. I'm credible for these reasons. Here's the mock ups. We're not launched yet. We're working on the product we want you to invest. We can give you $500,000 that represents let's say 250 investors who put in but $2,000 each. for accredited investors, you know, making a 2k bet in Vegas, no big deal.
(someone): There is a timing question too, right? Let's say you're a really early company and you're trying to your your pre launch and pre traction and you have identified like a brand new market that barely exists yet. How do you evaluate that? Yeah, this is pretty relevant in the climate thing, by the way, everybody's like, oh, yeah, microbes. And I'm like, yeah.
Jason Calacanis: So here's where accelerators, and taking small bets, while you figure these things out, it exists in the world, when things are truly speculative. maybe giving somebody 100k or them doing a 250k round to build a prototype to get five customers to try the product is in order. The problem is a lot of founders think highly of themselves, they self select for a group of people with strong charisma, strong egos, that's what you want. You want a charismatic, strong ego strong willed person. So they will be strong willed And they will believe that they should be funded as if they've already launched the product and have 10 paying customers. Yeah, so they'll want a $15 million valuation for a company that has none of the characteristics of other companies in the market that you could buy into at 15 million. So this is why we always talk about the founder, the team, the customers, and the deal.
(someone): Mm hmm.
Jason Calacanis: the three things the founders should worry about are those first three team product customer.
(someone): I would look at things. So this is social advertising. I don't know if this is an ad network that you have or whether you are running your own ads to bring people to a product. But I think ultimately it comes down to can you acquire customers profitably? And so are you spending less than what you are making on them rather than about the click through rates? If you are running ads on Facebook, it is helpful to have higher click-through rates because then your ad gets shown more. But it is also a factor of how much are you spending for those ads. And Facebook basically then factors in and figures out like, okay, is it worth showing your ad because with that same ad slot, I could be showing somebody else who makes me more money. One, what's your recommendation or hack on getting intros to angel investors? I would do two things. I think I would definitely cold email people in parallel. That's the fastest. You write a good cold email, you will get attention. And it's a numbers game as well. So don't like blanket email everybody the same thing or in the email address, put everybody's email addresses or whatever. I've definitely seen that and investors tend to ignore those. But if it is a very sort of, you know, solid cold email that captures attention, then I think angel investors will respond to that. As for intros, I would definitely pursue that in parallel, but it is slower. The slow path is try to get to know the best company that that angel investor has invested in, get that person excited, and then get that person to do an introduction.
(someone): And I appreciate what you said about, you know, tough questions. Keep asking them.
(someone): Yeah. Maybe a less tough question. All right You said that you think that angel money is really valuable for founders. They don't money from founders of venture-backed companies Not your cousin the dentist Okay, that's good to clarify My question was where are some recommendations of how to find those people because it's a lot easier to find venture capital I mean crunch base
(someone): LinkedIn you look them up. They're so much more likely to respond to a cold email or an introduction from a friend Like they're not assessing in the same way in part because you're not necessarily I'm not suggesting approach every founder you meet as a potential investor first of all someone don't have money But increasingly in part because of venture capital scout programs some do Some who have yet to have a liquidity event do But you are founder to founder like that's like a sacred bond And so I think you can oftentimes surprisingly get mentorship and input, you know, maybe not from like Brian Chesky today Maybe him, you know, maybe he loves what you're doing In fact, it's actually very similar to how Airbnb took photos of their properties as a former super host I could say that was really valuable But some founder who's a couple clicks ahead of where you are in terms of progress and who seems to be doing a great job, if you can't get to that person, you're going to have a lot of other challenges in this business. And I do think it's easier than BC.
Jason Calacanis: That would be a weird thing to say. And this was such a weird thing to say. It kind of threw me for a loop. You can see it in my face where I'm like, what the F is this person talking about? This is so weird. And he and he, he literally, I didn't ask him to name check Robin Hood, I didn't ask him to talk about stocks and, you know, appealing to a wider birth of a wider footprint of, of consumer retail investors, as well as professionals like family offices. So that was really weird. But perhaps one of the weirdest red flags of anything a founder can do is when a founder is so unconvinced of the value of their stock, that they sell it early. If you're selling your shares in a company before you've even relaunched, before you've even launched your product, That is the red flag of red flags. We had a company called secret where the founders sold shares before they were prof, they had the product in market like a beta, but they had started selling shows already. We just had clubhouse, um, which sold, I think the fat co-founders sold before the product, even in the app store that raised a lot of red flags. These are red flags folks. And when we get back, Trevor is going to answer the question of why he took 70 million.
Jason Calacanis: Was this investor great to work with? Did they check in with me? Did they help with introductions? as my friend Roloff, both assess to me, you know, you don't have to have like a really helpful investor, a neutral investor is okay to somebody who just puts in cash, but doesn't cause problems. That's that's a that's a high quality investor in a way. You want high quality investors who are going to add tons of value as demonstrated by the reviews from other founders, and the outcomes and how many outlier outcomes have they had, that's really who you want. So when you think about firm like Sequoia, like, Okay, trillion dollar companies, Apple, Google, they've been involved in Facebook, they kind of were involved in by selling Instagram and WhatsApp there, which were the primary shareholders in or larger shareholders in both those companies. So aside from the founders, so you really want to pick your investors wisely. If they have not been a drag, and they've really helped great, but you want to clearly communicate why you need the bridge round. If something went wrong. Yeah, you could say like, listen, we didn't hit the targets, but we came within this amount. And here's what we're changing. giving people a plan. You know, asking for more money without a plan is kind of like a really weak way to go about it.
(someone): and that they still have a focus on the type of businesses that you think. This can be as simple as checking the firm's website. But since folks move around and jobs change, even in VC, this step will save you a lot of time and energy in the long run. Okay, a couple to point out here that are a little less obvious. You may see funding announcements that list investors and you can pull leads from here for the top of the funnel. Also, founders are a great resource. If they have a connection, they may even be willing to give you a warm intro. Now, while we're talking about warm intros, each investor and firm have different expectations here. Some will require a warm intro. Others have a complete open door policy, send the cold email, we love to get them. And others will require companies to reach out through their site or some other standardized form. Don't read too far into this, but do reach out in the way that they ask. It's going to help you get there faster. And now for Twitter. Twitter is such a powerful tool. You can search for things like active VCs, active investors, and then take that search a step further. You can add stage, for example. So search for active early stage investors or active seed stage investors. You can see on the examples here that these are really recent threads and they also have a ton of replies. In addition to finding lists by stage, you can keep searching even deeper on Twitter. Folks will often do lists and threads like this with specifics for technology business model industry. The example here is specifically calling out investors in AI who also do seed stage deals. If this is the type of investor you're looking for, this list is going to literally be a cheat sheet for you. So please take a look at Twitter and see how it might help.
(someone): And so usually, if you were to be an LP in one of those funds, you'd be very excited to be an LP in one of those funds. And so being able to be invested alongside them is, you know, historically has been a very good deal. One red flag that we've seen over the last couple years, certainly since the last 18 months, is those companies that basically had been funded by a lot of fancy VC firms at incredibly high prices in 2020 and 2021, crazy prices, stupid prices, they started to run out of money. And those deals were not that... The first deal, that was not available on AngelList. Those deals were sharp-elbowed. Everyone was fighting for allocation. And getting an allocation on AngelList only happened if you were already a significant insider in the company. And even then, you had to go to war. For instance, I'm in Mercury, the bank. I've been there since the beginning. And I've had to fight like crazy to get my allocations in the subsequent rounds. And I got, I got by some good friends who led, who led subsequent rounds, who literally were like, well, bummer. And they're like good friends.
Jason Calacanis: Oh yeah. Not friends anymore in my book.
(someone): Yeah. Well, there were that, that, that definitely threw a big damper on our relationship from my side of things.
Jason Calacanis: Um, but anyway, I have a simple rule with that, by the way, we get super inside baseball here, but that's why people are listening.
Jason Calacanis: Okay. So that was a red flag. Now they're coming back to AngelList or syndication.
(someone): Yeah. So now all of a sudden, these deals are suddenly getting bridge rounds because the VCs are trying to keep the companies alive. They're not doing well enough and they probably never will do well enough to raise at an up round. So we're getting flat rounds, we're getting bridge rounds, we're getting notes. So especially if you're seeing a note going into an existing company, has a well-known VC who led a previous round, that means it's a bridge round. And suddenly, if it's suddenly a bridge round, a note, and a well-known VC is in the deal, they say, and it's basically happening with a note, that's a red flag. Because what that means is that they basically have said, oh, let's go get some dumb money from AngelList to keep this company alive so that maybe the company can get to a next up round, at which point we will basically go out and raise it, fund it ourselves, and we won't give it to Angelus. So there's two strategies that have worked well historically in Angelus as a lead. One strategy is the long-term greedy strategy, which is basically think about it like every deal you do is going to be on your permanent record, which is true. It's public and permanent, and you do a deal. And 10 years from now, people are going to be like, why did you do that stupid **** deal?
Jason Calacanis: And shortly after the launch real coin rebranded as tether and partnered with the crypto exchange Bitfinex. And understand tether you need to understand the Bitfinex relationship Bitfinex and tether are both owned by a parent company called iPhone X. Okay, now this is you know, usually when there's a shell game going on. That's another red flag might not be but the red flags are piling up here. And that is run by three characters that I think the consensus is that they are shady at best is kind of the vibe I'm getting from Twitter. I'm not sure if that's how I feel. I've never met them. But they've all been MIA for about two years. And this reminds me of Elizabeth Holmes, just being unwilling to show the technology the CEO jl van der velde is a very secretive person. No interviews, no public appearances, the chief strategy officer, Phil Potter. He worked at Morgan Stanley 90s lost his job without bragging about his lifestyle. According to this New York to a New York Times reporter, and the CFO, Jim Carrow, Dev Vazini. He was caught pirating and selling Microsoft software in Italy in 1996. And it wasn't like a small amount of pirating he there were over 25 counterfeit disks that were seized.
(someone): And the businesses are amazing.
Jason Calacanis: Well, that's the opportunity then for somebody to make a better. Well, I mean, actually, if you think about it, think about how bad friends are in my space were before you use Facebook, you know, Facebook actually made it stable. Okay, Jillian, via email as an angel investor, what are some low key red flags that you might not want to invest in a founder? Not talking about glaring ones like terrible product, no business model, 20 minutes late to meeting, etc. low key things, things that make it less desirable to invest in the company?
(someone): I tweeted one today that I read the other day that I like, which is, you know, a lot of founders are really proud of their organic growth rates. And they're like, Hey, look how great we're growing our cac is zero, and we're growing this fast. And like, for me, that's actually like a red flag, because paid acquisition and sales marketing, understanding your channels is a muscle. You have to start doing it and iterating on it and learning and you do it and you realize something's not right and you get better at it. And like showing that you basically very early on in the sort of life cycle of your business, realize that this is a muscle that needs to get big and strong for your business to get as big as it could get and starting to build it and starting to think about it and starting to get good at it is like super duper critical.
Jason Calacanis: But in the early stage, Well, what how much money do you need to make it to the next level? And how much dilution do you want? So okay, you need $3 million. Okay, you want to dilute no more than 20%. Okay, so you got a $15 million valuation, a $20 million valuation, somewhere in that range. And then you just test it with the market. And if you're happy with that valuation, and you think it's reasonable, but then both sides of the table can feel like they, you know, did a reasonable transaction, and you can get back to work. if you're optimizing for that extra 5 million, the most talented investors will say, Okay, you know what, maybe I'll invest in the next round. So let me know. And then you get some sucker at the table, who's trying to, and we talked about it before, maybe you're getting, you know, the finance guy, or the, you know, send you on a wild goose chase mission. Gal, who, you know, you don't want as investors. Yeah, now you just added somebody to the cap table, because you're optimizing for
(someone): valuation, and it's a red flag for me. Like, in fact, the point that the entrepreneur is more focused on the valuation than our relationship and the business that that's going to be built there. That for me is like, probably not a deal I want to do.
Jason Calacanis: be best is that money going to get the best return by investing in a company in our portfolio or by a new company and placing a new bet or going to another company in our portfolio that's performing really well. Remember capital allocators and the reason why Silicon Valley and capitalism is winning so big in the world perhaps too big according to bernie sanders elizabeth warren and many people in the country you know this is a small. Vocal minority of people who feel capitalism is too vibrant to successful and i understand the argument it certainly does seem like these companies get bigger than ever. You must think of the capital allocator i need to hit a certain return profile so as an investor. I need when I have a fund to give back three or $4 for every dollar I'm given in order to be considered a success. Well, if I have this pool of capital, and your company's failing, another company is growing, and a new company is surging. where would you put the money if you were in the capital allocators? Will you go with the surging company or the high growth company in your portfolio already? Because you have information that they figured out product market fit, and they're growing. If you want to get people to participate in a bridge financing as a founder, you need to think about what that capital allocator is going through. They're trying to maximize returns so they can stay in business. just like you're trying to raise money.
(someone): What the markets are clearly telling you is that the kinds of businesses you're talking about, the technology growth-oriented business that have a clear runway, everybody recognizes that. So sometimes what makes for a great business doesn't make for a great investment because of the price.
Jason Calacanis: That's what I've been trying to... I teach a course,, where I've been teaching angel investors every month. 300 people, 400 people come every month, accredited investors, and I'm like, entry price matters. And I tell them, listen, here's a matrix of traction of the company and the market cap, essentially, the valuation. And you want to see as much traction as possible on the lowest possible market cap, because that's your entry price. And they're like, well, why not pay three times as much and I'm like, they're like, it doesn't matter if it's a unicorn, you still get a great return. I'm like, yeah, but you need to have you get three shots on goal. If you can find three comparable companies at a lower price, you get three shots on goal. And really hitting a unicorn is about shots on goal. Can you get to 25 or 30? I get one unicorn every 30 investments or so to date.
Jason Calacanis: What is your number one piece of advice for newer angel investors, please take your time. And please try to get to some amount of diversification in your portfolio. If you have 250 k to invest, I would love to see you do 20 investments of 5k. Now you got 100 k into the first 20 companies 150 left over, then take the top five companies out of that 20 and put 30 k into those. Now you've got 35 k in each of your top five investments do not blow your entire bankroll on the first investment, or first two investments because 80% of startups fail or more. Second, I want you to invest in companies that have gotten their products to market and have customer traction customers you can talk to, let's call it 10 to 100k a month in revenue, because 90% of startups fail before they get their products to market. That's just my personal experience. And I'm talking about like, projects, maybe they're not even incorporated yet, they're kind of starting their startup. And then if you took the class of startups that actually get to launch of those another 70% wind up in a zero. So it's something in the neighborhood of, you know, projects that become startups, maybe 95% go to zero, and then startups that have been incorporated and raised a little money, maybe it's 70 or 80% go to zero, you can avoid all that early pain and heartache.
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