202. Cram Session, Episodes 138-143 (Nick Moran)

202. Cram Session, Episodes 138-143 (Nick Moran)
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Welcome back to TFR for another Cram Session. In these special releases, we have aggregated the takeaways and tips from previous episodes. In this installment, we will be recapping the following episodes:

Transcribed with AI:

0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the full ratchet.

0:22
Welcome back to TFR for another cram session. In these special releases, we have aggregated the takeaways and tips from previous episodes. If you’d like a focus refresher on previous topics covered, stay tuned for this cram session.

0:42
In the next segment, we have the takeaways and tips from how to Angel invest like the best with Jason Calacanis.

0:54
All right, amazing interview there with Jason. Let’s wrap up with the key takeaways. Again, we have five takeaways today in key takeaway number one is called 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 $100,000 plus, 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 one to two extra household income. Now if you live in a nice area, the home prices are often five to 10x household income. Using one’s personal real estate to create wealth is no longer viable. And Jason mentioned that the conventional wisdom from books like Rich Dad Poor Dad and secret millionaire on the block 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 or poor middle class to rich or from rich to the ultra wealthy. Okay, key takeaway number two is called 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’re wired for this, and you want to learn, Jason recommended to make small investments in 10 to 20 startups. What was not previously possible is now possible via syndicates. Angels can find these syndicates on AngelList funders club or seed invest. He suggests that new angels only invest via syndicates. And to start out with four figure investments, but act as though their five figure amass a diversified portfolio 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 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 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. Okay, key takeaway number three is called the Colombo approach. When evaluating startups for investment, Jason likes to ask very basic questions and listen intently to the answers. He prefers short, open ended questions and looks for incredibly considered intelligent, passionate and thoughtful responses. In Jason’s experience, founders must be super thoughtful and tactical these days to be successful. So preinvestment Jason has a small mouth and big ears. Example 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 pull events 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 founder cannot tell you about their customers, if that’s the case, If there’s something seriously wrong, also, if a founder lists eight different ways that they’re going to make money, Jason thinks it’s unlikely that they’ll make any money if they’re trying this many different business models. Now, after Jason’s made an investment, his interaction does change. He now insists that founders send a monthly update. And he asked one or two questions per update. Jason is careful not to tell founders what to do. rather ask them how they’re approaching a problem. It’s really a matter of asking the right thoughtful questions. If Jason is confused or curious about their location strategy, he will ask the founder how they decided to launch in certain locations. Other question frameworks include, have we thought about blank? How are we approaching blank? Have you considered blank, 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. Okay, key takeaway number four is called the Goldilocks zone. Jason has witnessed a growing opportunity at the seed plus or post seed stage, startups that have raised a precede or angel round and a seed round, but are not yet ready for a they’ve eliminated a ton of risk. In many cases, these companies have hit 50 to 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 derisk companies at favorable prices. Jason is now seeking out investments in the Goldilocks zone, as he calls it. Okay, and finally, key takeaway number five is called 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 encourage them to make investments. These angels would find the early stage startups to invest in and then split the economics with Sequoia. This provided Sequoia and inside look into many hot emerging startups, and they’d be positioned to lead the ARB 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 became a very valuable exercise. Today, a large number of firms are launching their own Scout programs, some via lead angel investors, and many by taking LP positions in early stage venture funds. Jason said he learned a lot from the program and thinks it’s not only wise, but maybe their only strategy for getting access early. When a firm has 500 million under management, how can they deploy $50,000 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 here with 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 returned 5x It won’t move the needle for a large fund of funds. Rather they’re 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.

9:12
In the next segment, we have the takeaways and tips from beacon an engineering systems approach to investing with Chris farmer.

9:25
Big thanks again to Chris farmer for joining us and sharing the story of signal fire. Let’s recap the key takeaways. key takeaway number one is called deconstructing beacon beacon is a connected platform that starts with sourcing but also does monitoring context diligence, syndication and most importantly, per Chris portfolio support. It’s a data platform that looks like a Bloomberg terminal for the startup industry. They started building it seven years ago and they employ a full blown engineering team of data scientists and tech engineers beacon tracks a vast array of data on 6 million different companies. And Chris started with first principles asking, what are the KPIs that management teams of these companies are measuring? Those are the same elements we should measure with beacon. It analyzes items including customer behavior, frequency, engagement, CLV, consumer transactions, financial flows, quality of those flows, news sentiment, and also team construction and quality, just to name a few. And signifiers platform isn’t just for the investors, there’s a UI for advisors, and most importantly, founders as well. Founders can utilize their robust SAS recruiting platform to address the key need of early stage companies recruiting top talent. With beacon signal fire has set out to tech enable the entire value chain of a venture firm from end to end. Early indications from folks in mind network are that it’s an impressive platform indeed. OK, key takeaway number two is called the prepared mind. signal fire did not coined the concept of the prepared mind, but Chris does follow it. The approach that came out of Excel has an emphasis on heavy research on existing domains, the creation of market maps that help visualize the landscape and reveal its opportunities. In a previous episode, David Callen discussed his approach to the space vertical that leverages this methodology. And in Chris’s implementation, he’s constantly refining the maps, he meets with LP experts and founders to go much deeper and broader than he could do with the data alone. The result is that signal fire is often much less bullish on the Invoke sectors, and vice versa. Their investment in pizza making robot company zoom certainly illustrates their fresh perspective on an oft ignored industry. Okay, key takeaway number three is called the common thread of success. I asked Chris for a common thread that he’s noticed across successful startups, and I really enjoyed his response. The common thread in winners are those companies that are doing things full stack, they are creating an end to end solution that is vertically integrated, where a company can be its own customer in order to provide a better solution for the end consumer. I discussed this concept with Charles Hudson. In a previous episode, we talked about finding the place within the vertical supply stack that enforces discipline on the chain and drives the most value. Chris’s point was compelling in that he looks for startups that own the chain, not just a part of it. Okay, let’s wrap up with a tip of the week. And this week’s tip is called tail wags dog, the affinity investor. Today, we discussed a data centric approach to investing signal fire invest broadly across a range of sectors attempting to find areas that have the most return potential. Whether or not you believe in the data engines ability to identify opportunity, it is a returns driven focus. He’ll go anywhere, invest in anything, or anyone, so long as their approach identifies huge return potential. A very different strategy that I’ve come across more and more is what I call affinity investing. These are investors that adopt a thesis based on an affinity group, and one which lacks a reasonable argument for why that group will outperform everything else. Here the tail wags the dog, the special interests of LPs drive the investment focus. A recent example is a VC that is raising a fund to invest in those whose ancestors hailed from a specific country, regardless of where the founder is currently located. Another was an aspiring fund manager that invests only in founders of a specific religious group. From where I’m sitting, there’s no discernible strategy for how these founder types will outperform all other founders. To go a step further, this approach suggests that deal flow will be extremely limited to only those founders meeting very specific criteria. As an example, one of the universities I attended approached me 18 months ago about managing a fund on their behalf. The phone was raised, the capital was ready to deploy the catch. I could only invest in companies that included alumni on the founding or executive team. Now, I currently receive about three to four pitch decks a day, and it’s still challenging to find opportunities where I can confidently invest my money. With this proposal, I’d likely struggle just to find startups meeting the criteria, forget about their likelihood of success. This offer was one of the easiest passes I’ve ever made. I’m not in this business to manage money. I’m in the business to drive returns. But there is one major advantage to the affinity investor, and that is raising capital This approach allows the fund manager to tap into affinity group members, those that feel very strongly about their communities and want to support those in it. Those that trust other members of their group, increasing their willingness to invest. If two people are aligned on a greater cause, the absolute return of investment is subordinate to the cause at hand. Look, if the goal is philanthropic, and one is looking to drive impact, by all means, I applaud the effort. But if the goal is ROI, the thesis should reflect that. I asked should we be deployment focused or race focused? Should an emphasis be placed on the ability to drive returns or the ability to attract assets under management? I know where I stand, whether startup founder or early investor, does your strategy drive value or is it built to attract capital? While one may have a faster and easier path to raising funds, we all have a responsibility to deploy it wisely.

That will conclude this cram session installment jump on the TFR website at full ratchet dotnet today to sign up for the newsletter and receive all the info on special content episodes and the best articles written on startups every week. Until next time, over prepare, choose carefully and invest confidently. We’ll see you next time.