How to Invest in Technology Startups–Timeless Advice from an Angel Investor Who Turned $100,000 Into $100,000,000

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About Jason Calacanis

Jason Calacanis is a technology entrepreneur, angel investor, and the host of the weekly podcast This Week in Startups. He’s the founder of a series of conferences that bring entrepreneurs together with potential investors. Jason worked as a “scout” for top-tier Silicon Valley venture capital firm Sequoia Capital. He used this knowledge to become an influential angel investor. Subsequently, Jason has invested in 150 early-stage startups, including four that have achieved billion-dollar valuations.

Synopsis

Angel offers a guide for 21st-century investors to find the companies nobody else would invest in. Startups have significantly high failure rates. However, you only need one of these startups to be a success for you to gain millions of dollars. Jason Calacanis has over 25 years of experience investing in companies that are close to failure but have outstanding potential. The key is investing in the founder rather than their current product. Their current failure only offers further opportunities to have greater ownership and more influence over the company’s trajectory. Jason offers guidance on choosing the startups with the greatest likelihood of success. Plus, he provides the same approaches he adopted to invest in multi-billion dollar companies, like Uber, during their startup phase.

What Is Angel Investing?

Angel investors aim to invest in companies that are less than three years old. These companies also have little or no product, are financially desperate, and are not listed at a public market exchange. This might sound like a recipe for disaster, but with the right founder, any company has the potential for success. Crucially, you will be the angel investor who invests in a struggling company during its hour of need.

Create Your Own Luck

“Honest communication, deep collaboration, and taking the work seriously win the day.”
– Jason Calacanis

Investment outcomes can be relatively random. Due to the unpredictability of investments, this pushes many people to invest in the passive income of index funds. However, other approaches have far greater potential returns. Leading investors adopt these approaches, allowing them to earn 1000-10,000x returns on their investments. Jason believes the investors who most consistently acquire large sums of money adopt the Angel approach.

The Angel investment approach is not for everyone. When there is the opportunity to win substantial amounts but potentially lose money, people will look at these investors as stupid. However, the reality of Angel investments is you do not want many people to be supportive of your approach. If everybody were willing to invest in this way, then this type of investing would no longer offer once-in-a-lifetime returns on your investments. However, at this point in time, there are millions of people passing on investing in technology startups with little worth. Some of the world’s largest businesses, like Airbnb and Uber, were passed on by several well-known investors during their earliest stages. In this way, Jason argues we make our own luck. Instead of merely being correct about investments, we have to make our own luck by making superior investments with limited information.

These superior investments, and subsequently our improved luck, are not random. Jason argues that putting the hard work into choosing your investments will help improve your chances of success. Plus, he suggests combining this approach with also surrounding yourself with successful people.

Investment Returns

Unlike index funds, investing in early-stage investing is far from offering guaranteed returns. As most people argue, Jason states most early-stage investments will fail. However, Jason points out that the failure of these investments does not mean you have to lose money. Instead, if you are investing effectively, then you will at least get your money back. Hence, you are limiting your possibility of losing money and significantly improving your chances of making huge amounts of money. This is especially true because involving yourself in the angel investing sphere further increases your chances of future success. For example, after angel investing, you will meet more driven and creative individuals within the sectors you want to invest in. Plus, you will expand your network of people, knowledge, and learning opportunities.

Jason describes the investor returns of Angel investing as following power-law distributions. Essentially, if you remove the top three biggest wins from all Angel investors’ portfolios, then their returns will likely be the same. The power-law suggests your top one or two investments will provide most of your portfolio’s return. This law highlights that Angel investing will not guarantee success with every investment. However, it will increase your chances of finding those one or two investments that will offer significant returns. Additionally, it also showcases that failure is inevitable, and success will lag. Therefore, you have to be strong-willed and willing to fight through failure.

Most business failures occur during the first year or two of their creation. However, the business’ success will take significantly longer to mature and provide exits. Therefore, you should not be discouraged by failures outweighing positive outcomes during your first few years of angel investing.

Investor Psychology

Psychology has a significant impact on people’s investment decision-making. As well as impacting markets, psychological biases can impact on your investment decision-making. For example, confirmation bias may take over, whereby minor success in one investment choice pushes you to over-value future investments that are similar. Subsequently, this confirmation bias could prevent you from broadening your investment choices and potentially obtain significantly more money.

One way to overcome the investment biases you are most prone to is to write deal memos. Deal memos involve documenting specific details relating to every investment. For each investment, you should document your reasons for investing, the potential risks and concerns, and any other rationale related to the investment. The aim of these deal memos is to continually improve your investment decision-making process. Deal memos should help clarify your short-term thinking by forcing you to put it down into writing. Additionally, deal memos offer a relatively less biased outcome of your investment logic. You can look back at these memos later down the line when the investment is doing poorly or well. Subsequently, you can use these deal memos to guide your future investments. Jason recommends reflecting on these each time a startup raises additional funds, or another decision must be made.

Due Diligence and Deal Screening

Investments should never be impulsive. Instead, investment decisions should be made after having had time to reflect. Subsequently, Jason suggests you never say ‘yes.’ Simply saying yes to anything in business suggests you have reached a decision on impulse rather than reflecting on your decision. With regard to investing, you should tell founders you need to complete due diligence before investing. Specifically, you should compare all your investment options before making a decision.

Jason suggests you should be utilizing these same principles for equity crowdfunding. It is easy to watch passionate founders talk about their project and be convinced the business will succeed. However, deciding to invest at this moment is instinctive. Instead, take a few days to reflect on the opportunity provided by the business and compare it to other investment opportunities. Additionally, try to view the investment objectively rather than getting attached to the concept on a personal level.

An effective way of adopting an objective standpoint is to obtain the product and conduct due diligence. Trying their product as if you are a customer is an effective way of understanding if this is a worthwhile investment. Jason recommends investing based on the founder rather than their product, but objectively examining the product is part of your ‘hard work.’ By testing the product, you are gathering more information than the average investor. Subsequently, you will have a better grasp than most investors of the company’s customer service, vision, and marketing.

As well as comparing every potential investment to other opportunities, you mustn’t hyper-focus on opportunities you passed up on. There are dozens of fantastic deals weekly. You only need one of these deals to be making considerable money.

Great Founder and Big Ideas

“The number one reason a startup shuts down is not actually running out of money, which is what most people believe. The number one reason a startup fails is the founder gives up.”
– Jason Calacanis

Every potential investment must meet two criteria to even be considered. Specifically, potential investments have to be led by a great founder and have big ideas. You should be asking yourself whether the founder is seeking to change the world or merely change a feature or app. The former is where you want to hedge your bets, as they have far greater potential. Jason explains it can be possible to create the same product with these two approaches. However, the business’ success is more dependent on the vision of the founder and their mission. Essentially, powerful ideas can differentiate one product from another. It is more likely that a bold business with big ideas will succeed because employees and investors are more motivated by a bold vision.

Business Scalability

“In order for Starbucks to reach a billion customers, they needed to open tens of thousands of stores, which on average serve five hundred to seven hundred cups a day, according to reports. Starbucks was founded in 1971.”
– Jason Calacanis

Jason splits businesses into two types: scalable and non-scalable. Jason only invests in scalable companies. Both scalable and non-scalable businesses are prevalent within the equity crowdfunding world. Therefore, you must understand this point to choose between two comparable companies based on whether they are scalable or not.

Examples of non-scalable businesses offered by Jason Calacanis:

Independent Films
Restaurants
Bars
Bed-and-Breakfasts
Consulting Firms
Clothing Lines
Microbreweries

These businesses can be highly successful. However, these successes are uncommon. These companies are generally non-scalable because they require significant effort and capital to scale up their orders to billions of dollars. This billion-dollar threshold is used to describe startups called unicorns. Jason Calacanis was an early investor in Uber, which has since been valued at over one billion dollars. Uber was an example of a company that was clearly scalable. Subsequently, there was a reduced risk of failure, less potential dilution, and fewer factors impacting its chances of maximizing returns.

Investments Are Never Permanent

One of the benefits of investing early is you can easily choose to invest more later if you gain more trust. For example, you could decide not to invest during the first round of investments based on certain circumstances. However, if the company improves on the limitations you identify, then you can always invest in this company within a future round of investment. Ensure you keep in mind the distinction between the founder and the product. It is relatively easy for a company to pivot from one product that isn’t working to another and attempt to raise additional capital. However, it is much slower and damaging to change the founder.

Founders and Minimum Viable Products (MVPs)

“I don’t need to know if your idea is going to succeed, I need to know if you are.”
– Jason Calacanis

As stated previously, Jason prioritizes fantastic founders over fantastic products. Notably, he seeks to invest in founders that are doers rather than talkers. Big ideas are crucial. However, this does not mean you should invest in somebody purely because they are full of big ideas. Jason recommends avoiding investments in founders who wait on the safety net of funding or the perfect time before building the idea. These founders are what Jason would describe as talkers. Alternatively, you should aim to invest in founders who have big ideas and act on them. Specifically, those that create minimum viable products and test several iterations to figure out what does and doesn’t work. These founders will continue to produce based on their big ideas and subsequently will reduce the chances of failure.

How to Angel Invest With Little-to-No Money

“If you want to make a lot of money, you’re better off being a world-class programmer on a very esoteric and in-demand vertical and getting Google or Facebook to give you $1 million-plus a year in stock and cash for ten years in a row. You have no downside, you can work a couple of hours a day, and you get unlimited free food.”
– Jason Calacanis

One of the issues for angel investors is that angel companies often expect investments of over $10,000. However, there are other ways to become invested in a company with huge potential. For example, consider whether you have any skills you could offer the startup. You can become an advisor to angel companies by offering skills like marketing, coding, or design. Similarly, you can become part of the company’s board without any monetary investment if you have a network of people beneficial for this company. Subsequently, if you adopt either of these approaches, the company may reward you with shares in the company. However, this is only an approach you should adopt if you do not have the money to invest. You will be investing a significant amount of time to obtain these shares. Jason describes this type of investor as a Broke Angel.

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