Episode #69: Jason Calacanis, “This is a Little, Secret Way… A Dark Art of Becoming Truly Wealthy… Massive Wealth”
Guest: Jason Calacanis is a serial entrepreneur, angel investor, podcaster and writer. He has been called “arguably, the world’s greatest angel investor” – as proof of that, he turned $100,000 into $100 million, which you can read about in his book “Angel”.
Date Recorded: 8/14/17 | Run-Time: 1:29:14
Summary: We start with Jason’s background. From Brooklyn, he worked his way through college, then was in New York at the breaking of the internet. He started his own blogging company, and eventually sold his business for $30M. Later, he landed at Sequoia Capital as part of its “scouts” program, and went on to be an angel investor in a handful of unicorns (a startup company valued at over $1B).
As the conversation turns to angel investing, Meb starts broadly, asking Jason about the basics of angel investing.
Jason defines it as individuals investing in companies before the venture capital guys get involved (before a Series A). He tells us that the more you can analyze a company through data, the lesser chance it’s an angel investment. That’s because to get the huge returns that come through a true angel investment, there has to be some level of risk (in part, related to having less data-driven information about a company’s financials).
So, the challenge is to find that “Goldilocks” period – before revenues are so high that a VC is interested, but after a startup company has launched a product and shown a hint of traction (so many early stage companies end up failing even to launch a product). When you time your investment in this manner, you reduce your downside risk.
Meb makes a parallel to traditional equity investing, where only a handful of stocks make up the majority of overall market gains. He suggests this dynamic is likely even more exaggerated in angel investing.
Jason agrees. That’s why he suggests you want to go slow at the beginning, ramping up as you learn more, building your network, and growing your deal-flow. But when you get it right, it can result in massive wealth. Or as Jason says, “I think that this is a little secret way… a dark art of becoming truly wealthy… massive wealth.”
Meb points the conversation toward a section of Jason’s book which made the point that to get started in angel investing, you need at least one of four things: money, time, expertise, or a great network. He asks Jason to expound. So, Jason provides us some color on these different angel-factors.
This dovetails into how much of your net worth should be allocated toward angel investments. It’s a great conversation diving into the math of various net-worth-percentages, and how a couple of investment-winners can have a profound impact on your overall wealth. Meb tells us about his own early-stage investing experience, and how the contagious optimism is exciting.
Meb asks what are some resources and places to go for more information. Jason points toward doing some syndicate deals. By doing so, you can read the deal memos, and track the investments even if you never actually invest. It’s a great way to learn – Jason uses the analogy of playing fantasy baseball. The guys go on to discuss ways to grow your network through other syndicate investors.
A bit later, Meb asks about pitch meetings when company founders are looking for money. What’s your role as a potential investor in these meetings? Jason likes to ask the question “What are you working on?” He then provides some great reasons why this question is effective. A follow-up question is “Why now?” In essence, what has changed that makes this moment right for your business? For example, for Uber, it was GPS on phones.
Curious what the “why now?” of the moment is? Robotics is one of them. Jason gives us a couple others (but you’ll have to listen to discover what they are).
The conversation drifts into how to exit your angel investment (or invest more). Jason says if you have a breakout success you want to quadruple down. For instance, if a big VC like Sequoia is thinking about investing, you’d definitely want to jam as much money in as possible. The guys then discuss taking some money off the table if your investment goes public, perhaps selling 25% of your position at four different times.
Meb likes this idea, as we discuss the behavioral challenges of investing so often, with so many investors thinking in binary terms – “in or out?” But scaling is such a powerful concept.
There’s so much more in this episode, and if you’ve ever been curious about angel investing, you’re going to learn from the best. The guys discuss how the lack of liquidity can be a blessing in disguise… why the sophomore year of angel investing can be brutal… a great way to tell if your angel investment is doing poorly… a huge ($10M huge) tax benefit of early stage investing… and of course, Jason’s most memorable trade – it turns out, he was the 3rd or 4th investor in Uber.
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Links from the Episode:
- 1:55 – Introduction and background to Jason Calacanis, angel investor, author of Angel: How to Invest in Technology Startups–Timeless Advice from an Angel Investor Who Turned $100,000 into $100,000,000 and host of This Week in Startups
- 3:26 – Silicon Alley Reporter
- 4:03 – Inside.com
- 5:49 – What exists in the place of Silicon Alley Reporter today; TechCrunch, Venturebeat, and Mashable
- 6:37 – Real journalism – The information, ReCode
- 7:36 – Most popular category on Inside
- 8:40 – Basics of angel investing
- 12:16 – The chances of finding a real great pick is small
- “The Capitalism Distribution” – Longboard
- 13:20 – Typical market cap for an angel investment
- 15:09 – What you need to get started with angel investing
- 18:29 – Importance of being in Silicon Valley
- 19:34 – Basics of putting together an angel portfolio
- 24:42 – Good places to find more information
- 27:59 – Syndicate leaders to follow to learn more about angel investing
- Angel List
- 30:58 – Benefits of investing with a syndicate
- 36:06 – Concerns about the current market
- 40:48 – Roofstock sponsor message
- 42:00 – Exploring the pitch meeting
- 44:25 – The important question, why will an idea work now
- 48:11 – Some other factors that Jason thinks about in terms of selling
- 52:30 – How angel investors can mess up their strategy
- 56:58 – Warning signs that you should not reinvest with a startup
- 58:38 – Why no database tracking angel investments
- 1:00:33 – Importance of good updates from startups
- 1:06:35 – Tax benefits of investing in qualified small businesses
- 1:07:47 – What’s the most common reason angel investors don’t do well
- 1:08:50 – Café X
- 1:11:11 – Is equity crowdfunding good for non-accredited investors; Republic.co, SeedInvest.com
- 1:15:39 – Jet.com gets a big following with equity giveaway contest
- 1:16:40 – Caution about ICO (initial coin offering)
- 1:18:56 – What was the most series round Jason has seen
- 1:20:00 – The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success – Thorndike
- 1:20:22 – Where should new podcast listeners to Jason’s show start…@twistartups
- 1:22:30 – Waking Up Sam Harris Podcast
- 1:22:34 – Brett Easton Ellis Podcast
- 1:23:11 – Most memorable investment
- 1:23:47 – Most frustrating investment
- 1:25:00 – New ice cream startup being started by Jason’s 7-year-old daughter
- 1:28:07 – Best places to follow Jason – @jason and Jason@calacanis.com
Transcript of Episode 69:
Welcome Message: Welcome to the Meb Faber Show. Where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
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Meb: Welcome, podcast listeners. It’s summertime. And today, we have an amazing episode with a guest I’m very excited to have on. Got to know at the poker table. He’s a tech entrepreneur, renowned investor, kind of one of the godfathers of podcasting, by the way. You’re not that old, but how many episodes in?
Jason: We’re well over 700 now, started eight years ago.
Meb: He’s been called arguably the world’s greatest Angel investor, which you can read about in his fantastic new book “Angel.” We feel very fortunate to have him on the show. Welcome, Jason Calacanis.
Jason: Thanks for having me.
Meb: So Jason just flew in. And I know there’s been a ton of interest in Angel investing and we’ll get to that, as well as many other things today. But like a lot of the investors we have on, a lot of personalities, a lot of different backgrounds, and I think yours is some great context for some of the advises in the book. And I thought it’d be a good place to start, maybe just give us a few minutes, kinda where you came from, the path that got you to Angel investing and then we can turn over to focusing on the investing world.
Jason: So I’m a kid from Brooklyn. And got into computers at a very early age in the ’80s, had a PC junior, and worked my way through college. And then wound up being in New York at the breaking of the Internet when it just sorta became part of the public consciousness. And I started a zine, which is a magazine that is self-produced, for people who are millennials and haven’t heard of a zine before. It’s sort of a print blog and that print blog, the zine, was called Silicon Alley Reporter. Very quickly became a magazine and I was a journalist for a decade or so and still am a writer and a pundit, I guess. And that really sort of set me up with a huge network.
I did a couple of companies. One of them I sold for $30 million to AOL. It was a blogging company called Weblogs, Inc. that did blogs like in gadget, auto blog joystick, a lot of famous blogs. And so I hit that wave as well. So I got pretty good at timing waves, the Internet blogging, etc. and when I was an entrepreneur in residence or in action at Sequoia Capital working on my next company which was Mahalo.com which we pivoted to Inside.com, still exists, they had an idea for a Sequoia Scouts Program. And I had been introducing a lot of entrepreneurs to Sequoia and some of my friends there. And, you know, a lot of my friends back 10, 15 years ago were raising funds and trying to, you know… We would talk about investors. And so, I gave a lot of advice to people like Evan Williams from Twitter or Mark Pincus from Zynga or Elon Musk and, you know, we were all just friends talking about start-ups back then.
But I never Angel invested. And then Sequoia’s, like, “You know, you keep introducing us to these incredible companies,” and we passed on Twitter and Zynga and Tesla, literally three companies I’ve pushed them to invest in, and they said, “Why don’t we just give you some money and you invest it?” And I said, “What’s the catch?” And they said, “Well, let’s put it 50-50.” And I said, “What’s the catch?” It’s a pretty big carry, right? Like, “How much do you guys get?” And they were like, “Well, you know, it’s never gonna be anything. So it’s just gonna be like this little early warning system for us to cut 25K to 100K checks and we’ll see how it goes.”
And all of a sudden the first three, four investments I hit two unicorns in $100 million company and actually probably three unicorns in the first seven. So it was this crazy hit rate. And from there I raised a fund and I’ve invested in 150 companies and the idea of writing a book about Angel investing happened just over a year-and-a-half ago.
The Wall Street Journal, this Kid Rolfe over there, he got some documents, some LP papers or something about the Sequoia Scouts Program, and it was this program that, you know, $3 million or $4 million was invested in the portfolio, became worth $200 million. And they were like, “How’d that happen?” And it was my investments. And then Sam Altman from Y Combinator fame had done Stripe as well. So he was like $20 million of it and I was the other $180 million.
Meb: That’s a pretty fun winding road. And it’s funny you see a lot of…journalism is I think actually a pretty great background for equity research in general, whether it’s private or public. Before we keep going, is there a modern version of Silicon Alley Reporter this day and age? Is it Tech Crunch or is there anything like it?
Jason: Yeah. I think there’s Tech Crunch, and VentureBeat, Mashable. A bunch of people cover the start-up scene. But, you know, journalism is dying a brutal death and it’s pretty, pretty dark, I think. You know, the quality of journalism has just fallen off a cliff. And the idea that you could take your time and write one story a week just doesn’t exist. And people at like Tech Crunch are filing three times a day, four times a day. They’re not doing any kind of meaningful journalism, you know. It’s up to people like Stratechery or The Information or WEcode. There’s like very few places left that actually do real journalism where a writer like Peter Kafka, you know, or the writers at The Information or Kara Swisher could write something that takes three or four days to develop or three or four weeks let alone. So, you know, this day of tech journalism is pretty, pretty bad.
Meb: You know, we spend a lot of time on this podcast and, in general, moaning about curation. And Inside is actually a pretty interesting idea. We subscribe to a few of the newsletters, run the podcasting in Cannabis once. With this fire hose of information, we struggle with it as investors so much. And then I think there’s a lot of opportunity there. And we think about it just constantly just…I mean, there are sites like Seeking Alpha that has something like 10,000 investment writers. There’s not 10,000 good investment writers, you know. There’s very few. But it’s a struggle, I mean, finding kinda the signal or the decent materials out of all that information. It’s tough.
Jason: There’s definitely a need for curation in the space. That’s what inside.com does primarily. We have 25 newsletters.
Meb: What’s the most popular? Do you know?
Jason: Well, the Inside Daily Brief, it has over 100,000 people on it and that’s just twice a day. Here is what’s happening in the news from global news, etc. And so that one is not a vertical. It’s general news and it’s the biggest. But Inside AI, Inside Drones, Inside Bitcoin, you know, a bunch of these have 10, 20, 30,000 subscribers. And so I just did the math on it. We can get any newsletter to 5 to 20,000 subscribers after a year. So I was just like, “Let’s get to 50 and see what happens with the business.” We were halfway there and we just started paid subscriptions last month. And that’s already very promising. It’ll get us to breakeven within six months.
So I think going direct to consumers, having zero dependency on Facebook or Google or Twitter and then having consumers pay is the only way journalism gets saved. You can’t have any reliance on advertising and any reliance on an intermediary. You just have to go direct to consumers, which The Information is doing quite brilliantly. Stratechery is doing brilliantly. And so I think that’s the big play but it’s a slow play. So I’m slowly grinding it out.
Meb: We think a lot about it. A lot of our listeners…let’s start to talk a little bit about early stage investing. You know, a lot of our listeners are familiar with public market investing. Obviously, investing in the Facebooks and the Googles and IBMs, Walmarts of the world. But so let’s start a little broadly when you’re talking about this concept of Angel investing. What’s the kinda quick way that you would describe the basics of angel investing? What does that mean to you?
Jason: So Angel investing I define as individuals primarily investing in companies in the phase before venture capitals get involved. So anything before the Series A is really Angel investing. And there’s a whole bunch of micro-little moments there along that timeline before the Series A. The Series A, when a Sequoia or a Benchmark or a Kleiner Perkins invest let’s say $5 to $15 million into Series A, which is a lot of money… It’s gone up over the years. It used to be $2 or $3or $4 million into Series A.
But now Series As happen when there’s much more traction. So there are about five or six opportunities to invest before it hits the Series A. And even in the Series A, there might be Angel investors of note in them. And so, you’re investing in companies that are either pre-launched, recently launched or have modest traction. If the company has $5 million a year in revenue and it’s predictable revenue and they figured it out, well then they qualify for venture capital. And if they are scaling that revenue to any meaningful level and tripling it every year, well then they’re on the way to going public, right? And so the more you can analyse the company through their data, the greater the chance that it’s not an Angel investment. And the reason there’s such a huge opportunity there to have a 100X return or a 500 or a 5,000 and that’s an outlier obviously, but to have those kind of opportunities there needs to be some level some of risk.
In other words, for Uber or Thumbtack to be worth $4 or $5 million in their first rounds of funding, which I have participated in both of those, those companies were highly-speculative companies at the time. And to invest in…you know, if Masso’s gonna invest in Uber right now or General Atlantic and they’re gonna pay $50 or $60 or $70 billion, they can look at the number of rides, the number of cities, the growth in each city. There’s a whole swath of data for them to look at. There’s eight years of Uber data now and it’s incredible, incredibly granular. So when people see these very high valuations for these private companies that are in their later stages, and it’s typically happening through very smart hedge fund money or public money that’s dipping down at the private phase, I wouldn’t worry about those folks. They’re doing their diligence generally speaking, or overwhelmingly, and they know what they’re doing. So Angel investing is that early period.
Now, most of the time, people are using sweat equity or friends and family money to get them to the launch of a product. So what I advise people in the book is to try to find what I call the “Goldilocks Zone,” which is before the revenue is so high and the traction is so apparent that a VC would invest, but after they’ve launched the product. And that’s the “Goldilocks Zone,” not too hot, not too cold. That’s what I specialise in and that really greatly reduces your risk because of the 100 companies that raise money, that say they’re gonna build a product, less than half of them actually get their product to market and probably only 1% of them get any kind of traction.
So if you just wait for the 1% that have traction, you’ve now eliminated 99% of the risk. Now you’re in that 1% or 2% pool. And of that pool, probably half of them don’t scale the traction in any meaningful way. So now, you’re down to 50 BEPS of that original pool and you can really reduce your downside risk when investing in these companies.
Meb: A couple of things on what you talked about. One of the best and biggest challenges of Angel investing is it’s actually pretty similar to public market investing. There’s a great paper we’ll link to in the show notes called “The Capitalism Distribution” that looks at stocks, so back to the 1980’s. And it shows that two-thirds of stocks underperform the index. Something like 40% are negative returning investments. And these are big public equities and something like a quarter just basically go to zero and 10 to 20% generate all the gains.
Meb: So this law of just like these a couple huge outliers, the Amazons, McDonalds of the world, this is even probably more true in the Angel investing space where, you know, there’s a pretty low batting average but the wins are huge.
Jason: Correct. And what I try to explain to people who wanna get involved in Angel investing is how to go slow in the beginning and learn and to play small bets, and then to quadruple down on the winners. As I said earlier, there’s probably four or five or six opportunities to invest in these companies by Angel investors before they hit a skate velocity and they don’t need angel money anymore. They need $5, $10 million checks. They don’t need $50,000 or $100,000 checks.
So if you have that many opportunities and you have what’s called pro-rata, the ability to maintain your percentage ownership in later rounds, there’s gonna be an opportunity for you to quadruple down. And so, what you wanna do is learn slowly and play small bets to start. Just like if you were learning poker, the idea of sitting down at the $100, $200 table, you know, the game that I play in every week which is a $5,000 or $10,000 buy-in, you wouldn’t play that game when you were learning. You’d play the $1, $2 game. You would waste $40 for each buy-in. And you’d do that three or four times in the night and you wouldn’t feel too stupid if you left Hollywood Park down $200, which is what I did for five years.
You know, I avoided playing in the big games. I kept getting invited as well, as it were, and I think that’s the best model for angel investing. Start very slow, build your network because you do need to have a network to have deal flow, and learn. And if you have, let’s say 10 or 20 investments and they’re only $1,000 each or $5,000 each and that represents just 1% or 2% of your net worth, If one of those hits and does 50 or 100 or 200 to 1, what it does to your net worth is pretty amazing, right? And I think in the public markets and certainly commodities and bonds, these kind of opportunities don’t exist.
So the reason I really wrote the book is because I think the ability to become affluent or change your station in life from poor to middle class, middle class to affluent, is getting harder and harder. And I think that this is a little secret way, a very opaque, dark art of becoming truly wealthy, LIKE independently wealthy, LIKE massive wealth. And most people don’t know about it. Nobody’s really written books on it, certainly nobody successful has written…no successful angel has written a book on it because I don’t think most angels think it’s in their best interest to invite more people to the party.
Meb: And part of this is just the simple math of it. I mean, the typical market cap or valuation range for an angel investment, is it like $1 to $10 million?
Jason: Yeah, I would say when I started it was $2 to $5 million was an angel investment, a seed round. Now I’d say seed rounds are $2 to $8 million so probably, on average, $5, $6, $7. But it had peaked about two years ago during the Uber, Airbnb, InstaCard, you know, peak valuations at the time. And during that period, we saw people coming out of Y Combinator with $8 to $15 million valuations with little or no traction. And it was kinda laughable for a period and I kinda just paused and, you know, sat it out because anybody who’s asking for ridiculous valuations like that, it’s a bit of a tell. Like they’re disconnected from reality and one having an adversarial relationship with investor’s probably not a good thing.
And so most of the time, I’d say $5, $6, $7 million is what you’d be looking at for a seed round in Silicon Valley today.
Meb: And then just so for prospective listeners, you know, a small cap, most of what these public funds would even consider dipping their toes into for a lot of big neutral funds is like $2 billion. Some of them will come down to maybe $200 million if they consider them still small or micro-cap. So if you think about an investment at a $10 million valuation so they’re even the top of the range, you know, for that to go 10X, 100X, which what we could call a unicorn, that barely gets you into the small cap range for a lot of these public funds.
So you have the ability to have these truly exponential sort of outcomes, whereas if you’re buying a stock that’s maybe a small or mid or small cap at a billion, you know, for that to have a 100X, it needs to become a really, really, big company but it’s also a bit of a minefield as well. So we’ll talk a little about some practical advice. And, again, investors, just go read the book. There’s a lot in here that we’ll just touch on briefly but, Jason, you mentioned, to get started, you need, you know, one of four things: money, time, network, expertise. Could you touch on, you know, that just briefly or ones that you think are more or less important to someone just getting started?
Jason: Yeah. So if you go to Silicon Valley and you attend demo days, and all you have is a check book, your trust fund kit or a plastic surgeon whatever, somebody with disposable income and a lot of disposable time, you can just write checks. I’ve literally met somebody at Y Combinator [inaudible 00:17:34]. I said, “What do you do? You know, what’s your company do?” because he was 20 years old. He said, “Oh, no. I’m an investor.” And I said, “Oh, really? How many companies did you invest in?” “Something like 20.” I said, “Oh, where do you work?” And he says, “I have my own fund.” And then I said, “Oh, can I ask how old you are?” He says twenty-one or something. I said, “How did you get money to invest? [Inaudible 00:17:49].” I saw a 50,000. It was…dad had given him a fund or something, which is awesome. I was totally jealous.
And so, if you just wanna write checks, trust me, people will cash them. So you only need to have that. And I joke a little bit in the book that people come to me for advice and from my network but mostly for the cash, and that’s me. And I have the biggest network of anybody probably and I have in terms of advice some of the best advice. But on a network-basis and the ability to promote a start-up, there’s very few people who have anywhere near what I have in terms of followers and the reach of my podcast.
So I think just being able to write a check qualifies you. And being in Silicon Valley, qualifies you to hit some decent chance of returns. So expertise, people overthink this a bit. Every start-up needs help in some core areas: hiring, sales at some point, management, operations. So if you were a career salesperson for a telecom company and you saw a start-up that was just starting to hire sales executives, and you emailed the founder, and said, “I would like to trade you my management services and sales advice and I’ll help you setup your sales team. I’ll, you know, interview the people, hire them, train them, etc.” you could be an advisor to that company. And instead of taking $100,000 in consulting fees, take $25,000 in consulting fees and $75,000 in equity.
So I talk in the book a little bit about the common practice in Silicon Valley and other places of advisors. So a board of advisors has no fiduciary legal responsibility like a Board of Directors. A board of advisers is just a fungible term. It means nothing. There’s no legal concept there. It just means you’re advising somebody and some companies have board of advisers and some don’t, but usually it’s 2 years, 25 to 50 BEPS, you know, 1% even.
And I got started with a lot of advisorships. And so that’s another way to get on the cap table, the capitalization table of a start-up basically, which is a Google spreadsheet or an Excel spreadsheet with how many shares there are in the company and who owns them. And literally sitting in my Google Drive is Uber’s first cap table with like, “Here’s everybody on the cap table,” and it was just an Excel spreadsheet, right. Then eventually these things become more formalized and companies go public and the shares exist in other systems. But you can get on the cap table by being an advisor to the company and employee of the company, starting the company or being an investor. So there’s actually four ways to get equity in these companies. So even if you were broke or had no money, you could theoretically get on a cap table by starting a company, working for one, or being an advisor to one.
Meb: And so as people think about this and say, “Okay, I’m gonna commit whether it’s through the sweat or through…I’m gonna start angel investing. I’m gonna take it slow. I read Jason’s book. I’m gonna start networking.” By the way, my favourite chapter in your book, I used to wanna write a joke book on losing weight just [inaudible 00:20:43] and every chapter was just exercise more and eat less. And you have a chapter in the book where it says, “Do I need to be in Silicon Valley?” and the entire chapter just said one word. It said, “Yes.”
Jason: Yes, chapter five. It’s quite controversial.
Meb: So…but I loved it. But, you know…and I don’t think those [inaudible 00:20:58] like it’s impossible to do it anywhere. It’s just a lot…
Jason: To be a great angel investor, I think you need to be in Silicon Valley.
Meb: A lot of tailwinds.
Jason: Because if you just think about the number of investors there and the number of opportunities, it’s somewhere between 100 to 10,000 to 1 another market. What I tell people is if you’re in Silicon Valley and you’re trying to match eight numbers on your lottery ticket, they give you the first five. You know, if you’re playing Texas Hold’Em in Silicon Valley, your first card is the ace of spades every time. You’re probably gonna have a playable hand in all likelihood, right? Most hands would be playable when you start with an ace.
Meb: Give me some broad…just to framework some other things. So you talk about this in the book but, you know, how much of your net worth should you put to play? How many positions should you look to build? What’s your timeframe? Just some of the basics on putting together an angel portfolio.
Jason: I’m curious as to what you think of what percentage you should put into it. But what I’ll say is I think if you’re gonna do this half-time or full-time, let’s say 10 to 50 hours a week and it’s becoming a class of employment I believe. It’s going to be a full-time job, angel investing. It didn’t used to be considered a full-time job or a career but I think with VCs moving downstream to Series A when you have $3, $4, $5 million in revenue, there’s actually this huge opportunity that’s opening up in the “Goldilocks Zone” to actually do this as a career.
So if we think about it like a career, if you had a net worth of a couple of million dollars, if you were to lose…if you allocated 10% of it to angel investing as an accredited investor, that might be $300,000 of your $3 million of net worth. If you were to lose it all on average in the public markets, you would breakeven. You’d recoup that in what, 18 months, 12 months, 24 months, depending on, you know, the market’s performance that year or years.
And so, I think there’s very little downside risk to that and if you were able to recoup half of it in returns, well then you’d only be losing 5% of your net worth, which you would recoup very quickly. At the same time, you would be learning a heck of a lot and hanging out with the smartest people in the world who wanna change the world and with the outside possibility of hitting the lottery.
And so, when I look at it, I can’t imagine that people wouldn’t do this if they had the time because it’s so enjoyable to work with these companies. And the possibility of having an outsized return is, you know, so realistic in Silicon Valley, while the downside is somewhat protected. If you do 30, 40, 50 angel investments in Silicon Valley and one of them returns 20X or 10X or 50X, you’re gonna be somewhere in the losing half of your money or losing two-thirds of your money to doubling your money.
And I do think that’s probably the likely outcome, lose half or double your money. That’s probably the likely pattern until you hit 50 or 75 or 100 investments in year 5, 6, 7. You may hit a unicorn. Now when you hit six like I have, I doubt it. I don’t know that I’m gonna wind up being the greatest of all time but it’s probably…it’s definitely my goal, so I’m in the top five. But it’s possible you could hit a unicorn, and if you do and you have that 50 or 100X, you know, you’re gonna be well into the black.
So I like the idea of people putting I’ll say 1% to 10% of their net worth into this because if you lost it, it wouldn’t be a huge loss and if it does hit and you go 100X, you’ve now doubled your overall net worth which where does that possibility exist in other investment vehicles?
Meb: So we actually agree with you. And, you know, we’ve written books on this topic where we say, “Look, public markets, asset allocation, the vast majority of them you will eventually get wealthy if you have a timeframe of 30 plus years. And…but it’s mostly a stay rich or keep up with inflations sorta strategy.” Asset allocation and public markets, in general, it’s really hard to have that exponential life-changing sort of wealth. And you have to have the sort of the Warren Buffet style returns which are 20% and we’ve had somebody write some articles on that, which is, in public markets, 20% returns is almost impossible.
And if you do it, you end up as some of the top…the George Soros, the Warren Buffets of the world. But it’s interesting to me is the kinda angel investor. And so I started doing this in I think 2014 and my goal set was kinda what you described. I said, “Look, I’m gonna start really slow. It’s gonna be $1,000 checks. I think the biggest is up to $10,000. And my goal is to breakeven.” But the huge benefits have been the learning but also a not trivial benefit is getting the contagious optimism.
And I’m a quant so in everything I do in public markets is rules-based. And so for me, this is an interesting exercise because I’m the world’s worst discretionary public market investor but that’s why I’m rules-based in quants so it’s been really fun experience. And for me, oddly enough, the area that I’m most versed in I haven’t done any investments in which would be asset management or Fintechs sort of the world. So it’s been a great education. There’s a great stat.
And here’s also a challenge though and probably why it’s so much opportunity is that Kraft did a study. It showed that the average person spends more time researching what TV they’re gonna buy than their time in investments or anything, right. And so, the challenge of the angel investing is it’s very hard to find information. And so, a lot of the things you mentioned, the network and the expertise, you know, that’s a pretty steep learning curve. And so, what are some of the resources or sites or places to go that you think are good starting points for people to find more information?
Jason: The reason I wrote the book was genuinely there is not a lot of information out there. And so, you know, that really is the reason I wrote it because if you look it’s like where do you even start? After you read the book, and the book is really an opportunity cause. I was talking to somebody about it and they’re like, “Why did you write the book?” I was like, “You know, I think it’s part of my legacy and I want to have other people benefit from it because I’m gonna do 150 more investments myself and then I’m done. That’d be 300.” And we’ll see if I could hit 10, 12 unicorns.
I have a sort of master plan in mind of a 10-year arc of this career and then I think I’m gonna hang it up, to be honest. Well, I’ll make the decision when I’m 50 or 51 but that’s basically my current plan is to do 150 more investments.
Meb: Then what though?
Jason: I could figure it out but, you know, I have to think it through. But I can tell you when you this many investments, it’s intense. I mean, I like it. I’m an intense person. I like being engaged. I like playing high-stakes poker but I’m not sure I wanna do it for the rest of my life. So I’m gonna give it another five years, maybe finish another fund we’ll see.
And, you know, for people to get a feel for how to do this I think, and I outlined this in the book, doing 10 or 20 small syndicate-style investments, there’s a concept of an angel syndicate which pioneered by a website called AngelList which you can Google. And AngelList has a bunch of different micro-funds on it. You can put $20,000 or $10,000 into a fund led by a syndicate lead. They do five investments on your behalf. Or you can go to SeedInvest or Republic or My Syndicate which used to be on AngelList but we got a little too big for them and now we’re on Jason’s Syndicate. And we will share a deal memo with you. Here’s the next investment we’re doing if you’re an accredited investor. We’ll share a deal memo with you and we’ll talk about non-accredited investors because they’re gonna be able to come to the party soon.
And we’ll just say, hey, here’s the deal. If you wanna invest, go ahead and invest. Pick a number between $1,000 and $100,000. We have an allocation for $300,000 or $400,000 in this angel start-up. And we get 20% of the carry. So we have some upside. If it goes well you pay a very low price in terms of the carry on the investment. You only pay us if we find a company that has a return. And if you don’t like that particular company, you can pass. And so, what’s very interesting is you could join a bunch of these syndicates on SeedInvest, AngelList, Republic, Jason’s Syndicate, Funder’s Club, and you can just pass on every investment and just read the deal memos and do it like Fantasy Sports where you just read it and say, “What if I would have invested, what happens?” and just track it over time if you wanna just do Fantasy Baseball, which somebody suggested to me after I wrote the book and I was like, “Wow, that would have been a good chapter. I’ll add it to the next one,” which is if you can’t afford any of this in your 20’s, just do angel investing as a practice of look at CrunchBase, look at Mattermark and say the company was valued at 20 million in the last funding. I’m gonna pretend I put $10,000 into it. Let me check back. I’ll write my thesis. I’ll write my own deal memo and I’ll see how it feels in 10 years or 5 years from now and how it did.
Meb: So you generated a couple spin-off questions. First, are there any like kinda syndicate leads that would come to mind that are doing this that you think are…would be good, people in general, to follow?
Jason: Yeah. If you go to AngelList you’ll see Ed Roman is quite good, quite considered. And you’ll see Tom Williams and you’ll see Gil Penchina. All three of those are pretty well-considered. One of the trends that’s interesting is a lot of the people in angel investing do so well that they then wind up calling in rich. They just decide to become VC’s or they just check out. Chris Sacca just was like, “Why am I doing this every day? I’m out.” And this happens over and over again.
Mark Endrizzi was doing angel investing when I met him 15 years ago. He was gonna invest in my company Weblogs, Inc. And now he’s running Andreessen Horowitz with billions of dollars under management and raising billion-dollar funds and writing $50 million checks, not $50,000 or $250,000.
So I think you have to look at it and say…one of the big challenges I think is…the challenge and the opportunity is that these angels just, they outgrow it. And I’ve tried to scale angel investing myself and that’s what I’m…my efforts have been at. So I think going to any of these sites and just signing up and backing any of them and just placing very small, micro-bets and then using those to build your network is the real strategy that I outline in the book. So let’s say you do 20 investments at $1,000 each through syndicates then you look on CrunchBase or Mattermark or any of these online databases to see who are the co-investors, now you make a Google sheet with 20 investments with 20 co-investors each. You got 400 names. Maybe there’s some duplicate.
You find out who the dupes are and you email those first and say, “Hey, we’re investors in these three companies, these two companies together. I’m in San Francisco on these dates. I’m in Los Angeles on these dates. Let’s get coffee and then we could share a deal flow,” or you just email all 400 and say, “Hey, we’re co-investors in company name.” You do a mail merge. I’m gonna guess a third or half get back to you on the first email and I’m gonna guess 10%, 5% or 10% meet with you.
Now, you’ve built a network and this is, you know, one of those things [inaudible 00:31:56] “Oh, my God. It’s so hard to build a network.” And for me, I’ve always kind of had a preternatural ability to build networks. I don’t know if how…maybe it’s just surviving in Brooklyn and having to build alliances. It’s kinda Game of Thrones-ish.
And so, if you just do this simple technique, invest in 10 companies, find the co-investors, now all of a sudden you’re gonna have a world-class network and you’re gonna be able to trade deal flow. And then you now have proprietary deal flow which is you email the 400 people and say, “My next company I’m investing in is Acme. Here’s my reason for investing in Acme. If you want an introduction to Acme CEO, let me know.”
You do something like that and seven of those people take an introduction and two of them invest. Now you’re doing what the top line angels like myself do, which is they have proprietary deal flow and they’re able to syndicate deals to help the founder which builds your reputation with founders which then builds your deal flow because those founders tell other founders, because they all talk, Jason’s the nuts. He always gives me great support and introduce me to great angel investors.
Meb: There’s two interesting comments I’ll make. The first is that one of the nice things about investing with the syndicates or other angel investors is very often they’re former entrepreneurs. And so they kinda know what to take in. Maybe they sold a company like you did or kinda been through it. And so it’s not like you’re just investing in a public market investor. And one of the things we talk a lot about on this podcast is skin in the game. And there’s a stat. It’s something like 70% or 80% and the numbers are always up around this high of mutual fund managers, and this is asset allocation. Mutual funds have zero investment in their fund and it’s like…
Jason: It’s crazy.
Meb: I mean, it’s just insane but, you know, of course, they want you to invest and you say, “Why in God’s name would you ever do this?” So the nice thing about a lot of the syndicates is you’re co-investing with that manager. So, yes, you’re paying carry but the benefit is that they care.
Jason: This was a big debate when NuVal launched AngelList which was some of the syndicates were only investing say $5,000. And then they were…had their syndicate investing 400,000. So they placed a $5,000 bet. They would get the 20% of the gain on 400,000. So just theoretically back of the envelope, you can consider that similar to getting 20% of that 400,000 which would be 80,000. So now you bet five but you’re getting, you know, call it 85,000 in play. You’re gonna place bets differently than you would if you were getting a lower ratio, right?
So I always invested 25 and then had 200,000. So that was like a 10 to 1 ratio on my money in terms of leverage or so. Other people were getting, you know, 80 to 1 which was for some people they thought that was creating some risk or some misalignment. But if you look at it and the person’s investing let’s say 20 to 1, 30 to 1, I think, is that money reasonable? If they lost it they would not feel good about it, right?
And then I started thinking about it myself. I was like, you know, I’m actually more conservative with my syndicate than I am with my own money. I actually feel a higher sense of duty when I’m doing a syndicate, which I don’t…I can’t tell you if that’s actually in the best interest of the syndicate members that I actually care so much. You know, it’s almost like this show Billions when Axle Rod’s like, “I wanna invest my own money or I’m gonna invest other people’s money.” He was having this real trying time trying to figure out when is he a better investor. And then he changes from a suit to jeans and this t-shirt. I don’t know if you watch the show?
Meb: Yeah, yeah, of course.
Jason: You remember this…
Meb: He was wearing like a Metallica t-shirt or something.
Jason: He just walked in. He’s like, “I’m putting $1 billion where my money in. You can come along for the ride or not. Let me know how much you’re in for and if you’re not afraid of anything, you don’t need to call me because I’m…” just [inaudible 00:35:42] anyway basically, long and short of it. And I thought that was pretty freeing because you’ve got the sense Axle Rod was putting his own money to work and you could either come along for the ride or not but it’s gonna be a heck of a ride. I mean, he’s gonna go with his gut.
And that’s…I think what makes the great investors is that they can think contrarian. They could have independent critical thinking. And if you’re going along for the ride and you’re only vetting 10% of your net worth and that 10% of your net worth is gonna be across 50 companies, that means each individual company is 20 basis points of your net worth. You really can relax and enjoy it.
And the big cardinal mistake people make when they start angel investing is they have a $300,000 stack and then they decide, okay, F it. Let me put it…I’ll put 150 into this first company I meet. They seem like really charismatic founders. This is a really good pitch. You know what? The people who self-select to be founders are people who are charismatic and convincing. That’s how they get people to come work for them for free or for half of the market rate that their normal salary is. That’s how they convince the world to bend to their vision. They’re charismatic, convincing people.
Then they burn that 150. They come back and now you’ve burned 150. They convince you to put another 50 in. They convince you to put another 50 in. Now, you’re in 250 into one investment and you’ve blown your whole chip stack. And then I see people go through this where they’re invested in three start-ups and they quit angel investing after burning $300,000 in three start-ups or 400,000 and three start-ups and they go too fast. And what they don’t realize is if that company’s taking money from you, a new angel investor, that’s because they’ve already asked me and Chris Sacca and Gil Penchina, and Ed Roman, and Esther Dyson and everybody else for money. We all turned them down. You are the last desperate Hail Mary pass as a new angel investor.
So if you wanna take those odds that all of us passed and \you invested and you think that we all couldn’t see it but you can as somebody new to it, that’s like sitting down with Phil Hellmuth and, you know, Phil Ivy and a bunch of…and Daniel Negreanu and sitting at a poker table and just thinking you know better how to play this flop. You don’t. You probably don’t know how to play the flop better. You could get lucky but it’s unlikely.
Meb: The old poker analogy. Who’s the fish at the table, right?
Jason: Exactly. If you can’t identify the fish, it is you.
Meb: But so, the syndicates is one nice way to do that. It’s an interesting line as you kind of learn and start small and I think it’s also important is the way I think about is commit to an X number of years where you’re gonna say eventually you’ll go through another bear market in the U.S. and valuations come down and they wash out and probably…
Jason: When’s that coming? It’s been almost 10 years, right?
Meb: The, you know, from a quant, you know, we…
Jason: Are we nine years in now?
Meb: We always say it’s a spectrum of future probabilities. And as someone who speculates at the poker table, you know, you wanna put the odds in your favour. So we say that public equities in the U.S. are gonna return maybe 4% going forward, nominal. But the higher the valuation you get, the higher chance you have a big fat draw down. And U.S. stocks as we know have declined by over 80% in the past than the great depression. NASDAQ did plus 85 or minus 85 in 2000, 2003.
The good news is at least a lot of foreign equity markets are very cheap. So we say a lot to these foreign countries could still do double digits. But most U.S. investors are very U.S. specific. A lot of home country bias. So were also turned followers though so who knows? The valuations have hit…in the peak in ’99 they hit 45 PE’s, word around 30.
Jason: Forty five trailing years we’re having.
Meb: Ten-year average. So this is a very long-term metric. So we’ve seen this before but that’s the only time it’s been this high before.
Jason: Ten-year average.
Meb: Ten-year PE average. They’re just for inflation. It’s called the Shiller Cape Ratio. But in Japan, in late ’80s, it hit almost 100. So that’s the beauty of these sorta things, the bubbles that they could always go further than you expect. And on the downside, it’s hit as low as five but the rest of the world is pretty cheap. A lot of Europe and emerging Europe is down around 10. So there’s some yin and yang but it doesn’t mean it has to crash. It just means that it’s…the odds of hitting an inside straight on the river is, you know, a little less likely.
Jason: I dialled everything back. I have my belief is like this is…we’re bouncing along the top. And so I’m on…I use Wealthfront. I’m an adviser and investor at Wealthfront. So I have my Wealthfront dial to 3 as opposed to I had it on 10 and I was just like, you know, 6 months or a year before the election I was just like, “Nah, I’m gonna put it on 3 and just pair my equity.” So I missed but I didn’t fully participate in the top part of this rally but I kinda feel like you just dial back your risk as you start peaking is probably a wise idea. And I got foreign equities and bonds.
Meb: But that’s the beauty of the automated services is they…from someone who just kinda does it on their own and implemented them, they…it’s hard to imagine a world where people go back to the old-school way of, you know, the high-feed brokers but that’s a whole another podcast.
Jason: I fired all my brokers.
Meb: That’s a whole another podcast. We only have you for so long so I wanna touch on a few more things.
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Meb: Talk to me about the pitch meeting. You know, you sit down with someone and again read the book. There’s templates for questions to ask before, during, questions to ask yourself. So we’re not gonna spend a lot of time here but I think a lot of people probably don’t think about these meetings correctly. And you had a great phrase called “Big Ears Small Mouth” rule. So just real briefly let’s talk about pitch meetings and when you hit some other…
Jason: It’s sort of like being a podcaster, right. If you have a great guest you’re gonna wanna, you know, ask short, tight questions like you’ve been doing and get the best out of them and get them warmed up and talking, right. And once people start talking, the truth comes out eventually. I always tell people when you’re listening to a podcast start with the last 20 minutes if you only have 20 minutes to listen because when somebody gets to that minute 40, they’re gonna be loose. They’re used to talking. They’re gonna open up.
And so when I look at a meeting I wanna ask short questions, what are you working on? What are you working on? Five words. And this is a very short question and it celebrates the fact that there’s a you in it, the founder and work. And I like this question because it sets the tone of work and that this is serious business and I take it seriously. I take what I do seriously. I take start-ups seriously.
And I’m looking for people who share that level of commitment and who work hard. And there’s a lot of tourists in our industry right now. It’s tourist season whenever the market gets hot when, you know, Facebook hits or Uber, Airbnb hit. You have a movie like the Social Network or, you know, Netscape happened last time or the dot-com boom before, you know, in between that. All of these things trigger tourist season and we are in high tourist season.
So right now my job is just sorting through people who are just going to give up and go back to whatever they were doing before they thought they could be a founder. Being a founder is a very hard job. Most people are not suited for it. You have to have a demented, sadistic desire to change the world. And you have to be willing to deal with 100 days of those 100 days. Ninety-eight of them are gonna be just arduous and then two of them are gonna just be absolutely brutal.
There are no good days. It’s just, you know, maybe when you sell your company it’s good for like a day or two and then you regret it, like even in that instance. So it’s very complicated. It’s very hard. And so I wanna determine if the person is legit or not. So by just asking what are they working on, I can get them warmed up.
The question that I like most when I’m analysing companies is why now? Why will this company work now? What’s changed? Because there are so many founders working on so many different ideas that usually if something is gonna work it’s because something has changed. If you look at Uber, there were many people who had the idea for Uber before Uber. In fact, there was a company in New York I used to cover as a journalist called Vendigo. And you could text Vendigo “sushi restaurant New York” or “sushi restaurant, you know, 23rd Street.” It would return back over SMS the restaurants in that area. You could also order a taxi over it. And you would SMS that you want a taxi’s location. They would call you back. So it was basically one step better than calling a taxi company.
Meb: I was a big Taxi Magic user here.
Jason: Right. Did it work well…or it was SMS or it’s phone?
Meb: It was okay. It was phone.
Jason: You called on the phone?
Meb: It turned into something else but…
Jason: So there were people who tried it but I really think the “why now” for Uber and for Lyft was GPS on phones because you could see in real-time the car coming to you and also payment systems, but really GPS. So the commercialization of GPS allowed for a bunch of start-ups that wouldn’t previously had existed if GPS didn’t exist, right.
And if you look at storage and you look at bandwidth, that was the why now for Youtube and to a certain extent even Netflix now. Netflix and Youtube, because streaming has become so cheap and storage has become so cheap, it works. Mark Cuban was writing about how Netflix would never be able to scale because of what he knew about broadband. And then broadband, all that dark fibre, came online and it was free and had been overbuilt so the dot-com boom overbuilt so much fibre. It became so cheap. Storage became so cheap that all of a sudden, bandwidth starts costing 100th of what it cost five years earlier.
And whatever anybody thought was possible previously had now changed. The reward you got for posting a video online used to be a $5,000 bill. If you posted a video online and you let anybody watch it, you would get penalized for doing so. So just think about that. Creating a video 15 years ago, there was no way to post it on the Internet without putting your credit card on it.
Now, you can post a video all day long for free. You can shoot 4K video and have it online for free. You can shoot 4K video and upload an unlimited amount of it for free to Youtube. That is insane. If we were sitting here 15 years ago, people would say that’s insane. That’s just not possible. And so what I’m always looking for is that why now. And if you think about it, you know, there’s gonna be a big why now over robotics, one of my favourite things right now, where, you know, just…there was a lot of false starts to robotics. We’ve had like six or seven times robotics was gonna change everything, the rumba, the segue. It was just a lot of times that this was gonna happen and it didn’t and I think now is actually the time it’s gonna happen.
AI, same thing. We had six or seven times that was gonna happen. VR and AR, we had five or six times that was gonna happen. And, you know, these technological trends sometimes they take four or five times to actually hit. Storage online and bandwidth took multiple times to hit and now they’ve hit and we see what happened, a 10-year boom in cloud computing. We’d have a similar 10, 20-year boom in robotics, AI and VR-AR.
Meb: And I think even in genetics and biotech.
Jason: For sure, yeah.
Meb: I was a former biotech guy and around for the first kinda bubble in this promise of genomics and genetic data. But, remember, like at the time people were saying, “Look, even if we had all this data, the cycle building these drugs, 10, 20 years but we’re finally getting to that time when a lot of these drugs are coming online.” It’s pretty cool.
Jason: And kids are using crispr and people that are making glow in the dark plants using like, you know, DNA splices from glowing eels and putting it into, you know, tobacco plants. It’s pretty crazy.
Meb: So moving on from the pitch meeting, you know, and thinking about evaluating the deal, timing like you mentioned is sort of a big. There’s an element of luck in that of course but, you know, it’s important. Can you touch briefly on why a couple other deal valuation terms where there’s pro-rata or valuation and then also I’d like to hear a little bit about your cell methodology. So if you have an investment that then eventually IPO’s are acquired, a secondary, how do you eventually liquidate a position? Like what’s the method?
Jason: I’ll take the second one first. If you have a breakout success in the early days, you’re gonna want to quadruple down on it. So if you invested, you know, 5K, had a $5 million valuation and now the company gets Sequoia to invest out of $15 or $20 million valuation, that should tell you something. Sequoia or Benchmark are not investing unless they can go 100X or 200X in their mind. So that means it’s another 100X opportunity. So you invested at five. They’re investing at 20. So there’s a 4X lift. If they ask to buy your shares, you should have in your mind if they’re investing, they’re investing because they see this as a multi-billion dollar company. If the smartest kids in the room think it’s a multi-billion dollar company, I’m holding.
And now I’m gonna place a bet of five times. So you put 5K into the first tranche at a $5 million valuation. That was a $20 million valuation. Sequoia’s coming in. You wanna jam in 50,000 maybe, 10X, or 25,000, whatever you can because if they think it’s gonna go 100X, now you’ve got, you know, 5K that’s gonna go 400X and then your 25K or 50K is gonna go 100X. You can just do the math on that and see where you wind up. So you wanna double down.
Now if you get to the point where it’s a company like Airbnb or Uber and these are companies that are hitting spectacular valuations and the people who are investing are public market investors and they’re investing because they want to get in right before the IPO, and so they are expecting maybe to double their money in four or five years and that would be a success for them. They’re expecting a 2X, right. If TPG’s investing in a company or some other hedge fund or public market fund, what are they expecting to do in your mind? Like double their money every three or four years would be a great outcome for them?
And there’s very few places for them to double a billion-dollar investment or a $3 billion investment. So if they’re looking to double a $3 billion investment or a billion dollar investment, well maybe it’s time for you to take some money off the table and book a win. So I like the idea of dollar cost averaging and just, you know, it’s always stuck with me. I think Warren Buffet or his partner Charlie Munger said like, “How’d you get rich?” And they…somebody said it before them but, you know, selling too early.
So I think selling 25% of your position maybe four times and just do it as you’re on that peaking situation and maybe letting the 25, the last 25%, keep rolling when it goes public because companies like, you know, Netflix or Google have returned tremendously post going public. But we also have to ask yourself has something fundamentally changed and how come these go public? But the time they go public, if you look at the raise in cohort, how much is left? How much is left for Twitter, Snap, Trello, Box when they go public? How far have they come already? Are they gonna go five or 10X. We’ll see.
You know, I think Uber and Airbnb have a 5 or 10X left in them. Certainly, they have 10X left in them each I think. But for other companies, does Dropbox have that? I don’t know, you know. Just does Twitter have it? Not sure. But some people looked really smart when they invested in Twitter late. I think Lionel Perkins famously put like 200 million in or something at a $3 or $4 billion valuation. Obviously shot up to 45 billion, came back down to 15 or whatever.
Either way, they still looked really good cash on cash. So I think dollar cost averaging, getting your money out when you’re hitting that peak, and banking a win is always a good idea for people.
Meb: It’s actually really important. We spend almost all of our time talking about behavioural issues with investing. In public markets this happens all the time and people so much wanna think in binary terms. Should I hold gold or should I sell it? Are U.S. stocks expensive or are they cheap? Should I sell my Uber or keep it? And this concept of never going kind of all in but scaling is such a powerful concept to investors to behave better because it keeps them from that sort of hindsight bias. “Oh, man, I wish I had sold this. I wish I had bought this.” And it gives you a blended average.
Now, the reason not a lot of people do it is because they like to gamble. And they like having something to cheer for which isn’t the best way to invest but…and by the way, this is one of the…for the longest time, people talk about private investing and angel investing as one of the downsides is the illiquidity. And I’ve actually come around over the last three or four years as thinking is that is one of the major benefits because investors and public stock investors, one of their worst enemies is themselves. And they muck around their portfolios and it…to their detriment, but private stock valuation won. You end up being more thoughtful, I hope, because you may not be able to sell for 5 or 10 years if ever.
Jason: Five to ten years is probably a good lock-up period. It’s a very astute observation actually because there were many times in notable companies I’ve invested in that people tried to get out and they weren’t allowed to and it wound up 10Xing or 20Xing them. And then I do know of some situations at notable companies where people got out and literally six months later I know of one that was particularly brutal, the person got out at X and it went 4X six months later in the valuation.
And they had to their LP’s why they sold six months earlier. And then it continued onto go 7X from there. So that’s 28X from when they sold half their position. Now they sold way too early that half of the position. And listen, it may have returned the fund but that’s a really…to sell half your position that early in something that’s still going up, you have to do the work.
I mean, if you look at the size of a company like Airbnb or an Uber and you understand the opportunity ahead of those companies and you understand the market size, you can really understand that you wanna be slow in selling them because of how big the opportunity is. But this requires work and I think some people sell everything too early, some people hold forever. There’s definitely something in the middle where you’re selling a piece.
Now, if you had only sold 25% and it went 28X, you know, you’re only leaving a quarter of that on the table so you don’t feel as bad. It’s when you start selling your whole position or half your position too early that the psychology comes to play. But I think it’s very important to understand your psychology. I’m a gambler. I have the gambler’s instinct. I have the gambling gene.
And I think angel investing appeals to me because I can put 30%, 40% of my money into my Wealthfront account and keep it super safe and put on a very low setting. And then I can take the rest and be hyper aggressive and try to build real serious wealth, you know, nine-figure wealth in my life where private jet wealth, trying to really hit some high number by taking risks. And I think you just have to be smart about having one set…I guess people would call it a barbell which is what I have gone after which is really secure, blended portfolio with low fees and then on the other side just complete, insane angel investments that are, you know, 9 out of 10 are going to 0 and 1 out of 50 are gonna go 100X or 50X or 5,000X hopefully or 1,000X or 500X, whatever it’s gonna be.
But you have to be willing to manage your own psychology. And this is why poker is such a great analogy for angel investing or any investing because if you go on tilt and you start acting recklessly and you’re not able to control the bad news, you’re not gonna be well-suited for angel investing. I mean, if you think about public markets you list it like three times they went down over 50%.
Now imagine investing in angel investing where in your second year of angel investing the 10 companies you invested in, your 1 come back to you, they…7 or 8 of them need money. And two of them don’t need money. They’ve hit some level of profitability or breakeven where they’re having an easy time funding, but eight of them are struggling. And of those eight, six of them die and the second.
Now you’re like, “Oh wow. I just lost 60% of the hands I’m playing. Two of the hands are up and two of the hands are just even.” The sophomore and junior year of angel investing are particularly brutal because you have all this bad news and people are begging you for money and you have to say no and you have to say, you know, “Listen, there hasn’t been enough progress for me to continue investing.”
Meb: Is that a decent kinda rule of thumb? I mean, in the book you had a great quote. It said, “The founders are no longer selling the promise they’re selling performance.” Is it a general good rule of thumb? And you may or may not agree with this that if the company’s struggling and doing poorly, just like a straight up the default answer should be no. And if it’s seeing traction, say yeah. I mean is that kind of a decent…
Jason: It may not…on a human level you might not seem very decent by having that position but I do think it’s probably a cutthroat position that will eventually pay dividends because if you demand performance in a follow-on investment, you just say, “Listen, I’m an angel investor. I make 1 investment in 10 companies and the two that perform best I quadruple down on. But if you don’t have performance I can’t quadruple down. You have to show me.”
If you’re upfront with the founder about that, you know, I very rarely follow-on. I only follow-on on breakout success. That at least they can calibrate. They know they can’t count on you for follow-on funding, whereas venture funds will say “Hey, here is when we follow-on. We take our pro-rata. If things are okay, we’d lead rounds if it’s breakout. And we may participate under our pro-rata as a sign of support if you’ve worked hard, maybe you’ve gotten a couple of bad beats.”
So VCs with big chip stacks will probably define what their follow-on rules are upfront. But for angels, I think you could be a little more fluid about it because you’re not gonna be the primary source of investment nor do people expect it. If you’re putting only 5 or 10K in in the first bet they probably don’t expect much. I have had people say, “If you don’t invest in this round we’re gonna wipe out your rights in the next round.” And they really get like a little aggressive about it. This doesn’t happen often but that’s a bit of a tell as well, if the person is trying to strong arm you into investing.
Meb: And then there’s a pretty…I mean, it’s kind of a wild west. I’m surprised that we haven’t had a either an investment bank or some enterprising investors start a research boutique that really focus on this space. Is there such a thing that exists? I don’t know. I mean, there’s a lot of data start-ups.
Jason: I mean, the Crunchbases of the world and previously VentureSource and, you know, some other databases, they were all like interesting indicators of a deal flow. You know, you can follow the top investors. That’s probably the best way to do it. So if somebody started interviewing and just all the Series A investor investments and starting to study them, that would be a good business. Mattermark I think did this to a certain extent. They did it from a data view.
So they were trying to come up with an index score, like a Mattermark score. But my start-ups all started to game in a bet. So the number of open positions you had in hiring on LinkedIn I think was put into it and some other things. And so they started backing into improving their scores. So like I literally had one of my…I’ll call it lower third performing start-ups being the highest ranked on Mattermark because they had gamed it a bit.
Meb: Good for them.
Jason: And I was just like…well, I was like, “You know what? This is the wrong way to, you know, approach it. It’s like you really have to focus on the metric that reflects what matters most to your customers, right.” So I kind of have to always get founders to stop thinking about how to game start-up land and playing the video game start-ups and playing the video game of customers. Like literally my inbox is filled with, “How do I convince investors to do this? How do I convince VCs to do that?”
And I’m like, “How do you convince customers to buy your product? Let’s answer that question. How do you convince people who are using your product to use it twice as much or tell their friends about it? Let’s focus on those questions, not how to game investors who are savvy and who know how to look at the key metrics and make a decision.”
Meb: From someone who’s kind, you know, the dumb money that’s trying to learn here, who’s…I think I’m up to like 25 deals now. By the way, I was part of your robotic coffee deal.
Jason: Oh, you were in Café X?
Meb: I was in Café X. I haven’t been in the Metreon to have one yet but I’ve seen a very wide spectrum of quality of both syndicates and investor sort of treatment. And one of the things you talk about in the book is how important, you know, monthly or quarterly…just updates in general are.
Jason: For sure.
Meb: And across the spectrum, I mean there’s probably half or a third don’t offer updates at all, to where I’ll email the CEO. It’s gonna be like, “Look, you know, we’re in your world. You know, we’re a billion-dollar money manager almost.” Like I understand the space but like why wouldn’t you do this?
Jason: So I’ve been the champion of these monthly updates. And I basically started by trying to convince people to do it. And now I have demanded it. So what I did was I started by, you know, basically saying, “Hey, if you send updates, you’ll have an easier time raising money.” And I had a bunch of companies that were super entitled who were like, “I don’t have the time.” And it’s like if you’re not tracking your sales or your P&L, then we’ve got a problem.
So it shouldn’t take you any time to grab that from your dashboard or your CFO or your COO or whoever your accountant and send it to us. And I’ve had companies like Zirtual that were doing 10 million a year go out of business because they didn’t have good operational controls in place and the finances were a mess.
And that led to like a huge brouhaha and a lot of investigations and bad feelings and mistrust and just nasty stuff that happened because they just weren’t on top of it in sending the data as frequently as it needed to be. So then I said to people if I invest, it’s in my side letter. A side letter is a letter agreement that goes outside of the normal convertible note or safe agreement, the normal…normally, these investments occur via a lone vehicle that converts to equity.
And I put a side letter on it that says, “If I own over 5% I have an option of a board seat. I have the right to information.” And these are the…including these types of things and I will get a monthly update with how much money you have left, how much runway you have left, what the revenue is, etc.
And then I told the people in my portfolio who came back for money I’m not gonna do follow-on funding unless you agree to do the monthly update. And that created a little bit of negotiation but that’s also worked. So now I have people sending monthly updates who previously wouldn’t because they came back to the well for additional funding and I just said, “I’m gonna hold the line on this.”
And so if you’re a small investor in a syndicate you may not be able to have the leverage I have or the influence just yet but you will eventually. And I think asking them every month, “Hey, I didn’t get the monthly update,” just because I used to do it two years ago, “Hey, haven’t heard from you guys since January. It’s been six months without an update. I may have missed an update. I check my spam filter. Has there been an update since January?”
So I’m kinda like taking the approach of like it’s probably me. It’s not you. I looked at my spam… I mean, sometimes my email is flaky. But if there hasn’t been one I would love to get one and I always end with short is better than nothing. And I kinda, you know, herded cats for a long time. And if you’re starting out you can herd cats. Ask to meet with the founder. I’m gonna be in town. I’m in your area, would love to get coffee, would love to meet the team, even if you’re only investing $1,000 to $5,000. They’re gonna probably want to meet with you because what founders know is if you put $1,000 to $10,000 in, you can probably afford to put $10,000 to $100,000 in. If you’re placing those bets that are small 5 or 10K bets you probably have the ability to put 50K in and 100K in if it’s a breakout. So what I’m telling my founders that I invest in is curate that group.
If you get 99 people in a syndicate who’ve each put in 3K on average in Café X or something, well, the next time you do a syndicate they might put 30K in which is exactly what’s happened with a lot of different companies like Café X that have good performance. People put a feeler bet in a 5K. The next time they put a more convicted bet of 25K. Just like if you wake up with 10 jacks suited in a pretty loose game and you’re in position and you’re on the button. You might, you know, see a flop for 500 bucks. And, hey, when it comes up and you’ve got an up and down straight, draw and a flush draw and you hit a pair, like you’ve flopped the world, now you could put a bigger bet in, right? And now that founders understand that, they’re starting to do the updates without having to be asked for them.
Meb: The investors are often a big resource, you know, because many of them have networks and, you know, etc. etc. yadda, yadda.
Jason: I always tell them to put an ask at the bottom to see if people are actually reading it. So I say put the most important data up top, revenue, users, etc. then follow it with the soft data, products, speaking gigs, other nonsense. You know, we’re going to some at Etsy. We’re web summoning, whatever bullshit. Sorry, I don’t any curse but…
Meb: Fire away.
Jason: Whatever bullshit conference they’re going to that’s gonna have no impact on their business, whatever award or start-up competition they won that’s gonna have no impact on their business, no impact on their future, like you can put all that nonsense below it. But, generally, here’s the core data in the business. Here’s what we’re struggling with. Here’s our asks. Like keep it simple and that’s really worked.
And I’ve had so many companies that go out of business and they tell me, you know, their update is, “We’re out of money. We’re going out of business,” or the update is, “We’ve gone out of the business.” You know, and I’m just like…
Meb: We closed shops six months ago, Jason. Were you paying attention?
Jason: Great update. No, it really happened. I tell the stories in the books of all the bad behaviour and when the book was finished they were like, “Hey, Jason. The book’s great. We love it. It’s gonna be a perennial bestseller. We’re so thrilled.” My publisher voice. “Please meet our general counsel at Harper Collins and let’s talk about all the lawsuits that will be triggered by this book.” And that’s when we changed all the names and scrubbed all the identifying information, composited the, you know, stories a bit to protect the guilty and innocent.
Meb: Smart move. I’d love to keep you here all day. We’re gonna do a couple just really quick, short questions and then lets you get running around Los Angeles. One of the things I don’t think I saw in the book and I may have skipped over it and if I did, one of the huge benefits of kind of early stage investing is the QSBS tax stream where a lot of investors don’t know but there’s relatively recently over the past I think it’s a number of years, I think it’s the answer to qualified small business stock.
Jason: First 10 million in gains, if you were issued stock and they file for this qualified small business, you get tax free. In a start-up land, they don’t actually issue the shares for three or four years typically because they’re doing convertible notes. So it doesn’t apply. But if it did apply you would save $3 million in capital gains or something incredible. So that could be amazing and actually one of my venture partners, Mike Savino, is always bringing it up. So we’re actually going on a little bit of an effort to get people to actually price their rounds and convert to shares and do this qualified small business thing.
Meb: We talked a lot about taxes and that’s like the best way you can add alpha to anything is just avoiding paying Uncle Sam. And it’s like 10 million or 10X. I think you have to hold it for five years maybe.
Jason: Five years.
Meb: But what a massive…and very few investors know about it so look into it.
Jason: It’s a good one.
Meb: It’s a really important one. And put it in addition too of the book that’s not in there and in the back.
Jason: Well, definitely in the next edition for sure.
Meb: All right, a couple of questions. We had a few from Twitter. We actually answered most of the Twitter questions. One is what’s the most common reason an angel investor doesn’t do very well?
Jason: I think we talked a little earlier about placing big bets early and not learning and not being patient. That’s a big one. I think putting bad money after a good, in other words, you know, just continuing to buy into a story that you know is not gonna work, terrible. Investing locally is, you know, probably makes you feel good if you’re from Boston or Austin or San Diego but that may not be in your best interest if you’re the only angel investor in San Diego or Austin. It may make you feel good but the chances of you hitting something big is low.
So being in the wrong market, not recognizing where the hits are coming from. Now, listen, if you go to Stockholm, they’ve had nine unicorns in a decade. So there’s something in the water over there, right.
Meb: You ever do any international?
Jason: I have not but I may. I do have a lot of companies that I find internationally and then I bring them to Silicon Valley. Café X, we talked about the robotic coffee one that you’re in the syndicate on. Café X is one that I found in Hong Kong. The person emailed me a video of a robotic coffee machine and I said, “Is that a joke?” And he said, “No, it’s not a joke.” And I said, “Oh, if it’s real you should come to [inaudible 01:09:05].” He said, “How do you get in?” And I said, “You already did. It starts in three weeks. Just get your ass over here.” And I gave him 25K without ever meeting them because I was like if this works, and it takes 90% less space and 85% less humans and they charge a third less than Starbucks for the thing, this could be a huge revolution, right, to have robotic coffee machines everywhere. And if they can keep doing interesting things and learning about robotics then maybe they just won’t be making lattes. Maybe at some point they’ll be doing latte art.
This sounds crazy, I know, but I just had a meeting with the Café X team and I don’t wanna…I guess I can share this. They are gonna be doing a tap for a nitro. And I was like, how do you make that work? And, you know, they were like, “Oh, well, we have a weight sensor and we have these video sensors that we can sense when the cup is full but if it’s got foam…” They literally know how to pour a tap beer which you’d think about, pouring a tap beer, that sounds like something that a computer’s not gonna do particularly well because sometimes it comes out with a lot of foam, sometimes it doesn’t, right.
But if they could actually pour a tap of, you know, a nitrous coffee without…and the robot can do it, we’re starting to get into the edge cases, sort of like driving cars. If they can handle when the lines have been painted over by accident or there’s fog or snow, those are the edge cases that are holding back self-driving. People jumping into streets in San Francisco, homeless people like meandering into intersections or people who are drunk meandering into intersections, snow, ice, fog, these are the things that are keeping self-driving off the road.
So the model X, the model [inaudible 01:10:46] all these cars can already…that Tesla makes can already do highway driving from here to…from L.A. to San Francisco, no problem. I mean, 98% of miles are gonna be flawless. It’s those final two that are the hard, the edge cases.
Meb: That’s a fun fact, by the way, you’ll learn in the book. I’m not gonna give away any more but Jason owns a serial number 0001 Tesla.
Jason: Signature Model S.
Meb: Cool. A couple of more quick questions and we’ll be done. Another Twitter question, is equity crowd funding a good idea for unaccredited investors?
Jason: Oh yes, we didn’t get to this.
Meb: How do you avoid adverse selection problem?
Jason: There is an adverse selection problem here. So, okay, equity crowd funding means like Kickstarter but you get a share in the company. So with Kickstarter, Indiegogo, you would buy the Pebble watch ahead of time. You’d wait 18 months. And depending on the product you would probably in all likelihood be disappointed in the quality and the build but you were a part of some revolution in making, you know, the first smart watch.
And actually, Pebble came out pretty good. That was a high-quality product. But for other products we all know the story that you order something on Kickstarter, it never shows up. It’s kind of the joke. I think, in most cases, Kickstarter and Indiegogo have figured this out and they’ve worked to fix it.
Now, equity crowd funding is just where not accredited investors in the United States can buy a share in the company. Sometimes they’ll buy a share in the company and the product so you give somebody 100 bucks and you get, you know, the little tiny drone and you get a share in the company. The problem is a lot of the companies that have gone to equity crowd funding sites, there are two that I think are high-quality, SeedInvest, and Republic. All the other ones, I’m not gonna mention their names, I’m not in the business of deriding people. Well, I kinda am but I won’t in this case. All the other ones I think are a little fugazi. Be careful.
I think Republic and SeedInvest have a much higher screening process for those equity crowd funding sites. And so non-accredited investors can put I think in most cases maybe $250, $500 bets. So if you’re placing $500 bets, I don’t know that there’s much damage that can be done unless you really are up against it in terms of paying your bills. So, again, if you spread out your bets I don’t think it’s gonna be a disaster but I think there is a signalling problem because it’s still very complex to do an equity crowd funding deal. It costs money.
And so the great companies may skip over syndicates unless there’s a great syndicate lead doing it. So some people would argue even syndicates are negative signalling like the top companies wouldn’t have done that. I don’t know if that’s actually true. Like I think Uber would have done it. I think dumb tax certainly would have. But that is an argument that some people make on these equity crowd funding sites. I do think there is in year one a definite negative signal, which is we have such a vibrant seed market with syndicates and seed funds and angel investors right now, you have to ask yourself if somebody is going to equity crowd funding site, is there something wrong? Is there something where they couldn’t clear market?
And I think if you look at the companies on Republic or SeedInvest, the companies I see there I don’t get that sense that they couldn’t clear market. I get the sense that they’re enthusiastically trying to engage this new audience. In other sites, I saw companies that I know couldn’t clear market. So given my inside information, I’ve seen companies not clear market and then go to those kind of sites.
But I do think that will change over time. And we’ve actually got a partnership with SeedInvest where we’ve been putting five of their companies on stage at our events. And then I’ve been investing in some of them. And we want to see equity crowd funding work. So I am very excited about it and I would very much like to see some of my Café X or Blockable, some company that’s starting to break out get to 10,000 customers and email their 10,000 customers and have 1,000 of them participate for $500 each. It would be magical.
Which eBay did, right, at the IPO of Ebay, they gave power sellers the ability to buy shares I believe. Somebody can fact check that. But this has been the Holy Grail of a lot of marketplace sites and, you know, sites with a large number of let’s say, drivers or hosts. Like, if Airbnb and Uber could have done something like this for the drivers alone, imagine emailing hundreds of thousands, millions of drivers or tens of thousands of hosts on Airbnb.
The Airbnb hosts are making money. The Uber drivers are making money. They know that this is working. They know the customers love it. And then they get to put some money into it. This could be incredibly powerful the next time a flywheel like this happens. If you had all these recruiters using LinkedIn and they had the opportunity even though they were not accredited and you just emailed all the recruiters on LinkedIn and said, “Dear LinkedIn, we now have 30 million people. We now have 3 million people in the service. We’ve been enjoying it. We now have the opportunity for you to put a minimum of $500 in. Would anybody like to do it?” And all of a sudden, 10,000 people do it and they raise $5 million and that’s their Series A or Series B, it’d be incredible.
Meb: There was a fun story. Was it jet.com who had a contest for whoever signed up the most new accounts got a little equity and the equity ended up being worth like 10 million?
Jason: That’s incredible.
Meb: It’s a great story. I can’t remember. I think that’s the story but it’s a great, fun story.
Jason: There’s some…you know, the SEC is, you know, pretty tight on these kinda regulations so they are suddenly confronted with the world changing radically. Because in Europe, these rules don’t exist, which is kind of interesting when you think about it. In Europe, where they’re very protectionist, socialist, whatever, you know, they are sanctioning Google and the EU is giving them fines. And it’s a pretty fine filter over there when it comes to human resources and laying somebody off. But when it comes to actually investing in start-ups, they’re more progressive. And when it comes to crypto-currency they’re massively more progressive.
Meb: We haven’t even talked about that. I was gonna bring that up. I think we’re running out of time. I was gonna talk about…we’ll have to get you back on a year from now and talk about crypto but…
Jason: Bitcoin 400,000.
Meb: Wow, man. There’s so much here. I mean, the listeners are gonna be drooling. They’re gonna…
Jason: ICOs, be careful. I think almost every ICO I’ve seen is for a company that does not exist and giving a company that does not yet exist $30 million or $150 million, I can tell you from having seen this movie before is going to result in a lot of zeros. Like, literally, what we do as angel investors is we look for performance and then reward it with a continued investment over time. What these ICOs are doing is dark money is going into these companies that have an idea. The last time I saw ideas get funded like this was special acquisition vehicles.
Jason: SPACS. We’re looking for the name I think on the last episode or whatever. You were like, “What was that thing called?” I think SPACS were like you had to define that you knew what you were gonna buy, something in this range, right. You had an idea but you would raise this money from public markets. We’re gonna get $100 million and we’re gonna buy something sort of in the food space between this value and this value. And then before that there was a company… Incubators were going public, like Idea Lab was gonna go public and other incubators had gone. I forgot the name of the big East Coast one that…Vertical Net I think had gone public and another one had gone public.
Anyway, these incubators are going public in the dotcom boom on the idea that they would raise $100 million and then start a series of companies.
Meb: Was that CMGI or [crosstalk 01:17:58]?
Jason: CMGI was one of the incubators, yeah.
Meb: I have tax loss carry forwards probably from that when I was 18 years old.
Jason: Right. But these things became worth billions of dollars in some cases or hundreds of…they had raised hundreds of millions of dollars before actually having a product. When you see that happen, that should be signalling alarm bells for everybody.
Meb: We certainly see a lot of the speculative behaviour. And I got no dog in this fight. I mean, I’ve been a positive cheerleader for cryptos in general but all my friends that shouldn’t be asking me about this are. That’s just my one comment.
Jason: When the gas station attendant is…I always remember this when the dot com boom…like I literally was getting gas and the gas station attendants had a dot com shirt on and was like, “Hey, I just bought double click. What do you think I should buy? You know, like the Globe? And I was like, “The Globe is run by two idiots. Nobody should buy the Globe.” “The Globe’s going public.” “What? You’re a gas station attendant asking me about the globe.com? Was like, T-Glo, really?” I remember the ticker symbol, like complete disaster.
Meb: Three more quick ones. What’s the most serious rounds you ever heard of in VC. Like is there…have you heard of like a Series M? How far down the alphabet have we ever gotten? Do you know?
Jason: I don’t know the answer to that. I think they typically stop naming them after like the E and the F round. It’s just sort of like there’s been a funding but…
Meb: That was always just a curiosity I’ve had. I’ve never…I hear about some of these that just go on and on and there was actually… So I attended Jason’s angel conference in Napa which was wonderful and one of the most thoughtful presentations was a lady who actually had a great perspective. She’s like once we invest, she’s like I don’t wanna see a lot of our companies doing follow-on rounds. She’s like I would love to see them just have great success and never need any more money. I’m trying to remember who that was but she was a really wonderful speaker.
Jason: She was great. I forgot right now. It will come to me but that’s actually…if you think about like Google, I think they raised like one round of funding and then they were done. Like it can happen that great companies could do this but in a market where there is unlimited capital, raising capital from great investors at high prices, if your business is a real business, kind of a smart person would do that.
Meb: Outsider’s a great fantastic book on the public markets about trying to think of capital allocation. Most CEOs think of operating the business and selling the widgets as the sexy part but capital allocation, you know, when to issue stock, when to buy it back, when to pay dividends, at least in the public market, is a very big driver performance.
Three more quickies. Sorry, there’s one that I forgot. Podcasting space from…I mean, there’s probably not a lot of people that have put out as many podcasts as you. One of the challenges, and some listeners who listen to this they say, “Oh, man. I got shortlisted into Jason’s podcast.”
Jason: [inaudible 01:20:35].
Meb: Where do you start?
Jason: Well, if you go this week in startups.com, you can take a look or our Youtube channel. You’ll see like the top 10 episodes or whatever. But just I would sign up for it and just…
Meb: And is that by like downloads, the top 10 episodes?
Jason: I think it’s curated by our team.
Meb: So this is a rarity and this is something that I struggle with where, you know, it would be great if it was a feature on one of the platforms, so if Castro or Overcast or Apple did it. But none of them were doing it where there’s like a Rotten Tomatoes to podcast space.
Jason: By episode it’s be great. Discovery’s a bit of a problem. What we’re doing now is we have four full-time people on the show. If you follow TWI start-ups on Twitter, we’re starting to put out clips from the archives that we just tweeted, Peter Teal, Kevin Systrum from Instagram, Tim Ferris, Paul Gram from Y Combinator. So we’re now going to the archive from 2011 to 2014 and pulling clips, putting text over them and releasing them with links to the episode, you know, @thisweekinstartups/194 or whatever. Kevin Systrum was on episode 194.
And we’re starting to release those just sort of just let people know that these great episodes even exist. But, you know, it’s so easy to produce content but it really is expensive to curate it and package it and to do videos. So we’re literally spending, I don’t know, hundreds of thousands of dollars a year producing this show. I’m building a new studio right now in San Francisco because we do two episodes a week. It does $1 million a year but it’s a lot of work.
Meb: A lot of work. It’s a lot of fun, a lot of work, but this goes back to the curation theme where nothing gets me angered when I’m walking my dog in the morning, commit to an hour-long podcast and it’s just terrible. You know, so of the 10 I listen to per week, I would love to have it ranked and say, “You need to skip this one. It’s a snoozer. But listeners to business idea, one of you can run with it. We’ll invest in it.” Two more quick questions.
Jason: Listen to…I’ll give you my tip for good ones. Sam Harris’ Podcast, really great. And then Bret Easton Ellis has a podcast that’s really great, the film director and the writer.
Meb: I don’t know that one.
Jason: Yup, Bret Easton Ellis like…who did Less Than Zero and American Psycho has his own podcast. The BEE Podcast. He’s really great in interviewing people. Sam Harris, the notable thinker and brain scientist who talks about all kinds of trauma [crosstalk 01:22:54].
Meb: Great. Now I have two more podcasts to listen to. It’s a full-time job.
Jason: I’m telling you about these podcasts are just aces. Well, put them on double and you gotta do it when you’re walking.
Meb: I can do 2X.
Meb: You speak a little faster than I do though. I don’t know if people could do 2X with you.
Meb: Like 1.5 maybe.
Jason: They slow me down on my audio book. They were like, “Go slower.”
Meb: Two more. We ask this of every guest. What’s been your, I mean, most memorable investment?
Jason: Well, clearly Uber has had, you know, the greatest run so that would be it. It’s surreal to me an investor in a company like that.
Meb: And listeners, and we may have glossed over it, but Jason was a straight up angel in that, right?
Jason: Yeah. The third or fourth investor is what I was told in the company. And, you know, there were…that was a $4 or $5 million round and obviously the company’s worth $50, $60, $70 now. And, you know, people like Benchmark’s smart people think it’s gonna go 5X or 10X from here and it’ll be worth hundreds of billions. I’m not sure. I think that’s a distinct possibility. You know, nothing’s a certainty but…
Meb: What’s been the most kind of frustrating or I don’t wanna say worst but what’s…is there one that sticks out on the other side?
Jason: Yeah. I’ve got a bunch in the book where I talk about sort of bad stories and just, you know, things dying. I try to not obsess over the losses but there’s a lot of times where a company like you know they could have succeeded if they just didn’t make certain mistakes or you just really wanted them to exist in the world or the founder put in a massive effort and you really wanted to see them succeed.
So we had an on-demand food company called Bento that was doing bento boxes and bringing it out. And they got to, you know, thousands of bentos a week but the unit economics were hard because they could only ship 1.5 per thing and people wanted to get it for $12 and $18 was too much. You get the idea. But then they started doing catering and that started to work and they run a million dollar run rate. And Zirtual was another one that was at $10 million. And that should have worked. And in both cases, you know, the founders just put in colossally awesome efforts. And, you know, those problems will get solved at some point, food delivery and outsourced virtual assistants. Magic is doing it now over SMS and it’s pretty delightful. So those two were pretty frustrating for me.
Meb: Last question.
Jason: Here we go.
Meb: Tell me about this hot new ice cream start-up.
Jason: So I have a seven-year-old daughter and I have identical twin girls. And I’ve been thinking a lot about the world they’re gonna inherit. And I…having seen what I see I think a large percentage of jobs are going away. We didn’t talk about universal basic income or any of these major issues that the world faces but as a gimme, 30 million retail and driving jobs are going away completely which is a large percentage of the employed people in the United States.
And I think the world could go into a complete tailspin with AI and robotics and a lack of employment. And I think it’s gonna be very hard for young people to navigate just like when you look at millennials graduating from school with massive debt and not being able to figure out their way in the world and living on their parent’s couches.
So I’m trying to optimize for leadership, courage, grit, you know, independence, vision, risk-taking in my daughters. And so my seven-year-old really comes to my incubator when we’re talking about what business she might wanna start and she said ice cream. She saved up her money, got an ice cream machine. We did market research, went to all the top ice cream stores in San Francisco [crosstalk 01:26:14].
Meb: Which are a lot, by the way. That’s a tough competitive market for her.
Jason: It is. And so we went to them and we visited them. We took notes. And she just made her first batch of ice cream. It was vanilla spinach ice cream with peanut M&M’s in it. I’m telling you it was green. It tasted delicious and I think she hit it out of the park with her first batch. So I got her this nice like $300 ice cream machine and now we’re doing that as a business. I told her if she could sell 50 pints to her friends and family members, we’ll open up like a pop-up store or something and if that goes well, we’ll open up a permanent store. So I’d like to see her have her own small business at the age of 10 to 12 where she goes to and runs that business after school.
Meb: Maybe that’s a good niche. Ice cream that otherwise sounds terrible, but tastes delicious.
Jason: I mean, like think about it. If we make cricket ice cream or something like that with high-protein in it, like that would be a draw to the store. They’d be like…I remember there was lobster ice cream at some place in Maine. And, you know, it was always…you know, like most people in party won’t eat it but somebody eats it and then talks about it. So I think doing some crazy ice creams would be a lot of fun for kids. So I think…
Meb: You know, you could turn that…actually, that would be probably a really, you know, book number two, Jason, would be a young person’s…
Jason: Guide to entrepreneurship.
Meb: It could even be a comic book.
Jason: That would be great graphic novel.
Meb: All right.
Jason: I read graphic novels with her. That’s really another great thing that’s happened.
Meb: She got any…you know, that’s actually probably the kindest thing my parents did to me as a child is they said, “Look, Meb…” Middle-class family. Dad grew up on a farm. But they said, “We will…anything you want to read, we’ll buy you.” Then read books.
Meb: Period. Straight up. And so I…
Jason: Unlimited book budget. Pre-Amazon.
Meb: So the next thing you know, like three months later, that I have like 15 different comic book subscriptions just coming to the house like every day. I said, “Look, that’s what you said. Tough.”
Jason: I think it’s a good move.
Meb: I still have all…most of them. Look, Jason, it’s been a blast today. Where can people follow you? Where’s the best places?
Jason: So the best thing to do is follow me on Twitter, Jason, J-A-S-O-N, or Instagram, Jason. Instagram is mostly family photos. Twitter, I actually talk about stuff all day long. And my email is firstname.lastname@example.org. You’ll get a message that says this email gets 500 emails a day and that I don’t read it but, in fact, I do. That’s just my little test for entrepreneurs, see if they give up. And very easy.
Meb: It’s in the podcast, This Week In Startups.
Jason: This Week In Startups. That’s a great place.
Meb: And your blog.
Jason: At calacanis.com. I really haven’t been blogging all that much but you can sign up for my email there at calacanis.com. And read the book. And if you like it, write a review. If you don’t like it, email me. Tell me what you don’t like, jason@calacanis…
Meb: Jason, thanks for joining us.
Jason: My pleasure.
Meb: Listeners, thanks for taking the time to join us today. We always welcome feedback, questions, feedback in mebfabershow.com. As a reminder, you can find the show notes in other episodes in mebfaber.com/podcast. Subscribe to this show on iTunes. Just like Jason said, if you’re enjoying it or hating it, whatever, please leave a review. Thanks for listening friends and good investing.