Angel Investing with the Godfather of Silicon Valley
Ron Conway, Godfather of Angel Investing
The soapbox talk with Ron Conway, the man who has placed more bets on Internet start-ups than anyone else in Silicon Valley, was packed with over 220 people and tons of excitement last Friday. It was the first time ever that we had people drive from as far as Santa Monica and fly over from Italy to meet Ron Conway!
We talked about Ron’s investing strategy, his due diligence process, his advice for entrepreneurs and his thoughts on integrity and value of investors. Feel free to listen to the podcast as you read through our summary of takeaways below.
How do you define angel investing?
Angel Investing started in the 1930’s with people investing in movies in Hollywood. Today it’s about investing into technology. Angel investors are a group of people who invest in raw startups. A raw startup is defined as four people or less who have started a company.
When should entrepreneurs seek angel funding?
Before you want angel funding, you'll want to bootstrap. Bootstrapping as long as you can is the best thing for the company because you own the entire company. My favorite example of a bootstrap startup that was never funded is Michael Arrington's TechCrunch. When he sold the company to AOL, since he was the biggest share holder of it, he got most of the income from the sale.
Don’t go right into angel funding. Use your credit cards, do anything you can so that by the time you go to angels you have built a working prototype and have some users. You'll likely be valued higher and will suffer less dilution.
Give us the stats: How many deals do you get? How many fail/succeed?
We see 5 deals per day, 30 per week. All these deals are quality referrals from people we already know; we already either know the referrer or the entrepreneur. We’ll invest into 1 company out of those 30 per week.
Out of the 5 we see per day, we turn down 2-3 via email, without phone call. On average, only 10% of entrepreneurs looking for funding will actually get funded.
In terms of failure rate, today 1/3 of the companies we invest in fail, 1/3 of he companies return the money, and 1/3 of the companies return 4 or 5 times the investment. It’s a hits business. In 1999 when the bubble burst, 80% of our portfolio went out of business. Thank God for Google. That one hit paid for the rest of the companies in the portfolio.
Also, let me clarify something - I consider the 1/3 of companies that return our money as success. I get irritated with entrepreneurs who comes to me saying, ‘Sorry I only returned your money to you.’ I say, ‘You’ve got an attitude problem,’ there is nothing wrong with getting your money back.
What’s your evaluation process?
We have 6 other people at SVAngel. We invest out of a fund that is about $30 million dollars. This is our third fund at SVAngel. Due diligence usually gets assigned to the other 6 people, I don’t do any due diligence, I help companies at inflection points.
The way it goes usually is that at our meeting someone says, ‘I have a company that looks good. I like what I see on the paper.’ We say, ‘Okay, make the phone call.’ That person goes and makes a phone call. He comes back says that he loves them even more after the call and wants to setup a meeting. We vote on whether or not to have a meeting.
A little secret here: what entrepreneurs should realize is that by the time we meet face-to-face with them we’re much further along into deciding to invest in them then they know because we have this process.
What do you look for in a pitch?
We invest in people first, idea second, market size third. It’s our belief that the idea that we’re seeing is going to morph so much that we should not get wedded to the idea, we should get wed to the individuals. The traits we look for: Can this person be a leader? Can this person lead a team?
90% of the time it’s a group of three founders. We always looks for the dynamic between the three people. Will there be any problems along the way? Will they realize that their idea is not working and have a solution to fix it?
TechCrunch published your email concerning the integrity and values of other angels. Can you elaborate a bit on that?
The email from Ron Conway was sent to the group of super angels who were likely involved in the Bin 38 “AngelGate” meeting that Michael Arrington stumbled into back in September 2010. The following is the quote from the email:
I wish the Angel community could have the same integrity and values of the entrepenuer community, but unfortunately I now believe that is hopeless and your actions prove that.
Here is Ron’s answer to the question:
I don’t want to speak about that group too much. I’d say that all investors should care about is adding value to the entrepreneurs. Making money is a bi-product of adding value to entrepreneurs. Since there were no entrepreneurs in that meeting, and none of [the investors] were trying add value to entrepreneurs, it was a waste of air.
We opened up the floor to questions after the interview, and got several great ones.We talked about conflicts of interest within the same investment portfolio, the ownership percentage angels typically get from their investments, dealing with management upheavals and some of the best and worst entrepreneurs Ron has dealt with. Many people stuck around after the event chatting with Ron and connecting with others. As always, we’d like to thank Ron for such an engaging and insightful talk!