MI268: From Startup Executive to Angel Investor w/ Jason Kirby

24:59They're usually perceived as angels, I mean individuals, that can make a decision independent of anyone else and can act quickly and can just wire money once they believe in you or the idea or the business. They're harder to find the right angels. It usually is a network thing. So you usually have to know someone to be able to kind of get that check. But sometimes you know someone that knows someone that knows someone and you kind of go through the path and you can raise that capital from them. It is hard to kind of cold email angels and get checks, but it's possible. It's happened to me. I've written a check to a cold email.

25:33So that's typically what an angel is. It's an individual and they can make a decision independent of anyone else. A venture firm is someone that there's a general partner. So this person or partners goes out and raises money from what's known as limited partners. So these are family offices, institutions, pension plans, high net with individuals, and they'll raise$10 million,$100 million,$1 billion to then have at their disposal to invest into individual businesses following their investment thesis. So these VCs, in this case, are held to a much higher standard because now they're protecting other people's money.

26:10And as Warren Buffett says, never lose money. That's like the golden rule of investing. Unfortunately, venture capital is all about losing money. In fact, most investments are lost and amount to nothing. And it's what's known as like the power law effect. So an angel investor will make a decision independent of any kind of portfolio construction theory or thesis or anything like that. They're like, I think you're cool. I like you. I want to back you. I believe in you. That's a cool concept. It should exist. That's usually what indicates an investment from an angel investor. And they're usually investing an insignificant amount of their wealth.

26:41So they know it's probably not going to work out. I know most of my angel investments are probably not going to amount to anything. It's one of the sad realities of angel investing and why it's highly ill-advised for non-accredited investors or people that don't have the money to lose. And it's in the hopes of what's known as a power law effect where you, and this is for VCs as well, it's like, sure, like 90 % of your investments are going to go down the toilet. But that 1 % that returns all your money and some. So if you're an angel investor, you invest half a million dollars into startups, say$50 ,000 into 10 different startups, there might be one of those startups that go off to a billion-dollar valuation and you make$5 million off it and you make 10x off your entire investment, where the other nine went to zero.

27:25So that's what venture capitalists are trying to do. That's what angels are trying to do. They're trying to pick winners. And ideally, one of those winners goes to the moon and they're trying to back the biggest possible companies. And that's why, going back to the whole conversation earlier, venture capital firms, they need a 20, 30, 100x return when they make an investment in you. And so that's why if you're trying to raise it a$5 million valuation or something like that in your early days, you need to have potential to get to a$500 million exit. There's all kinds of factors in terms of dilution and other things that go into portfolio construction that I'll bore you on right now.

27:58But that's something that is pretty important to take into consideration, the difference between an angel investor and a VC. VC has to be accountable to limited partners. They have investment communities. They have a lot more deals to look at. So they're looking at a thousand deals a year and they're only making 12 investments a year. So it's a it's a very hard job as a as a venture capitalist, but also difficult for the VCs. I mean, for the founders to raise the capital from them. So you are an angel investor and you've made some investments over the years. What does your investment process look like?

28:30You kind of mentioned a few things there, but I'd love to know a little bit more about your due diligence and how you find deals to then how you figure out if you actually want to put the money towards it. I would say my first couple of investments were not as well due diligence as I probably should I kind of got caught up in the hype and the FOMO that was going on in the market in 2020 and 2021. Made some bets on things that I thought could be very big, massive market potential, but also something that I felt I could add value to. So that's another thing with angels is, you know, you can kind of write a check and walk away.

29:06I've had angel investors invest in us that basically like, yeah, here's a hundred grand and, you know, give me updates when you have them. And then I have other angel investors like, here's 10 grand or 25 grand, but I want to have meetings with you on a monthly basis and try to help you and advise. and they try to advise companies and give them feedback or try to find them customers or whatever it might be. So with some startups that I've made investments into, I typically like to have some kind of value add. So whether that's I can help them with fundraising, hiring, sales, marketing, connecting them to my network, that's typically a role an angel investor will play.

29:39So if some kind of manufacturing technology company comes to me and pitches me, I'm like, I have zero value to offer you. I don't really understand the market. so I'm probably going to be a pass. But with companies I do invest in, so I look at like, okay, so I know SaaS, I know consumer, I know B2B, I know crypto pretty well. I feel comfortable in these particular markets. So in terms of getting deal flow, there's a million ways to get deal flow versus updating your LinkedIn to basically state that you're an investor of some kind. Then you'll get a bunch of cold inbound stuff. There's lists and communities to join Slack groups and you'll just start seeing deals come through.

30:17It is a full-time job, period. If you want to actively seek out investments and make investments, it could be a full-time job. And that's not something I truly wanted. So I kind of either sat back and waited for inbound deal flow to come my way or got referrals from my friends or things that I saw on angel lists that I thought were interesting where I came in with a much less significant check that I didn't have as much influence on and things of that sort. So it just really depends. And it's a lot more haphazard than it should be in angel investing. there are some super angels that have very strict criteria and then most angels kind of like me where it's like i think i can have value i think it's interesting and i know i'll probably lose my money like those are the typical criteria but i'm willing to take that risk i'm willing to go on that journey with you and i'll try to help you along the way and those are typically what you want from an angel as a founder is you know the clear understanding that yeah they're you're probably going to lose the money that's just statistically speaking what happens and that That angel investor needs to be aware of it.

31:17And that's why, and also for your protection, you want them to be a credit investor when you get money from angel investors. If you take a$25 ,000 check and it's from their life savings and they have nothing else to their name, you should not be taking their money. And then as a responsible founder, raising capital from other people, you should make sure to do due diligence on your investors before you take that money because you don't want to take someone's life savings promising that you'll make them a millionaire because when that doesn't work out, which happens 90 % of the time, that person is going to be very upset with you.

31:46So it's best to take money from seasoned investors that are comfortable and understand what they're getting themselves into and know how the venture world works, the startup world works, so they can add value to you as opposed to basically take value, you know, take from you. That's kind of my rant on, you know, angels versus PCs and how to raise money from them. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley. just popping in with a quick message. If you like this podcast, well, I've got great news for you. We've got a handful of other shows for you to explore, from learning about Bitcoin to embracing a richer, wiser, happier lifestyle.

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35:26That's theinvestorspodcast.com slash tip-finance. All right, back to the show. Yeah, that's very interesting to hear you talk about that. And I love your transparency about how I guess unlikely it is to be successful in this. But I guess I'm wondering for individuals who could be interested in diversifying away from just investing in the stock market, who do you think this would be right for? Who do you think being an angel investor would be right for? Even if it's just a small part of their portfolio, maybe 10 % of their total investments, do you think it would be right for some individuals? For most people, no, to be completely honest.

36:07As much as I believe in growing the market and access to capital, it's a very complicated game. And I typically encourage angel investors to reconsider the idea of making individual bets and considering investing in funds and funds that you get access to. So if you're, let's just say you're an accredited investor, you're comfortable making big bets with 10 % of your money. There are some big bet opportunities with stocks, and that's very much a picking stocks. There's a lot more liquidity, there's more options, you can get into different strategies there. But when it comes to private investments, there's no liquidity.

36:42You don't get that money back. You can't just be like, I want my money back. Or can I get cashed out? You guys had a fundraise. And it's like, nope. You're in it for 7, 10, 15 years. And so it's got to be money you do not need. It's not considered a savings account. They're not liquid. There's a lot of risk involved. And that's why you typically hear why it's an old boys club and venture capital is hard to break into. It's because it is. And it's probably not great for a lot of systems. But there's a lot of, I would say, companies breaking down those walls. And if someone's very adamant about getting their feet wet and getting exposure to this market and making small bets, I recommend AngelList for getting access to syndicates.

37:22So AngelList has a bunch of syndicates and you can write a bunch of like thousand dollar checks. So if you have a hundred grand that you're willing to invest into the startup venture world, you can look at trying to get access to funds, which Thunder can get you access to on our platform. So we help introduce you to relevant funds that might be of interest. You join as an LP or as an angel and you can create an account and be able to identify which VCs might be relevant to you or which companies might be relevant to you. But typically direct investments in either to a fund or company will usually start around$25 ,000 minimum for a fund, typically$100K plus.

37:55So you have to kind of keep that in mind. There's not it's not as easy to diversify a small amount of money. Diversification is always kind of seen as a strategy, but it's hard to do with small amounts of money in private markets. So if you have a million bucks to deploy, then you have a lot of options. You can really architect a good portfolio strategy. But if you've got$10 ,000, I will say, in my opinion, stay far away from crowdfunding sites. So there's a lot of crowdfunding websites out there. They sound cool. Now, if you are a fan of a particular brand that you're a customer of, a little different.

38:29You know, don't necessarily want to say no to that. But typically, companies that fund on crowdfunding sites are typically not well enough capitalized to have like big venture returns. Also, there's not a historical precedent on actual return capital to investors on those platforms. Something known, I don't want to get into the technical terms, but basically the capital that gets paid back to investors is very minimal. So if a dollar has been deployed, a billion dollars has been deployed on crowdfunding, only maybe like$100 million has been returned. That's an assumption. It's not like a research document, but every crowdfunding platform I've partnered with or talked to, they have little to no information on what they have.

39:09Oh, we raised$100 million, we raised a billion, whatever, but they don't have any stats on what actually went back to the investors. So crowdfunding is, albeit you can put a$100 check in, yay, but you can diversify and you can find interesting companies. But typically, it's hard to find the best deals on crowdfunding. So I usually like AngelList if you're writing small checks. $1 ,000 minimum is typically the requirement, sometimes$5 ,000. But you can follow a bunch of syndicates. These are real VCs that have exposure to great deals at negotiated valuations. valuations. Typically crowdfunding founder could just make up a valuation and have no accountability to it.

39:47Whereas a VC will be able to get you a better rate, better terms, have liquidity protections, like what's known as liquidity preferential treatment. So there's all kinds of protections when you work with a manager. Now you pay a fee. There's either an admin fee and a management fee or performance fee associated with that. But you'll tend to get into a better deal in that situation through an angel list syndicate or a fund, then you are writing a$1 ,000 check yourself into a company, which you will have zero, say. You'll have zero influence. You'll just have to accept whatever the terms are. So that's just something to keep in mind.

40:21The more money you have to deploy in the private markets, the more likely you'll be successful. The less money you have, you're writing small checks. It's one thing to maybe use it as a learning experience, maybe use it as a way to build up an education in the space, but it's an expensive education. so I just kind of tell everyone to go in there with open eyes absorb as much information as possible follow you know thought leaders in the space you know get educated this is not something it's not like you do research on a stock and you're like oh that's cool and you go into rob an account buy 10 grand and they're like you can sell it five days later if you regret it or it didn't work out or like option trading these are things that are have a lot more liquidity a lot more data a lot more research and you have a lot more autonomy in those investment decisions so So that's kind of my input on investing in private markets, specifically startups, early stage startups, which is all most people writing smaller checks would have access to.

41:12That was really helpful to hear your perspective on that. And I do want to ask you, though, about one of your success stories as an angel investor, because I'm assuming if you're still doing it, they haven't all been bad. So do you have one that you can share with us? No, it's too early to tell. Like I said, it's a 10 year game. So I have a decent amount of chunk of change spread across a couple different companies, as well as a few funds. TBD. Most of that money was deployed in the last three years. I'll have no insight on whether or not they're all still everything's still alive and running.

41:46I would say some, you know, are struggling a little bit more than others, but they're all still, you know, they also have a shot. But there's no like breakout, you know, portfolio company of mine just yet. Some interesting ones. I've done some cool stuff, but not like household names by any means. So it's a difficult game. And for someone that has experience and has access, one thing I kind of decided is after I made about six or so individual investments, I decided to deploy the majority of my capital that I had originally intended to make individual investments. And I decided to invest into a fund that aligned with my investment thesis.

42:16And I pay the fees, I pay all that just because it's a full time job to really do angel investing right. And that's not where I went in my head. And also I have a slight conflict of interest making individual investments while also working with companies on Thunder and stuff like that. So it's just easier to end that. So my personal situation is more appropriate to invest in a fund. And do you think your experience working in startups and having that, I guess, that great experience building them, selling has helped you invest? I guess it's early to tell, but has that worked its way into your investment process at all or helped you, do you think?

42:51It helps me get access. So founders, when I meet with them, after having a chat with them and they learn about my experience and what I've gone through, they'll ask that I invest or be on the cap table or be an advisor because they value my input and they value my opinion. Now, they probably wouldn't want that if I was only writing a$500 check or$1 ,000 check, but that's typically my past historical experience is valued by the founders that I get access to their rounds and they want me a part of their cap table or as an advisor or something along those lines so I can share my input and help them navigate certain challenges when they need me.

43:30So that's often what it's about. It's more about getting access and being of value, at least from my perspective, when making those investments. And so that's where my background comes into play is being able to start a conversation. So if I message a founder, I get a response. Or if I didn't have the background and clout that I do, I might not get a response. Or if I reach out to a unicorn that's already worth a billion dollars and I say, hey, I want to invest in you, they're not going to respond to me. But for a founder that is raising$2 million and hasn't achieved astronomical success, I would typically get a response.

44:05So that's the other thing is reaching out to founders directly or having them reach out to you and having a conversation and figuring out what works. That makes sense. And two quick questions before I let you go. it kind of seems like capital dries up during hard times. And so right now, there's less liquidity to go around. Is that the same for the venture or startup world where it's harder to raise money today? Exponentially. It was hard to raise money in 2016, 2018, 2013. It's historically always been hard to raise money. But we're coming out of this massive inflationary market where free capital was abundant and anyone and everyone could raise money at ridiculous valuations.

44:46It was a founder's market. Founders were setting terms, things were going quickly. So everyone got used to those good times. And a lot of founders, first company, they raised capital in those markets. But we're kind of going back to what it was like 2016, 2017 where it's just only the best companies get funded. It's extremely difficult. You truly have to differentiate. You can't just be a me-too product like copying someone else's product and saying you're different. You really need to have a 10x differentiation gap between you and your other competitors. VCs are under a much finer microscope when it comes to their LP, their investors, because of the high valuations over the last year, overpaying for certain companies, losing money on deals.

45:33So VCs are a lot more hesitant. They're doing less deals. They're spending a lot more time into diligence. so you used to be able to go out in 2021 and raise around in a month from start to finish, like money in the bank. Now it's like three to six months and it's much more difficult. And why we built Thunder is it helps streamline that process of identifying who's going to be investing in who and makes it a little bit smoother. But even then, it's still a much more lengthy process than it used to be. And that's because LPs lost a lot of money, VCs made some bad decisions, founders over-raised or under-raised or raise a too high valuation.

46:09They're doing what's known as a down round, having to do what's known as recaps that are extremely painful and depressing. You raised whatever, 20 million on a$100 million valuation, but now you're only worth 30 million. It's like in this market, you might be cut in half or by 70 % or 80 % of whatever your last valuation was because reality has kind of come back in and people are doing due diligence. There's no more free money. So it's a much more difficult market. And I guess just last quick question. What do you see as the biggest trends and opportunities that are really shaping the industry today?

46:42AI is everywhere right now. ChatGPT, OpenAI, everything they've done since they launched, I think in November, December. Basically, any money that's really being actively deployed by what I call more generalist VCs. So VCs have a lot more flexibility. They're not necessarily sector focused. They have a lot more flexibility investments. A lot of that capital is going into AI related companies. that's kind of the hot trending sector right now. Companies having to focus on profitability is a big trend. I've talked to a lot of companies, a lot of founders that raise a lot of money in 2020, 2021 and they're like, all right, let's come back to the market and get some more and they come back and they're expecting these big valuations and lots of money and it's crickets.

47:23And they're having to go like, wait, this wasn't a part of our plan, what do we do? And they're making layoffs, they're cutting their costs, they're focusing on driving more revenue. And the ones that can't do that, The ones that can't pivot or didn't reserve enough capital to enable that pretty much are going to go out of business or get consolidated. And that's the other trend is I have a big bet right now on consolidation. There's a lot of amazing talent and technology out there that's raised hundreds of millions, if not billions of dollars across many different companies that is going to be underwater as far as the value of those companies.

47:56So there's like billion dollar companies that could probably get acquired for 50 million or 100 million. They've probably raised more than what they would get acquired for now. And that's a reality. So the companies that were smart, that were savvy, that were well capitalized, that are generating cash flow, are going to come in and scoop up those technology companies as acquihires or asset purchases to acquire the technology, the IP, the team on pennies on the dollar. Because pennies on the dollar is a better outcome for these companies than zero. Or facing debt or bankruptcy or anything like that.

48:29So these investors reluctantly will accept those terms because there's no capital in the market for those businesses that couldn't survive. So people in investment banks and mergers and acquisitions, corporate M &A, those people are going to be very busy over the next two years, in my opinion. I think that is all I had for you today. Before I let you go, though, where can the listeners go to learn more about you, everything that you do in your business? Yeah, sure. So anyone's welcome to reach out to me via email, jason at thunder.bc. If you want to learn about Thunder, it's just thunder.bc is the website.

49:04And then if you want to follow me, I'm on Twitter at Jason Kirby. So J-A-S-O-N-K-I-R-B-Y or LinkedIn, LinkedIn slash N slash Jason R Kirby. So anyone's welcome to follow me or reach out to me anytime. Perfect. I will link those all in the show notes. Thank you so much for coming on again. No, I appreciate it, Rebecca. Thanks for having me. All right. I hope you enjoyed today's episode. Make sure to follow the show on your favorite podcast app so that you never miss a new episode. And if you've been enjoying the podcast, I would really appreciate it if you left a rating or review. This really helps support us and is the best way to help new people discover the show.

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