David Lee at Startup School NY 2014

• Right now we have a pretty special investor here. All right, now David Lee has done a thing or two with investing over the years. He is one of the founding members, one of the founding partners rather of SVAngel, a little investment outfit you may have heard of invested in a few things: AirBnB, Dropbox, Twitter, Snapchat, etcetera, etcetera, etcetera. So, let's hear a little bit of his insights gained over the years about all things startups. Please clap it up, David. [audience clapping]

• [David Lee] So, I have to admit something, I've spoken a lot. I'm a little nervous right now... my daughter is here. I never spoke in front of her, and my mother-in-law is here. So if I stumble, just you know bear with me. But let me just say this, there has never been a more exciting or better time to start a company. From what's happening in mobile computing and different areas like drones, virtual reality, Bitcoin, bioinformatics. There are so many different areas to explore as a startup founder. So, I'm really honored to be here and really excited for you as you think about starting a company.

So as Alexis mentioned, I've been angel investing since two thousand seven, really with Ron. I've been doing it with Ron Conway in SVAngel. So, it's been about seven years, but it feels like dog years. Through that time I've worked with probably over 500 founders, and the team and I at SVAngel have reviewed over 6,000 business plans. So, as Alexis mentioned, some of those companies, and I don't know where the clicker is... some of those companies include Pinterest, Dropbox, Square, Stripe, Github. Many of these companies and many of these founders have spoken here at Startup School. So, I really encourage you to go back, go to YouTube, listen to their stories, because some of their stories are really telling. Because particularly when they started their company, they're not the people that you see today.

So, given all of this data that we have, and I obviously given the number of companies that we've reviewed, the companies that we've worked with, not all, if not most, to the companies are not the Pinterest, Dropbox, Airbnb, and Stripe. I thought what I would do today for you is really three things. The first thing I would do is tell you a little bit about what we look for at SVAngel when evaluating a startup. The second thing I want to do is I want to talk a little bit about what you should be looking for when picking investors. There's never been a better time as a startup founder to seek financing reasons, which I'll get into a little bit later, and so, it's important to be discerning and think about what you should be looking for. And the final thing that I'm going to share is the biggest lesson that I've learned from Ron Conway in my seven years working with him.

So, as Alexis mentioned, you know Ron has is a prolific angel investor; he's been investing for about twenty years and really invented this class of angel and seed investing, and this one thing he taught me. I bring it up over and over again, and I think it has particular relevance for you as a startup founder, or if you decide to work for a company, or you decide to be an investor, and frankly it's the one lesson I always think about when we decide whether or not to invest in a founder again.

So...before I get sort of more specific, I want to tell you a story about the first founder or entrepreneur that I've ever known, and that's my dad. So, my dad graduated with his PhD in mechanical engineering from UCLA in 1962. He was the first Asian to graduate in that graduate program, and then, in the mid-70s he worked at a company called Alpha Industries. And so for those of you, I mean this probably I'm dating myself, but in the mid-80s, mid-70s Route 128 in Boston, that was Silicon Valley. Silicon Valley was the upstart, that was Silicon Valley, Soma as hot as you can get, and he was a senior engineer at one of these high-flying companies. He did that for about five years.

And one day...and this is about the early 80s, he decided to quit, and he realized that even though he was very happy doing what he was doing and he had two kids to provide for and a family, he wasn't following his passion and his passion really was building things for other people and for other companies, and he thought if others could do it, why couldn't he? So, he just quit, didn't know what the product was, and decided to go out on his own, a very risky venture.

So, the first product that he built was the first fully automated fortune cookie machine. So, before my dad's machine, you made fortune cookies by hand, and he built a machine that automated the whole process, so it was sort of a robotic startup before its time, and I don't know if any of you remember, there used to be those fortunes with smiley faces on them, those were my dad's; that's how I went to college. So... [laughter and clapping]

• Thank you, but this was the first product that he was going to use to catapult his whole company, because he wanted to build other things, but it turns out there was actually a decent market for fortune cookie machines and fortune cookies; people eat them. And 30 years later at 79 years old, he is still building these machines and he's doing it. I mean it's a great story and it sounds good, and he's doing it in one part because he loves it. He would rather do nothing else than build, but there's another part where he does it because he has to; he does it because he has to do it to keep the lights on.

Because this 30-year journey, which I witness and lived through, it’s something the ups and the downs. It's something that were it's borderline, I mean it's gut-wrenching, it's really hard, and I'm sure a lot of founders have talked about this. But there is the one thing that I've learned in that, sort of being his son, is the price you have to pay in order to do what you love for a living, and that's a pretty steep price. That's why we try to really stand behind all of the founders who do it, because...we know it's not easy.

So, with that in mind, I want to jump into what we look for at SV Angel. So, I'm gonna give access to all of you to this one document, and many here at Y Combinator have seen it, and it's the document that we have used since I started working at SVAngel. It's a document that Ron wrote 20 years ago and a document that we refined over time, and it's the one document that's really, it's our Magna Carta, it's our Bill of Rights, and it's called appropriately, What Ron and SVAngel Look for in a Company. It is simply just a laundry list of items that we look for over and over the years, things that just remind us. It's almost like a checklist, and so given that it's a laundry list and I will share this with you afterwards, what I wanted to do was just point out one or two laundry list items and tell you, you know, what we look for and why these things are important to us.

So, the first point that I want to highlight is that in the very first line in this document, and this is the sentence that Ron wrote 20 years ago. So, you have this title, and then you have this line, and so for those this'll insider baseball, you can see this is sort of a weird lot of weird typos, all caps, this is just how, not there are a lot of grammatical nicks in this document, but this document talks about the team. We at SVAngel, we look at Founders first, idea second. We believe that ideas morph, but people don't. If we like the founder, and we believe in the founder, more than likely we will invest if it's a sector that we like. And for us, there are some particulars. We may like, we've always preferred founders who build things from themselves or founders whose company is an extension of their life story. And that the founding of the company has been built, it's been built up over years.

But not all start-ups are like that. And one thing I do want to emphasize is that what we look for may be very different from what other investors look for, and so hopefully, though this is just one proxy in some insight into how we make decisions. So...one of the qualities that I want to talk about and one of the items in our laundry list is this: a good elevator pitch. Keep it simple. Now again, this probably, you know if I was really looking at this for the first time, my eyes would glaze over. I'd say, of course you have to have a good elevator pitch, you know this is written in every single MBA textbook, but this is there... there’s a nuance to this.

In this environment, where startups are more popular than ever and more smart people are going to startups than ever, I believe that the single most important skill for a founder as the leader of his or her company is to be able to express their vision to other people. Your ability to communicate that to prospective employees, investors, and customers is critical in this environment, where there’s so much noise and people have so many different options. You know when you start your company and you're trying to hire somebody, you will see how many options this candidate has, and I want to be clear about something as well; you know, this is not about being a great public speaker, this is not about, you know being Ronald Reagan or Bill Clinton and having this magnetic charisma.

You know, some of the best startup pitches in the best startup founders that I've known are some of the most classically inarticulate people that you would meet, and you know experts say that 80% of communication is nonverbal, it's body language, and your ability to express that vision is critical in this environment. So, I want to give one example, one story on this. So, I met Rick Morrison at Y Combinator demo day. I think it was in the winter of 2011. Rick's company, Comprehend Clinical, what they do is they take disparate data sources in a Palantir-like way, and they bring them together and they make the data actionable and usable to shorten and make clinical trials more efficient for pharmaceutical companies and researchers.

At the time, and this is not photo sharing, it's not something that you look at and go, "Wow, this is awesome, this is something..." You know, healthcare IT was not something that made me lean forward, and so at demo day, Rick said, "Hey, can we grab some coffee?" And to be courteous, I said, "Yeah, let's grab some coffee." And I knew what the pitch was and he told me about it, and he seemed like a very nice guy, and his background was in this area, so we ended up meeting about a week or two later and we met at this café on University Avenue in Palo Alto.

And for those of you who don't know, University Avenue was like The Times Square of startups in Silicon Valley. It's just, you see everybody, it's very loud, it's very crowded, so we sat down in a coffee shop and again this was more of a courtesy, see if I could help him as an entrepreneur after demo day, and he was able to, in that short period of time in that environment, he talked to me about what he was trying to do, and why this whole process was fundamentally broken and why this was such a big opportunity, and why he was the person.

And he talked about how this could impact people's lives and the timing was right because of what was happening with Obamacare, what was happening with the digitization of genomic data and his background. You know, his co-founder with expertise in machine learning and by 45 minutes I was hooked. And we invested right there, and his ability to articulate that vision in this picture is a picture of him with his co-founder signing our Term Sheet. I felt like if he could pitch, if he could make me interested in this topic in healthcare IT in 45 minutes, what could he do with a prospective employee or prospective investor or prospective customer?

And I just said that is the type of person that I want to back, and for me as somebody who's 44 years old, that is something I think about. I think about, "Does this person have the potential to be somebody that I would want to work for? And that I would want to get behind?" And so again, he was not the most, you know, I hope he's not listening, most charismatic person, but he was able to express his vision in a very authentic way, and that in a very authentic, infectious way.

So, the second item that I want to sort of highlight from this laundry list, and that's Rick's company. And again this is straight from the document: good listeners, strong-willed but flexible. So, the flip side of being a good communicator, in my opinion, is what I've learned in my time investing is that the very best founders are great listeners. And by that I mean I don't mean listeners in the empathetic sense, I mean listeners in the sense of taking multiple inputs, processing and synthesizing all of them, and being able to come to a decision or a point of view based on all those inputs and sticking to that vision.

You know, Ron has always told me that Mark Zuckerberg, this is his greatest strength, his ability to listen and think about all the different opinions, all the data points, and come up with a vision based on that is the best that he's ever seen. And so, that ability to me again, you will have many investors, you'll have many advisers, you'll have many mentors, and they'll all be telling you different things or they may be telling you the same thing.

Your ability to process that, synthesize that, and make your decision based on that is something that it's really, it's a skill that's invaluable. Because we have seen many, many founders, of course, strong-willed but inflexible. These are bad listeners; these are founders that we probably wouldn't back again. These are founders who have a point of view, and it's inspirational, and it's strategic, and it's smart, but it's wrong.

And it's wrong in hindsight, of course, but at the time, the way they don’t, they just don't listen; they ignore the inputs because they have one point of view. So, I'm gonna use Rick again as an example. So, we invested in Rick, he did his seed, and then six months later, as often happens, he hit a rough patch. And he realized that not everybody bought into his vision from a fundraising standpoint, and not all the customers were biting either.

And so, like all startups, there was just this point of doing okay, but not doing great. And the thing that Rick did over, and I've seen it, the thing that he did over this six-month period is that he really listened. He got to multiple inputs; he really understood and asked great questions, "Why? Why aren't you buying? Why aren't you investing?" With one particular investor he pitched them three times, and he did this with multiple investors, and each time they said no.

He said, "Why? What's the feedback? Why wouldn't you invest? What do I need to do better?" And some of the things that they told him, he ignored, but some of the things that they told him, he said, "You know what, they might be right." And when those opinions resonated with the opinions of his customers, he took his product and he moved it from a hosted solution to a SaaS solution. And by this third pitch with this one investor, the partner said to him, "You're the most persistent SOB I've ever met." But he couldn't ignore the progress.

And by the fourth time he pitched this firm, Sequoia Capital, the chairman of the firm Doug Leone stood up and clapped and they eventually invested in his company, and that is, I think this is the best example, one of the best examples that I've seen of a founder getting to the root cause. I can't tell you the number of times I've seen companies pitch either an investor or a customer, and they say no and then they give them the same pitch with maybe some progressive data.

They're not getting to the root cause as to why somebody is saying no. It's okay to go back. It's okay to be persistent so long as you're going with a different angle and a different vector, more informed angle or more informed factor. So, those are just a couple of things and again what we look for in a company is really just a laundry list of what we look for in people.

I can't tell you the number of times, you know I've been working with Ron, and we talk about a founder, and he'll say to me, "He or she is a good founder." Or, "He or she is a bad founder." And he's not talking about Mark Zuckerberg or Ben Silverman or the people who have flamed out. These are just the people who are going through their startup right now, and it’s because they do some of these things, they do some of the things that are simple but not easy.

So that’s, those are just a couple of items, and again, I'll share this list with you. Now, I want to take sort of a flip side, and talk about what you should look for when looking...when speaking to investors and looking for money. So, you are going to hear a lot of different viewpoints, and a lot of different advice. In my opinion, it's just one thing and one thing only: value-add. The only thing you should think about is that every investor needs to add value.

And this statement is kind of like a Rorschach test. It's like value-add means different things to different people and different founders. It means something completely different for a first-time founder doing an enterprise company to a second-time founder doing something in consumer. It depends on the founder, the market, and the industry. And you as the founder, you should really think about, be self-critical of yourself, of you and your company, to think about what are some other known unknowns, as Don Rumsfeld says.

"What are some of the challenges that I can anticipate?" Even though most of the challenges are going to be unknown, you at least want to think about, "Hey, who do I think can help me, and what do I need to do to get him or her team, or her on my side?" And so, a lot of founders focus on valuation and dilution, and we've always said, "If you just focus on this, and you focus on value-add versus ownership in the company, then the valuation discussion just flows from that."

So, I'll give you one example: so we invested in a guy named Jason Tan at his company Sift Science. So Jason, he was doing a company and is doing a company that currently is in preventing fraud for e-commerce. As someone you know, e-commerce is changing the way people buy, the way people sell it, so the fraud problems are different, and we invested in him; we're very excited about the company, and an opportunity came up for him.

Now, an opportunity came up for somebody, an individual named Max Levchin. You may know who he is; he is one of the founders at PayPal, probably one of the best people in the world when it comes to this area, and he's spoken here at Startup School. Max said to him, "Hey, I want to get involved in this company, and I want to help you, but here's the thing: I want you to stay with me. I want you to, you know, sit in our office, I want to mentor you one day a week, I want to really dig deep and help you here."

And I spoke to Jason about it, and the terms were different, probably more favorable to Max than other investors, but I said you have to do this. I mean this is, you can't work, you know, and not that he was, but don't worry about the dilution or what your cap table looks like. Worry about getting the best people who will add the most amount of value to your side. If Max wanted to invest and said, "Hey, I'll give you 100k, and maybe I'll have, you know, breakfast with you once or twice a month," that's a different proposition than what Max was offering.

So, Jason without much thought decided to work with Max, and today he is a company that, his is a company that's doing well, and Max was instrumental in that. Now, that's an extreme case, and hey for some of you and for many of you, it'll be the case that the biggest value you add for the investor is that the money is green and that they want to invest, but for those of you who have choices, and the reason why I say that this is the best time to raise money is that you will have more... you have more choices than ever.

You know with what's happening, I'm here at Y Combinator, AngelList, The Jobs Act, Crowdfunding, Kickstarter, these companies are changing the way. It's expanding the number of sources for financing both debt or equity that you can raise. There are many, many companies now, many may be overstating it, but it's not uncommon right now. And I wouldn't be surprised if in the next year there are many companies, who get financed on Kickstarter, some of the other Crowdfunding platforms, and they go straight to the large VCs.

And so with all of these different choices, you really want to be discerning in thinking about what value is an investor going to add. So, the final thing that I want to talk about, and I'm bumping up against my time, this is the one lesson that I've learned from Ron. It's the biggest lesson that I always think about, and this it is simply this: never forget your reputation is your biggest asset.

Now, you as a founder, and this is also some laundry list items from this part. You as the founder, what I can say is building a reputation is the best investment you can make in your career in technology, and it's the best way that you can sort of build your career. What do I mean by that? What I mean by that is leading by example. You want to be completely focused on your startup; everybody is going to be looking at you, and you want to control what you can control.

I don't know how many startups, or how many founders who ignore this, and who ignore the little things. So, for example, when Ron did... Ron, you know invested in 1998, he would talk about how they would have seminars for best practices. Sergey Brin and Larry Page were the only ones who showed up to every single one. Now, I'm not saying that's because it that's why they're Google, but it's just an example of controlling what you can control.

Another example: Joseph Lawler, HelloSign. We at SVAngel, we have cocktail parties for our CEO summits, where we bring our investors, partners, and CEOs. He came, and he tapped me on the shoulder, and he had a yellow post-it of all the people he wanted to meet who could be helpful for his company. He was the only founder who did that, and this was a cocktail party. Most of them thought it was a boondoggle; he thought it was work. I will never forget that.

So, in summary, I've given you a lot of sort of platitudes, a lot of things that could be written on tweets or fortune cookies: be a good leader, lead by example, look for value out of investors, be a good listener. But I can't emphasize enough that that's just the starting point for this journey that you're going on. We really know that this is simple, but not easy. It's a lot of hard work to really follow and do what you love, and we at SVAngel can't be more excited about the environment and can't be more excited about meeting you and possibly investing in you. Good luck. [audience clapping]