Ron Conway - Startup Investor School Day 4

That was a, I think, a fantastic survey, a summary of how to think about what it means to be a good investor. Paul Graham actually wrote an entire essay about what it means to be a good investor, with Ron Conway as the subject of the essay. So, the guinea pig? Yeah, he was the guinea pig.

This is, I think for me, the perfect way to put a wrap on this course. I'm gonna have a brief conversation with Ron; we'll take a few questions. Unfortunately, he does have a hard stop, so he can't hang around. And that's actually too bad for you, because I've learned most of what I've learned about angel investing from watching Ron and from talking to Ron. He's an incredible resource.

But there are a lot of resources out there that Ron points to for how you learn about doing these things. In fact, there's a reading list that will be on the website that SV Angel and Ron recommend for how you learn about being an investor. Teach yourself.

Yeah, so Ron, by the way, since I've had a quote from everybody, I have a quote from Ron. Ron said, referring to entrepreneurs, "You can't learn to be ambitious and driven." I think that's something I keep in mind every time I talk to entrepreneurs. I think entrepreneurs can become more formidable, but if you say "Yeah, maybe they'll figure it out and they'll eventually work hard and be driven," that's probably not the investment you want to make.

Ron has been angel investing certainly since before some of you were born and before I even thought about what an investment might look like. Can you describe a little bit how you got into that?

Ron: Sure, I'm honored to be here. I was born in San Francisco, raised my kids in Atherton, then moved back to San Francisco. My first job was at National Semiconductor, and a few folks from there went off and I went with them. I was a founder at Altos Computer, and this was a microcomputer in the late 70s that was disrupting the mini-computer industry. All innovation is around disruption; you're disrupting somebody.

At Altos, our lead board member and investor was Don Valentine, who was the founder of Sequoia Capital. He and I took a liking to each other, and after we sold Altos to Acer, Don suggested that I go observe board meetings with him and start mentoring founders and consider angel investing.

I loved the leverage of giving founders advice and, quite frankly, not having to do the work. I did the work at Altos and found out I didn't like managing people; I was a much better mentor. In 1994, I decided to start investing full time, and the best investment decision I ever made was to invest just in Internet software, which in 1994, that was two years before Netscape was even founded. You see how huge the internet software industry is today.

Interviewer: What insight led you to that? I mean, everyone wasn't investing at the time in semiconductors and hardware enterprise software. What strange epiphany did you have that made you go that sector?

Ron: I teamed up with Ben Rosen, who was then the chairman of Compaq. All we did is think about what is the most disruptive industry on the horizon that will grow by thousands of percent a year. Whatever industry that is, that's the industry we want to be part of. So it was driven by growth, and growth is the lifeblood of innovation.

A lot of folks here have asked questions about, "So how do you start? How do you get deal flow?" How did you guys, how did you in the beginning get deal flow?

Ron: Well, it was easy because back then there was only about one internet company being founded per month. So we would literally just look for any internet company, and for two years, we talked to every single internet company.

Interviewer: How many other angels were there at the time?

Ron: I guess 50. But Ask Jeeves and PayPal were two of our first companies that we invested in that got us excited about it and that kind of started the trend, and an anti-spam company called Bright Mail. Remember?

Interviewer: What was it about Ask Jeeves and PayPal that convinced you to write a check?

Ron: At SV Angel, it's always been the character of the founder. We invest in the founder first, the idea second. So at each of these companies, we were impressed with the founder.

Today, it's intuitive; within five minutes, I can decide if I like a founder or not. But back then, it took a one or two-hour meeting to figure out, "Hey, do we like the character of this founder? The integrity of this founder?" But it's the person first, the idea second.

Interviewer: I sort of had a question, you know, you put a lot of thought into what you like in founders. Back then, you had to meet for an hour or two; when you actually sat down, whether it was with Ben or all by yourself and decided to invest, what broke the tie? What actually mattered the most to you?

Ron: What probably mattered the most was the determination of the founder because these founders don't know it in the beginning, but starting a company is the hardest thing you'll ever do. And that's why we have such admiration for founders and are advocates for founders. If a founder is determined, we know that he or she will see it through; that they will try every trick in the book to build a big company and recruit the best team, and that takes a lot of fortitude.

So a lot of it is the passion, the leadership qualities that we think they're possessing at this early stage, but it's really the determination and goal-driven.

Interviewer: I think of Mark Zuckerberg, and then you meant...

Ron: We met Zuck when he was 19 years old the summer he came out here. He was supposed to go back to Harvard and never went back. But he was very, very driven, and he was driven by metrics and user experience. That's all he cared about; he didn't care about getting his name in the paper or anything else. That's the type of founder that, immediately, we thought, "Hey, this person’s gonna build a successful company."

By the way, since we do have limited time, if anyone has questions as we go along, feel free to just raise your hand and we'll try to fit it in.

If you look back at the decisions and hundreds of investments, hundreds and hundreds of decisions, some have worked, some haven't. As you look back, without naming names, what have you gotten wrong? What have you looked at in a founder and said, "I've got the founder in the SV Angel mold," and been wrong about it, and why?

Ron: One thing that I want to bring up is, keep in mind, 40 to 60 percent of every company you invest in is going to come, likely, to go out of business. So failure is part of the angel business model. 40% sacks are pretty damn good; that's our failure rate.

If you get this, we've been doing it for 25 years; in the beginning, your failure rate will probably be over 50%. That's part of the business model; don't be upset about that. You know, lots of angels after their first company goes out of business drop out, and I'm like, "What are you talking about? Failure is part of the experience."

You have to, often than not, just so we're clear, you will write a check and never see that money again; it's gone forever. Yeah, and that's why the winners have to win big; they have to pay for the losers. That's how it works in angel investing.

Now, I forgot what you asked.

Interviewer: So the thing is that there are a lot of investments you make where you say, "I took my shot," but sometimes you can look back and say, "I should have known." What goes wrong?

Ron: Out of 750 investments, we have three founders literally that they were crooked; they belong in jail. So it's bad to invest in crooks. That's pretty low; that's a low number. But hey, shame on us—a lot of times, it's that the co-founders don't get along. We didn't predict that.

Co-founders not getting along happens a lot, and it's something that you really have to grapple with because usually, one of them has to go, and that is very, very hard to predict. But we do look for that now, that, "Oh, these founders don't get along; we don't want to be the divorce lawyer again."

Interviewer: How can you tell?

Ron: We're in the company; we are the divorce lawyer! We have to get involved. That’s fun, right? Well hey, you got to do it; it’s part of the experience.

Interviewer: How do you judge whether founders are going to get along or not?

Ron: You just watch how they interact when they're making their first presentation. You watch very, very closely. Does each one have their own turf and what they like, or does the engineer—hey, that engineer—feel like he's going to be a marketing guy someday? Well, guess what? That's going to be a problem for that company someday.

Interviewer: It does sort of get to the point that it's sort of crucial for angel investors to see the whole team.

Ron: For sure, you should at founding; it's easy, there's only two or three of them. You should meet everybody on the team. When I went to Google, I saw Larry and Sergey going in; that's how our meeting was—there were only five people there.

But going out the door, the operations guy was Salar Kamangar. Salar Kamangar was the guy who figured out the business model; he figured out the entire AdWords model. At the time, he was, you know, an operations guy, and I stopped at the door while I sat down with him. He was so young looking.

I sat him down, I said, "Do your parents know that you're here?" And he said, "No." I said, "So where are you at school?" "I'm pre-med at Stanford." I said, "Boy, are they gonna be pissed!" He never finished; he never got his degree. He's very happily retired right now.

But yes, definitely get to know everybody in the building, get to know the assistants, get to know the culture. If you can get a feel for the culture of a company, you'll feel much better about the investment.

Interviewer: Okay, this is a good one. Post-investment, what's the biggest value you add for your portfolio companies in addition to general mentoring?

Ron: Initially, it's introducing them to other members of the team. Once the company starts to take off, they've got to hire engineers, marketers, salespeople, and helping them build out that management team is the biggest thing you can do. If they need partnerships to build traffic, if they need distribution, we introduce them to our contacts at Apple, Twitter, Facebook, Google.

The beauty of it is, a lot of these companies we helped get off the ground, so when we introduce somebody to Google, a lot of times, we're introducing to somebody we placed at Google. But these founders need help building the team and getting distribution for whatever the product is, in addition to all the day-to-day mentoring that we give them.

Most of the time lately, it's getting them to get off their asses and make decisions and execute. There's a wave of procrastination going on in start-up land right now that's making me crazy. It's my pet peeve.

So if you see a founder procrastinating, you can help them by saying, "Hey, you can't build a big company by procrastinating; you got to make decisions, even if it means making a mistake, and move the ship forward." I'm spending a lot of time giving that lecture today, and some of them are companies with a billion dollars in sales. Thank you, but they could be ten billion if they made decisions quicker.

Interviewer: Getting this right is really important.

I remember I was actually doing this kind of talk with Ron once, and someone asked a question. Ron mirrored a little bit, so I was sort of saying what would we do in this situation. I sort of explained, "Well, you know, if you’re running the company, do this." And Ron sort of looked at it, and after I finished my little spiel, he said, "Well, as an investor, I try to let my founders run the company."

I'm just saying, run, run, advance, or make decisions, right? But so it's a much kind of—you have to be careful of the kind of advice you give because it is not your company to run. And if you think you're gonna have to run the company, it's probably not going to do that well because you're probably not gonna spend that much time with it.

Interviewer: How did you get involved with YC?

Ron: Funny enough, Chris Sacca introduced me to Y Combinator, and it took some convincing because I said, "Oh, another Excel?" But the first time I ever came to YC, which is now well over ten years ago, I looked at Paul and Jessica. It's all about the people; everything in life is about the people.

Paul and Jessica were picking well; they were screening founders well, and then the advice that they were giving them was so impeccable. You knew that group of founders was going to be successful, and that's why YC today is head and shoulders above any accelerator. The second-best accelerator is like ten floors down.

Thank you. And it's because of the screening process and the advice and mentoring that they give founders.

Did not pay him to say that, but it's true.

So there's a bunch of investors here who, some of them have investors, who want to invest. If you're going to give advice, one or two bits of advice to a new investor—say, for example, a child of yours was going to get into investing, just say what’s the one or two things you would say?

Ron: I'm in favor of the portfolio approach, so I pick a sector that you like; hopefully, it's the sector where you have domain expertise. In that way, you can add value to the companies you invest in because you know the space well.

I would invest a little money, like 25k each in five or ten companies so that you have a portfolio. Many, many investors—angel investors that I know—they invest in three companies a year. One of them goes out of business—oh my God! One-third of the portfolio went out of business; this is the, "So I don't want to do it."

It's because, well, you know, three investments isn't enough. This is very risky business; you should spread it across ten companies, 25k each. Hopefully, one of them hits, and then you're playing with the house money for the rest of your career, which is basically what I've been doing. This is the house money; that's the goal: start small and get to the point where you're playing with the house money.

Interviewer: Yeah, how long did it take you, Ron, to figure out you were good at it? Did you use any metrics to measure yourself?

Ron: I did not use any metrics; we just invested away. But within two years, Ask Jeeves went public, and Ask Jeeves was a big, big win. So yes, that was a metric. I said, "Yeah, the metric is wins; there's no doubt about it."

And you know, once you get a win and you're playing with the house money, then you can focus more on adding value to founders, being an advocate for the founder, and not worrying about hits anymore. The lucky thing about SV Angel: every fund we've ever started early on, we've been able to identify a hit.

In our own mind, the investors don't realize it, but in our own mind, we know, "Hey, this fund's gonna be okay; it's gonna be a moneymaker." And let’s just go about our business and add value and help founders. If you keep helping founders and building your relationship network so you can solve more problems for them, you'll be successful.

Interviewer: You may have just answered this, but I want to return just briefly to what we started with. So Paul wrote—it's a theme we've come back to several times here—but Paul wrote the Ronco Principle using you as an example, but to point out that, actually being good wasn't a personality aberration; it was a strategy. What does being good mean to you?

Ron: Well, I think giving back to the community and being civically engaged is part of being a member of a community. And today, more than ever, we should all be civically engaged. While we're angel investing, you can do two things at once, and you can encourage founders to be civically engaged, locally and now especially nationally.

Right now, I'm drawing a ton of energy from these students in Parkland, Florida, where we have a bunch of 17-year-olds who might change the country. Thank you! Don't clap for me, thank you for clapping, but I know you’re clapping for these students. These students could change the country; they're gonna have a ripple effect.

I hope they solve the gun safety movement, and then they go solve a whole bunch of other issues because they're all going to go register to vote, and it's amazing and energizing, and we should follow their example. I hope everyone here is going to march on March 24th. I'm flying to DC and I'm gonna march in the main march, but there's 500 other marches, and I love it that all—every student in America is talking to their parents and their grandparents about it.

This is a real movement that could make change and slap some sense into Trump and his pals; that is a tall order.

I'm sorry; I don't have time for any more questions because Ron has to run, but one last point: everyone here is getting a virtual invite to WINN 2018 Demo Days. It's still hard to say Demo Days instead of Demo Day, and ten of them will actually get an in-person invite.

Do you have any parting advice for people who are going to Demo Day?

Ron: Take lots of notes because it moves really, really fast. But that's what I do; I sit up in front; I pay attention; I try not and get—it's weren't going to be there just to have like all these companies to listen to and every way, and you couldn't listen to it remotely—take lots of notes and be decisive. But I would try and pick a sector that you're gonna be an expert at; hopefully it's related to something you already know about, and go invest in that sector rather than investing hodge-podge, which is going to force you to try and become an expert if you're gonna help these founders in too many industries.

One fascinating one right now is the whole blockchain crypto space. If you're really ambitious, focus on that as a sector because I think that is Web 3.0; I think it's the next wave of the Internet, and it's pretty fascinating. But it's a hard one to get your arms around because it's a work in process; you really have to study the space.

Thank you so much for coming in with us, Ron; it's a pleasure.

Okay, that is nearly it. I just wanted to do a brief recap of what we covered here. We started with—weI don't know if I can't remember; it's been so long! Yeah, we started off with sort of, "Why do this?" I think Sam gave an awesome talk about why and what your motivations might be for investing and how you ought to think about what you investing, what you invest in.

Then we went and talked to quite a bit about the mechanics of investing. You heard a lot about the SAFE. You guys, raise your hand if you think you know how a SAFE works. Raise your hand if you've actually modeled it.

So all of you who didn't model it but think you know how it works, you're wrong; you don't! And you know, that's actually not—that wasn't our intention. The reason we invented the SAFE was because we wanted it to be quick and easy and cheap and simple.

And it turns out every time you do anything, there are unintended consequences, so we've tried to remedy by creating tools for people to actually understand them. So as you go on investing in SAFEs, please—we haven’t yet, but we're going to put up a spreadsheet you can use to model it, you can use AngelCalc, which is actually quite easy to model and understand what you’re doing and how it works and how that conversion works. You can actually see the formula, do the math, figure it out.

We will probably tweak the SAFE perhaps—to remedy some of the confusion—we're almost 100 percent sure when we do that, the unintended consequences will make things even worse, so we're hesitating, but we'll probably do something.

So we talked about how to get deal flow. We talked about how to go about starting. We heard a bunch from a variety of angels who became super angels who became pros; some of them are still angels; some of them are still on their own investing their own money.

We talked about how to make how to meet with companies, how to make your key investment decisions, and we talked about how to do this in a serious way. This actually means a lot to me because I did this for years without being very serious or rigorous at it, and I don't really want to talk a lot about how much money that cost me; it cost me a lot!

We talked about deal flow, and we talked a little bit about what today looks like and a tiny bit about what the future is going to look like. I personally believe that angel investing, the way we've talked about it here, will persist for a long time. Equity may evaporate and go away in the future, but it will not be the near, near future. I don't believe; I think SAFE will be part of our world, and we'll have to factor that into our decision-making processes.

But so will angel investing. I just want to repeat one of the key things that—to keep in mind here when we talk about being good—don't! I'll say it again: be penny-wise and pound-foolish. Be a good investor.

And that sort of leads to a final plea before we go do our networking and drinking and eating thing, which is let’s all work together to make the ecosystem better; to add and keep consistency, honesty, integrity, and transparency in the system. We can all do our part for these things, and we all win when it's this way.

You know, one of the—there's a lot of reputational downsides to being a venture capitalist of any kind, and I believe that came because in the past it actually might have helped VC’s to act badly. It doesn't work that way anymore; you've heard a lot about that.

And especially early stage, there's no win for you, and there's no win for the companies, and there's no win for the entire ecosystem. Aaron mentioned that we've both written about this. I wrote a post called Transparency in Startup Investing, and I actually think part of this was due to convertible sort of becoming the modus operandi of how people mostly raise early-stage capital.

But we don't have to give up on transparency. If your pro-rata is getting taken away, you should be told so you can have that conversation. If you're getting converted, you should be told what your conversion price is and indeed how it was calculated, and you should check it, and you should be given the information you need to check it.

I've actually suggested a form—the numbers don't matter—a form; this is on the post that you can send when you get a conversion on, saying, "Please sign these documents in two hours," and you get 400 pages of documents. Send them this form back and say, "Sure, just fill all this out for me, and I'll sign." And that's a legitimate quality request, high integrity request.

I mentioned we're going to be asking for feedback on this course; I'm sure there are many things that we could have done much better, and hopefully you guys will tell us what those are, or just suggest to us when we do this again how we can make it better and more useful to you or to others.

Lastly, I want to first thank all of the speakers who came and spoke to you, even though it was some work putting this stuff together. They did all the hard work—the speakers from within YC and without. I thought they were great.

And I also want to thank the team that put this together: Steve Pham here, Ramon Requital on camera, and our video guy, Craig, who can wave. Obviously, it's actually more work than I thought it was going to be to put the course together, and they were all fantastic.

So with that, we are done. Good luck and good investing, and thank you so much for joining us. Oh, and demo day invites, all that stuff will be taken care of next week. Thank you!