Ask an Angel with Zach Coelius | E1215

This is a recurring series where we bring on Zach to answer listener questions about raising money & building companies as well as evaluating startups & deploying capital. Zach was one of the first big breakout investors on AngelList and previously founded Triggit, an adtech company.

Zach Coelius | @zachcoelius

• Managing Partner, Coelius Capital

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Is having a low take rate in a marketplace in order to prove consumer behavior a red flag?

• Take rate is less important, there are successful companies that have take rates on both the higher-end and lower-end.
• The most important feature of marketplaces is the value provided to the sellers and buyers in comparison to their other alternatives.
• If you are a commodity, that's bad.
• The way you solve the supply-demand equation is key, take rate is less important.
• This is a classic founder mistake, focusing on things that are not relevant to investors or company success (30 under 30, winning a startup competition, etc.)
• The best startup founders learn that the most important things for success are usually the hardest to solve.

How to think about follow-on investment strategies as an angel investor

“The secret in the early-stage is to search for winners, and that's a discovery process. The secret to follow-on is to pile in the winners, and that's about information, understanding what's a winner and what's not, and avoiding losers.” - Zach Coelius

• Zach's three things to keep in mind about follow-on investing:

1. Understand that early-stage investing and follow-on investing have very different return profiles and practices, so you should have separate strategies for each
2. Follow-on investing is all about leveraging your information. If you have information rights or insights into important data, you can make the decision for yourself. If you don't, you need to use proxies (which firm is leading the next round, etc.)
3. As an angel it's not your job to keep the company alive. It’s okay if it goes out of business.

• Jason's advice:
• Bridge financing: Make sure it's a bridge to somewhere and not a dock
• Bankroll management: If you're placing small bets ($1K-$3K on average), you need to get to 25 bets to have diversification
• Example: If you have $100K to invest in startups (money you can lose!) Start out with 25, $2K bets. Assuming 5 investments meet your follow-on criteria, put $10K in each for follow-on. This way you have put 60% of your money into the 5 best companies. (5 x $2K, 5 x $10K)

How to prioritize product(s) roadmap when you're selling a suite but don't have time to focus on everything?

"The death spiral of most founders is a lack of focus, trying to do too much, fighting too many wars on too many fronts." - Jason Calacanis

• Zach lives by the mantra “One, one, one" Meaning: you need to find the one product or feature that provides incredible value for your customers
• Product suites typically originate from companies that create one wildly successful solution, get massive distribution and then find ways to upsell their current customers with extra products
• Zach advises early-stage startups against building an entire suite of products and trying to then level them up, and instead tells them to focus on their one core solution
• According to Jason, early-stage startups typically die from fighting too many battles on too many fronts
• If you're a founder that can't stay focused you need to put someone else in the captains seat so you can start another thing

Is $1M ARR too big for Jason and Zach?

• Nope, that's their sweet spot
• Jason started by writing $25-50K checks, and now is deploying $1M-$3M per deal on the upper echelon of his syndicate
• Zach only put in $1K of the $200K syndicate in his first AngelList deal (he had very little money after having recently sold his previous startup), now he is flexible and can go from $50K-$1M

Is it possible to get funding while working on your startup part-time? What if there is solid traction?

• Jason's advice: If your startup is growing rapidly, quit your job and go after it. That corporate job will always be there for highly skilled workers, but the opportunity to build a product and traction at just the right moment will not. Create, don't wait.
• Zach's advice: If the traction metrics are that good, be ready to quit your job. If you email Zach asking for the funding in order to quit your job and your traction is THAT good, he will be interested.
• Jason has an affinity for "doers." He thinks side hustles and weekend projects are awesome
• Indie Hackers and Pioneer are both great communities in which you can build your side hustle

How do Jason and Zach find and sort cold inbound deal flow?

• Zach reads and replies to 99% of his legitimate inbound, but mostly passes as he tends to invest in areas where he has expertise, barring extreme outliers
• The majority of his deal flow comes from friends and colleagues that have pre-filtered the companies
• However, there is a portion of his deal flow that is completely random - like cold outreach pitch decks or him stumbling upon a product/pitch and reaching out to the founder
• According to Jason, there is such a massive filtering process in early-stage investing that investors tend to lean on colleagues for deal flow because the filtering is already done
• Early-stage investing tends to be more collaborative, so investors openly share deals and deal flow, whereas Series A and beyond tends to get more competitive
• Jason sorts deal flow by having his team of researchers and associates take 20-minute intro meetings with any company that contacts LAUNCH and looks promising
• If the meeting goes well, the researchers send the company to a managing director - who then has a 30-minute meeting which is recorded and sent to Jason for final review
• If you want to work for Jason and break into venture capital, check out howtogetajobinvc.com

Changing venture capital landscape

"If I was a VC fund on Sand Hill Road right now, I'd be like 'Oh s***, we're in trouble!'" - Zach Coelius

• What is happening in venture capital right now?
• Mid-tier, stage agnostic firms are fighting a war for deal flow on two fronts:
• Early-stage: A guerrilla-style battle with Syndicates (Jason's Syndicate, AngelList), Rolling Funds (AngelList), equity crowdfunding (Republic, SeedInvest, etc.), and accleratos/incubators/scout funds
• Growth-stage: Aerial warfare against hands-off, fast and cheap capital from Tiger Global, Coatue, and other crossover funds
• According to Zach, "We are tearing their guts out right now."
• Jason credits Naval (via AngelList) and Paul Graham (via Y Combinator), and to a lesser extent the "angel brigade" of himself, Zach, Cyan Banister, Chris Sacca and others for changing the landscape over the past decade
• Who wins? Society (more funded startups), employees (more jobs), and founders (more sources of funding)

What % should you sell if you have an MVP but before you have customers/traction? (in today's market)

• Pre-revenue: If you're in a large market and have a tight MVP, raising $250K-$500K for 10% of the company is reasonable in this market
• Early revenue (Same company now has $120K ARR): Low end, probably raising around an $8M pre-money valuation. High end, the upper bound is limitless depending on revenue growth rate, team, market, etc.
• You should be willing to sell between 10-20%, but never over 20%

Anti-portfolio: Jason and Zach discuss their biggest misses and blindspots

• Zach's biggest miss was Uber
• Zach and Travis Kalanick discussed Uber when it was just an idea, and Zach maintained that the taxi lobbies would crush them, so he passed on investing
• Passing on Uber was a massive lesson for Zach
• He learned that the best, most exciting startups have really clear "normative violations"
• Success means working around "dumb" rules and corruption within cities and local governments to win those regions
• So, when Zach sees new deals that have similar normative violations, he now thinks "Okay, these regulations might kill this startup, but what if they don't?"
• Uber's "other side" was "push a button, get a car" and the upside to that is/was unlimited
• Jason's advice: As an investor, always be refining your investment process. Get 10% better every month.
• One of Jason's biggest lessons has been backing really competent founders who want to take on really difficult tasks
• Another lesson: Don't obsess about your losses, move on and keep investing

How diligence on your investors

• As a new founder, here is how you can best diligence investors:
• Once a firm gives you a term sheet, you are now in the driver's seat
• Once you receive the term sheet, you should research and seek out an intro to all each of that firm's portfolio founders to discuss what it's like to work with them
• According to Zach, you could spend 100 hours in diligence on a VC firm, and that probably wouldn't be enough
• In the worst case scenario, choosing the wrong VC to partner with could ruin your company (see: Ryan Caldbeck's email to a nightmare VC)
• Jason's diligence trick: on a VC firm's website, look at the portfolio page and cross reference those companies with their list of their investments on Crunchbase or PitchBook, and reach out to the founders whose companies that weren't listed

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