Angel Investor Secrets With Jim Brandt
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Episode Summary
Let’s say you’re a brilliant founder of a startup company, looking to make a difference in technology with all the plans and blueprints for success laid out – except for an investor. You’ve met with dozens of angel investors but none of your pitches have impressed them. How do you get investors to say yes when you pitch for funding? Jim Brandt, who has raised funds for Barack Obama’s presidential campaign, and who has invested in hundreds of companies including Slack and Skopenow, opens the secret world of angel investors. Learn more about the exact factors they’re going to look for in a potential investment.
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Angel Investor Secrets With Jim Brandt
Our guest is Jim Brandt, who is involved with the Tech Coast Angels both as an investor and sitting on their executive committee. He has invested on over a hundred companies, including Slack. He goes into the details on what he looks for when he has a pitch, why the team is just as important as location is to real estate, how to stand out and be extraordinary when you pitch or meet investors like Jim. He is really all about showing you’re smart, you’re passionate, and you have people skills. That winning combination is what gets you a yes when you pitch for funding. Jim, welcome to the show. I always like to ask my guest to take us back to the story of origin of when you decided along your career you wanted to be an angel investor.
Back in 2007, I got involved in the then Senator Obama’s campaign for president. In connection with the fundraising for President Obama, I met a boutique venture capitalist focused on healthcare and environment in an event called Opportunity Green at UCLA. It was a Friday, Saturday, Sunday event. It was full of startup entrepreneurs and angel investors and I had no idea that that world existed. By Saturday, I knew I was hooked.
What has been one of the best pitches you’ve ever heard and what made it so great?
Let me start with the second question first. What I look at primarily is the quality of the team. It’s like real estate. The three most important things are location, location, location. As far as I’m concerned, the three most important things with the angel investing is the team. The person who pitched me was absolutely exceptional. He was actually a serial entrepreneur. It wasn’t his first startup and he seemed to have all of the right qualities. He was clearly very bright. He had a very interesting idea and obvious people skills. That’s very important to me as well because the majority of startups fail for any number of reasons, but the leading cause is that the team implodes, which means that the founders got to have very strong people skills. This particular founder did indeed impress with that.
What is the mistake when you say the team or the founders implode? I’ve heard lots of stories. Is there one or two things that you see happening over and over again? Is it a fighting over equity? Is it disagreeing on the vision? What is it that causes founders to implode?
There are so many different challenges that founding teams face when they launch a startup. I would liken it to getting married. You really in for the long haul with a lot of very, very substantial challenges. The relationships are profoundly stressed again and again. It’s really is a matter of how well the founders can handle those stresses. It’s also interesting because many founders understandably found with family or friends is statistically the least stable startup team. The most stable startup teams are the ones that have worked together in the past. In between is a team made up of a relatively recent and acquaintances.
When you hear a serial entrepreneur pitch, obviously they’ve got confidence and experience under their belt and that comes through in the pitch, I’m assuming. Yes?
Yes, absolutely.
They’ve been able to express a vision, I would imagine, that caused them to assemble a great team. Ideally what I’ve heard a lot, and I’d love your opinion on this, is you give bonus points in your head going, “This team has actually worked together before on another company or another startup.”
Yes. The most stable teams are ones that have worked together previously.
Angel Investor: The most stable teams are ones that have worked together previously.
Yes. Let’s talk about one of your more famous companies. You’re an investor in Slack. How did you come to hear about them and what was that pitch like?
I think everybody has heard about them.
At one time, everyone’s invisible. You’re a seed investor, so I’m guessing you got in before it was a household name or did you come in after?
It actually is an outlier in my portfolio of Angel investments. Typically, I invested in the Angel level and I didn’t really invest in Slack up until recently. I got in at a Unicorn valuation. The reason I decided to get was is the team is extremely impressive and I’m confident. I think the set of collaboration tools are exceptional, the team leading the company is exceptional, and even though it’s already valued now at about $5 billion, I’m confident that there’s a lot of room for growth and that’s why I made that investment.
What Jim means by exceptional, because that word means a lot of different things to other people, exceptional means you’ve worked well together before. Maybe you’ve had other successful exits and you can handle high stress things happening multiple times. Is there anything else you can give us more specifically about what makes the Slack team so exceptional, so that someone listening could say, “That’s what I need to do to become exceptional?”
That’s a great question. I think the fact that they’ve grown it as quickly and as large as they have really speaks for itself.
The ability to show fast traction. Can you tell from looking at the team what is it in their skillset that allows them to grow that fast? Is it good marketing? Is it some kind of tech advantage? Is it creating brand ambassadors? Anything you can share that you think is the key to their success that made you want to invest in them would be helpful.
I think they really got all those skills across the board. How many companies launch and within a matter of few years after launch becomes so large? Statistically, it’s an exceptional success. It’s breathtaking and it’s rare that you’ll find a team. Even a team with a great business model and a great vision, execution is really everything. It’s clear that the Slack team excels in all the necessary ways.
Is barrier to entry for a competitor one of the key criteria that you look for whether someone like Slack that’s at the Unicorn level or a seed investor?
Yes. A sustainable competitive advantage is really important. Back in the 1990s when the Internet was just beginning to warm up, being first to market was a great advantage. It’s very difficult to come up with a truly original, creative idea that will afford a company a sustainable competitive advantage and a meaningful barrier to entry, the larger, much better capitalized companies. Yes, to the extent that you can identify a startup at angel investment opportunity that comes with a competitive advantage, that’s really desirable.
Can you give us an example, either from Slack or one of your other investments, that had a competitive advantage so the listeners could have an example in their head to go, “Now I see what that is?”
The first company that comes to mind is a company by the name of Neural Analytics. They’re developing software and hardware that will revolutionize brain health. They’re working in the space of stroke, concussion, and Alzheimer’s. They develop cutting edge or leading edge hardware and software. There’s a lot of intellectual property. They’ve got some very meaningful patents. There’s also a substantial amount of trade secrets that they’ve got so it’s enjoying a fair amount of success and it’s looking very promising. They’ve been doing it for quite a while. I would think that any large pharmaceutical company, if they like what this company is doing, I don’t think it would be a question because Neural Analytics is such a meaningful barrier to entry that it really would leave any potential acquirer to just buy it. It’s would be just a question of how much are they willing to pay for it.
Let’s talk about one of your many seed investors. What made you decide to say yes to them at the startup phase?
Usually, when someone comes to me with an idea, it’s pre-mature. I like to see something much further developed in an idea. Ideally, I’d like to see some traction which implies product market fit. I’ll go back to the company that I was talking about earlier or rather, the entrepreneur. His name is Eric Futoran and he founded a company called Embrace.io. He had been a founding partner of Scopely, which just raised a six figure round and the valuation is close to a billion dollars at this point. Eric is a very dynamic guy. I think what happened was after being at Scopely for five or six years, he saw that there was a good place when it comes to mobile user experience. I’m sure you experienced it from time to time, an app that freezes or abruptly closes or slow to navigate or of course, the dreaded endless spinner.
Yes, you have to shut down your whole computer and you can’t even figure out how to do that because everything is spinning.
It’s very frustrating. I’ve gotten to know Eric while he was still at Scopely and I was so impressed with him that I said to him, “If you ever decided to leave Scopely and start your own company, please let me know. I’d love an opportunity to consider investing.”
That does not happen very often. If it does, know that you’re doing something right. I’m just going to take a guess, Jim, that of all the founders you meet and all the pitches you hear, maybe you say that to less than five percent or even smaller people. Would that be accurate?
I would say a smaller percentage of founders. I don’t work a lot. I’m out probably at least two nights a week in West LA at different events, meeting entrepreneurs. Once in a while, I’ll meet an entrepreneur that is so impressive that I will invite him or her to reach out to me if and when they’re ready.
If you put yourself in the shoes of the audience, Jim, and they want to be in that one percent of people that you’re so impressed with. Anything you can do to describe what those characteristics are, either as a business person or a characteristic of that person as a person that makes you sit up and take notice and want to work with them would be so helpful.
Again, I would liken it to getting married, because when you invest in a startup, there’s no liquidity and it’s really a long-term relationship. I guess chemistry plays a part in it. You meet somebody and as you speak with him or her, you get a sense of how intelligent, how driven, how committed they are, and also how strong their people skills are. Of course, if they’ve got a vision, how compelling that vision is. I would say most often, I’ve only said that to a handful of people in the last ten years. Each of the person I was talking to is a serial entrepreneur, someone had proven his or her ability in the past. It’s very rare.
[Tweet “Passion, vision and people skills are key”]
You come across smart, you come across passionate, and you come across as someone who’s got great people skills. That’s where the unique magic is from my observations of all the people I’ve met, is if someone’s really technical, smart, and maybe even can articulate a vision, then nine times out of ten they don’t have really great people skills and vice versa. You can have really charismatic people that have this great vision, but they don’t have the technical expertise or don’t have people on their team to execute it. When you have that combination in one person, it’s almost left brain, right brain combo. That’s what people are attracted to. I think so many people, when they pitch an Angel investor like you, get confused and think, “I’m going to wow him with my demo,” and don’t even think about the people skills aspect of it. “I just want to have them hear it from the horse’s mouth,” so to speak, you, that the people skills are just as important if not more important than whatever your product demo is.
The bottom line is not one thing is more important than another. It’s that it’s so difficult to birth a company, nurture it, grow it, build it large enough and make it interesting enough to be acquired or to go public that really you need it all, and that’s rare.
The majority of exits seem to be getting bought versus IPO. Is that still the case today for you that you see?
I think it’s the case not only for me but generally. When I was growing up, it was like the go go 1960s, where all you needed was an idea to go public. Today things have changed dramatically. In fact, a really diligent angel investor will be just as focused on what’s the potential exit and who would buy this company as he would or she would be with the other considerations because the odds of a company of this startup going public are extremely remote. Of course, the odds are most startups are going to fail and the startups that succeed hopefully will fly. You want to know who are the natural acquirers and why would they acquire your company instead of some other company.
I don’t want to discourage your listeners who are aspiring entrepreneurs. I think it’s really exceptional for anybody to be an aspiring entrepreneur and make the leap and make the commitment to launch a company, but you really need a lot going for you in order for it to succeed. Not the least of which is good luck and absence of bad luck. We’ve all seen enough startups and enough really gigantic startups grow into something very dramatic and world-changing, and so that brass ring is worth reaching for.
It’s also the awareness that when you’re pitching someone like you, it’s really important if someone can put their empathy head on and realize that what’s important to someone like you is that you’re going to get your money back. There’s going to be a good chance of some kind of strategy for an ROI, that you’ve done some thinking on who could possibly buy your company that would make your initial seed round worthwhile.
Private startup companies, there’s no liquidity and the only reason that an investor invests is in the hopes of getting a return on investment. Although I will say that I made investment where the likelihood of return is less than I would generally make and that’s in the area of environmental, because I care about those things. I want to tolerate more risk, the biggest of which is I won’t get a return or if I do get a return, it will be more modest than what I’m generally looking for.
When you’re looking at your overall portfolio, do you allocate a certain percentage? Do you say to yourself, “10%, 20%, I’ll have some social impact influence in my yes or no decision?”
You would think I would do that, but I don’t. The reason I don’t is that it’s very difficult to identify a startup that I think is investment worthy. I only consider the issue when I get very excited about a company and I decide with each possible opportunity, “is this is one that I want to write a check for?”
A lot of research says that angel investors like you tend to invest within 50 miles or less of where you’re based. But when I look at your portfolio, I see LA and New York. Is that fair or is the majority here in LA?
Angel Investor: When a company is in your back yard, you can be much more effective with your diligence efforts.
The vast majority are, almost the lion’s share. Virtually all of them are in LA and there’s a reason for that. Number one, when a company is in your back yard, you can be much more effective with your diligence efforts. You can spend more time with the team, you can meet customers. Then once you write a check, these startups run into trouble for one reason or another. As I said earlier, there really are so many existential threats along the journey. When the company is in your backyard, it’s a lot easier and you can be more effective in terms of helping your portfolio company to overcome whatever challenges. When your’re distant, we do live in an information age so it’s not impossible but it’s not as efficient or effective when companies are in your backyard.
Jim, how important is a warm introduction? I know you’re out two nights a week to different events, but if you don’t come across somebody at that point and they’re just submitting and going through the Tech Coast Angel’s applications standpoint versus someone you know a little bit or trust a little bit or have some kind of relationship where they could say, “I think you might want to meet this person or at least take a look at their pitch deck.” How much does that weigh in for you?
A lot. At this point I’ve been Angel investing for about a decade. I have at least a hundred portfolio of companies. I’m on LinkedIn. I’m on AngelList. There’s a reasonable amount of awareness about me as an Angel investor. As a result, I get countless inbound solicitations and candidly, I just don’t have enough time to seriously consider each and every one of them on its merits, so a warm introduction from one of my Tech Coast Angel’s colleagues or someone who’s not a member but a colleague of mine who I respect then makes a big difference, then I will have a very close look at a company.
If you could give the listeners one big piece of advice when they pitch. It could be, “Don’t have too many words on your slide, don’t talk too fast, be sure you know your numbers, have a good story,” those are just some things I’ve heard in the past. If you have one piece of advice for people in order to get a yes when they hear a pitch, what would that be?
The first thing that investors typically see is a deck. I would make sure that if I’m going to be doing it, that my deck would be a very compelling presentation. Because investors like myself and other active investors, we get so many inbound decks that the deck has to be really, really well put together. The problems got to be set forth right up front, the solution has to be clearly spelled out, the team. It’s funny because in terms of frustrations with the deck, sometimes there’s too much information on a slide. Sometimes there’s too little information. I think in an entrepreneurial zeal to communicate how fabulous their vision is, they use fonts that’s so small that you really can’t read it. When I come to a slide where I see a couple of pictures, not sure exactly, there’s always an iPhone display and then they’ve got font that’s so small, I can’t read it.
[Tweet “The problems got to be set forth right up front, the solution has to be clearly spelled out, the team.”]
I just go to the next slide and then what I find is there’s not usually enough information about the team. There have probably sixteen members on a single slide. They’ll say college and the most recent company, but it really doesn’t give a lot of information. It doesn’t say what their position was at the prior company or prior companies. I think I’m not alone when I talk about how important the team is. If you’ve got five people on your team, make two slides so that you can have enough text under each picture, so the person looking at the deck and the slide can get a real sense of who the team members are and what they’ve done.
That’s great advice. Do you like certain areas, artificial intelligence, mobile, virtual reality, that you like to invest in, so the people know that, “What I’m doing isn’t the kind of thing he typically invests in,” or “I’m a good fit, I should figure out how to get in front of him.”
That’s a great question. Let me talk a little bit about Tech Coast Angels. We’re really vertical agnostic. We’re one of the largest and most active angel investment organizations in the country. We’ve got over 300 members across five regional networks. We invest in internet, software, life sciences, consumer products, hardware, really across the board. We don’t invest in movies, but we’re pretty diversified in the nature of our investments. We don’t just write checks, we bring experience mentoring, operational assistance. We bring valuable connections, and many of our portfolio companies have gone on to raise lots of money. Collectively, our portfolio has raised at least a couple of billion dollars in funding.
Jim, how can people follow you on social media? What’s the best way to keep in touch with what you’re doing and what your Angel Group is doing.
Look at my LinkedIn profile, my AngelList profile. Candidly, I’m not that active on social media. I think I’m a little bit older to navigate on social media on a daily basis.
We’ll definitely look at your LinkedIn profile and see what your next big unicorn might be that you’re going to be part of, because that’s certainly an indication for people that you’ve done your due diligence on them. Jim, thanks again for being on the show. It’s been a pleasure. Thanks for sharing your insights and wisdom.
Thank you, John for having me. I appreciate your giving me the opportunity to share my experiences and my thoughts.
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