Invest with Scott Kosch
5
Expected Deals/Year
0
Unique LPs have invested
Note from Scott Kosch
I look at about 500 deals a year, and in the past 5 years, I have participated in over 65 deals as an angel investor and in 3 seed stage funds as an LP. More of my portfolio companies have hit milestones and raised new rounds capital than have failed, but I am not a big fan of boasting about unrealized returns. A few companies have had moderate early exits or become less exciting acquihires, but because I started angel investing only a few years ago, I am still patiently waiting for the older and more successful ventures to reach liquidity events. One of my earliest investments has gone on to raise over $115M, another has raised $28M, another $17M, and many more have completed Series A rounds with institutional VC funds. But this is a long and difficult game, and no one can promise you that their next investment will be successful, regardless of their track record. Each new venture is unique; the externalities of each vintage year keep changing; the team and the hurdles they face are distinctive; future dilution can vary significantly; and, the opportunity for a profitable exit must appear at the right time. The best any seed stage investor can do is to keep learning, improve their deal flow and be giving of their time to founders and management teams.
To better understand my approach, if you are interested in participating in my syndicate, I have 7 key principals of angel investing I try to follow:
1) Deal Flow is a Competitive Advantage – If you see only 10 deals, you will likely pick your favorite. If you see 100 deals, and invest in your favorite, don't you think the chances are better that the 1 out of 100 is a better opportunity? To put it another way, an investor can only be as good at investing in startups as the volume of quality deal flow they generate.
2) You Are Not That Valuable – Angel investors like to invest in companies where they believe they can add value. I try very hard to add value to each company I invest in. I have weekly calls with many founders. I love to roll up my sleeves and make key contributions. Is a predictor of success that a venture needs my input? I think not. You want founders who listen to the opinions of advisors, investors, their team and customers; however, you should invest in founders with the vision, skill and drive to succeed regardless of your ability to assist them. Invest in quality teams with great ideas regardless of whether they need your help.
3) Attack Assumptions – We very rarely have the luxury in life of making decisions without also making assumptions, and most of our failures can be traced back to poor assumptions. This is role of the armchair quarterback, who clearly identifies your mistakes after the fact. When you focus your attention on the assumptions being made by founders, you are more likely to uncover risks that are not being addressed or, even worse, an Achilles Heel that cannot be mitigated. Moreover, invest in founders who instinctively test and retest their assumptions to de-risk their decisions. Entrepreneurs who buy into the popular notion that they need to be adrenaline junkie risk-takers should be avoided.
4) Do Not Stereotype – When you do well, or see others do well, you are attracted to new opportunities that remind you of these successes. Do you really need to invest in any sharing economy project, just because AirBnB has been a juggernaut? Maybe you had early success in new media like I did back in the late 90’s. Does that make me an expert investor in the space over 15 years later? Not really. Similarly, when you experience failure, you tend to shy away from a space. I spoke with a VC about a deal I was in, and he said that he had invested in different solutions targeting the same market twice before, and one failed and the other experienced success before the founder ran it off the rails. We discussed how this new technology was clearly a better solution and the business model was designed to avoid exactly the pitfalls he had witnessed with those pioneering ventures. Despite his unique experience in the space, he passed on this opportunity, simply because he had built up too much emotional scar tissue. Stereotyping ventures is as ignorant as stereotyping people. As the saying goes, “don’t judge a book by its cover.”
5) Value Proposition – Successful businesses do not begin with a business model; they start with a value proposition and never lose sight of the customer. I think this might be why many successful founders with great vision begin young, follow their passion and do not have MBAs. I did not graduate Wharton without learning how to count money, make money and leverage money; however, they could not teach me how to dream up great ideas. Similarly, when you cut your teeth working for established businesses for years, the company's value proposition is already in place, and you are usually a cog in the wheel helping to keep the business model running. This can lead to the belief that the business model is more important than the value proposition; however, the former has no place without the latter. Great businesses must first find a compelling and defensible value proposition if they hope to reach the stage where the business model can succeed.
6) How Big Is Big? – Don Valentine, founder of Sequoia Capital, said, “I like opportunities that are addressing markets so big that even the management team can’t get in its way.” There are limitless creative ideas that entrepreneurs and inventors can pursue, and all of these opportunities are not required to have mind-bogglingly large TAMs and SAMs. But if you are playing this particular high stakes game of angel investing in high growth startups, you need to consider how big the company can reasonably grow. Related to market sizing is whether the business will have larger strategic buyers looking to bid up the sale price based on a high acquisition multiple of revenue or EBITDA or whether the market opportunity presents enough potential for sustainable growth to become a public company.
7) Moneyball Has Its Place – I have developed a 23-point analysis to quantify the attractiveness of an early stage investment. Unfortunately even in baseball with objective measures like ERA, WHIP, OBP and QAB, building a capital efficient team that can win the World Series takes more than arithmetic. I doubt anyone can ever truly "moneyball" angel investments, but you must ask tough questions and maintain intellectual honesty, instead of letting your emotions take hold. Do not rely on "gut instinct," a founder's stellar track record, how red hot the space is right now, or what a great guy/gal the entrepreneur was when you did keg stands together back in college. There are many fundamental questions you can ask to assess every new venture, so it cannot be a bad idea to keep a checklist to help you measure whether your excitement mirrors the math.
Dealflow
I will syndicate a limited number of opportunities, which are a subset of my angel investing activity. My reasons for limiting syndication are two-fold:
1) Not every company I invest in will want to use this SPV structure to syndicate a large number of small angel investments. Sometimes I learn of an opportunity late in the fundraising process and there is not a large enough allocation available. Sometimes I am investing alongside institutional investors, who have already carved up most of a party round. Sometimes a venture already has another syndicator on AngelList or is using an alternative crowdfunding platform. When a syndication opportunity does present itself, then I must consider reason #2.
2) Would I recommend this opportunity to a close friend? While the most likely outcome of every angel investment is a total loss of capital, and you should not be investing money you cannot afford to lose, my appetite for risk is sometimes higher than what I would recommend to my friends. For example, I have funded a freshman in college to explore an idea and an inventor with limited business experience trying to develop a groundbreaking prototype. At the time, these investments were not de-risked enough to recommend to a friend, but I hope each will develop into syndication opportunities. I will only syndicate deals, which I feel have been de-risked sufficiently. To put it another way, I want to syndicate deals that I would be annoyed if I missed the opportunity because a friend did not share it with me.