Miles To Go.

Xin’s Thoughtful Gift: PBJ and Ramen 2

Being an entrepreneur is a lumpy business at best. And while I’ve written extensively about the mortality rate (95%), I’ve never written about how hard it is along the way for those 5% destined for greatness.

It ain’t easy, and it ain’t easy on everyone.

This is a basket of Ramen Noodles and Peanut Butter, presented on my Birthday by a very appropriate, thoughtful entrepreneur I backed; Xin Chung. Xin certainly has the moral authority to present the gift: he was liberated from Saigon as a child, spent time in an internment camp, and grew up in Valdez Alaska before settling in to SoCal and pursuing his dreams as an entrepreneur. He is now Founder and CEO of TrustCloud which has emerged from a “walk in the wilderness” with 10k passionate users and a growing number of interested clients in the social check space.

The Ramen and PBJ is our shorthand for being capital efficient, a must for start-ups.

My system at Vaux usually provides $250k of less for a team to develop a product that addresses a meaningful market problem, and do it within 90 days or so. This means most for the proceeds are dedicated to product. The next $250k usually goes to determining if anyone cares. The numbers vary, but either way the Founders and early employees do not get rich in salaries off of angel money. Frankly, they have to be prepared to barely eat, and when they do eat for strength. This is part of the ugly underbelly – and not a full underbelly! – of the dedication it takes to pursue your dreams. Every dollar you don’t waste can go to a better product or a better viral coefficient.

And of course, stuff takes longer than you expect. And costs more money than planned. This puts tons of pressure on the entrepreneurs as they debate the next crucial steps, often on an empty stomach. Probably once in my last 10 start-ups has a company got it right, right out of the box and kept doubling down all the way. Most try with a product, revamp, try again, tweak, and try again until there’s no track left. And it leads to some very difficult conversations about where to invest precious resources: make the product better and more people will come… or tell more people about the product and they will spread the word. Development vs. Marketing vs. Biz Dev. It often provokes difficult conversations, and sometimes desperate measures (these guys slept in a van on a Biz Dev road trip that lasted months).

And so the entrepreneurs themselves, while pursuing their dreams of autonomy, making a mark on the universe and yes winning riches, have to absorb the vagaries of what precious resources to assign where… including their own sustenance. I get queasy when I hear comparisons to the comp someone could make in the corporate world, which simply doesn’t apply in start-up-ville. And I get nauseous when I hear debates about how deep down the rabbit hole start-ups should go pursuing the next pivot (which is another term for fail and try again). Luckily  angels don’t have that much patience or that much capital for endless restarts. Which is why, when interviewing prospective partners I always look for that unique combination of resourcefulness, willingness and mental toughness that will see us through. And a dose of reality to know when to put a fork in it.

Entrepreneurship is not a straight line to the summit, it’s a jagged ascent and we have to be prepared for the whole ascent not just the sprint at the top.

~~

Save runway: TrustCloud’s sample T&E guidelines

Use personal credit card; expense every month with invoice. Avg trip: 2nts/3days, $800, $1000max

1. Air: economy $250

2. Ground:  $25/day

3. Lodging: Airbnb $50/nt

4. Entertainment: $75/day

5. Badges: pre-approved

6. Big dinners: pre-approved

Goats yes, power not so much

I use a mantra since Wadi Rumm called ABC- always be charging. It served me well in the desert, where power was precious and communication was crucial. At many times, we were several days ride from actual electrical power. But to us, the importance of blogging (and tracking!) our where-abouts were crucial to our state of mind, if not our well-being.

There were times when the sun was high and the solar panel would do wonders for laptops, phones and PLB’s but we were so exhausted all we wanted to do was crawl under a rock (literally 15 degrees cooler) and sleep. But Mr. Jones would never let that pass, and soon neither would I. If a recharge is available and the next power is days away, plug in no matter what. This simple rule got us through Jeddah, Wejd, Wadi, and all the way to Damascus.

But I have kept the rule with me. I used it at SXSW, I use it in airports, and of course I use it in the start-up world. On a long journey, in hostile territory one cannot afford to simply “run out”. 

Much like power in the desert, the journey of a start-up has incredible resource requirements. Capital, of course. And Talent. Creativity. Process. And Strategy. If each of those are not recharged regularly, they become tired and weak. We rely on old standards, and resist change, preferring to crawl under the shady rock and wait until things cool off.

So, I try to take a page from my desert adventures whenever I can. Restock on talent, and fill the pipeline with A Players waiting for a chance. Exploring different points of view and different ways of doing things from all walks of life before re-engaging with the problems at hand. And looking at strategy through different lenses and with new data points regularly (but not incessantly).

Yes, Indeed as Saba and Tad taught me well: always be charging.

Krish, Miles, Dan (who is in a rare moment of overdressed) in 2008

This past month marked the fifth year of working together with my two co-founders at Mojiva: Dan and Krish. If I were a DJ spinning vinyl to sum up those days, I would drop the needle with Bob Seger’s Against the Wind. With a few edits…

It seems like yesterday
But it was long ago
[Mobile] was lovely, she was the queen of our nights
There in the darkness with the radio playing low
And the secrets that we shared
The mountains that we moved
Caught like a wildfire out of control
Till there was nothing left to burn and nothing left to prove

Call it founder bias, nostalgic, or just plain sappy but it is amazing what’s has actually gone down in sixty short months. No one has been in mobile very long- old timers can claim ten years, most likely five is when the early scouts hit the beach. Apple was just about to launch the iPhone and end the carrier’s dominance of the “deck”. Premium publishers that took down minimum guarantees were not getting repeat business. Android didn’t exist. There were no apps, and no tablets either. No one knew the difference between online ad-tech and mobile, and how soon they might converge. Wow, that world was simple! It’s now Flintstones vs. Jetsons!

First thing we did, of course, was to name the damn thing. It may sound like a whim, but we actually worked hard to craft a name that had meaning- at least to us three. MoJiva was a mash up of jivan, which is a Hindi god (we favored the elephant Ganesh) and Mo for mobile of course. The good thing about crazy names is they are always available at register.com. And everyone has remembered us since.

We gave Krish $300k and 3 months to build the mOcean platform (he’s had a bit more budget lately!). In light of what developed, that amount just seems ridiculous. But that’s how it went down, and build it he did. We served 3M ads a day by month 3, and we felt like we were on fire. Three months later, we raised Series A from a strategic VC and hired a rock star CEO. Dan got going on Biz dev, and we went on a run. I can’t even begin to list the milestones along the way: often it seemed like we were on a runaway train, fixing the front wheels even as we were shoveling coal, painting the cabins and losing luggage out the caboose. Such is the world of start ups and technology. It takes a strong stomach and a keen eye for the rewards at the end.

And I remember what she said to me
How she swore that it never would end
I remember how she held me oh so tight
Wish I didn’t know now what I didn’t know then

Against the wind
We were runnin’ against the wind
We were young and strong, we were runnin’ against the wind

Amazing what you can accomplish when you don’t know any better. Everything we did was against the odds, let alone the wind. And now its five years on and we just completed another monster milestone year. We are now part of one of the best teams in Mobile ad-tech, over 100 strong. We’ve booked 100% growth for four straight years, and we now serve over 1,000,000,000 ads a day. Yes, that’s a billion ads a day. I had to write that out. In the December rush, we were serving 35,000 ads per second in virtually every country in the world.

But what makes me most proud is the team that we have built and what THEY have accomplished, sometimes by adding people, sometimes by subtracting. From day one, folks walk into our office and universally say Wow! This place is cool- I’d love to work here. Yeah, it’s packed now and someone needs to do the dishes. But we have a wonderful HR effort that backs it up with training, 401k, healthy Mojiva, Core values we live by, peer awards, leave bonuses, flex time, A Player recruiting… and a very open environment where every suggestion to make it better is heard (ok, not all are actionable), and we truly believe in the value of their equity, cause we all own it.

It’s flattering and humbling to consider this came from our DNA, and that vision we cobbled together 5 years ago is still going strong today. There’s more to the song of course, and there’s more to the story to be told. But I want to stop here and tip my hat to my two co-founders and say wow: we helped build that!

Nice job guys!

I’m about the x’s and O’s. She’s about 1′s and 0′s. (Notre dame photo)

I was saddened to hear of the death of Manti Teo’s girlfriend. It was a moving story of courage and recovery for Manti, and  demonstrated the empathy possible in a close knit nation called Notre Dame.  A truly moving story in time for the Heisman Media machine’s annual award.

And after the fact, it turned out to be all bullshit.

Manti was catfished in a hoax, whereby the girl he met online was… not what she appeared. I have written about this phenomenon extensively since the movie Catfish hit the screens a few years ago. Manti was focussed on x’s and o’s, she was all about 1′s and 0′s. If I recall, thousands of people wore lei’s to mourn the loss (of his mother as well) at a game, and the cameras couldn’t get enough of it. It has happened since, and it will happen more until people realize that, for all the time they spend online, they have to build and monitor a trust system they can rely on, or face the consequences of what is called Peer to Peer “P2P” risk. In short, buying through the classifieds has risks that don’t exist at Bergdorfs. And there is simply no way that could have happened if she had a TrustCard, or he had asked for one. DISCLOSURE: I am an angel investor in the sharing economy, including TrustCloud.

We are being more mobile and social everyday. believe me, I sit at the vortex of some 100,000,000,000 mobile impressions per month at Mojiva. People should start growing accustomed to being fooled with 1′s and 0′s, or not be shocked with the consequences. Manti is a telling tale for what is surely coming for most of America (except the jaded metro-skeptics) as we use mobile and social to power our interactions. Consider what Manti represents:

• Most of America still harbors vestiges of Classic Innocence that wants- indeed hopes- that what you see is what you get.
• Time demands and focus elsewhere – Manti had his dreams, and he spent 99% of his time (ok, still not enough) on his football. An expert on one field, but a rookie dater. And not much of a fact checker either.
• Doesn’t have time to track down all he sees online – and who does? And how would you?

It can suck to get catfished. Because we WANT to trust the peer to peer relationships we develop online. Sometimes, it means the car you rented on a sharing site comes back smelly. Sometimes worse. I’ve written extensively about the whoopsies in the Sharing economy here, here and here. Kickstarter has its case of the week, where Seth Quest may or may not have been forthcoming with his bona fides. And now on to dating, the ultra peer network  where Barry Diller will hook you up with a CRAZY BLIND DATE. Hmmm, can you say risk?

This will continue to accelerate as sure as mobile and social keep generating more P2P opportunities. And the risk will not be mitigated until there is a portable trust solution that people can rely on to quickly vet P2P prospects, reduce friction in transactions, and provide a trail of digital footprints if something goes wrong.

Until then, would someone please get Manti a real date?

BTW; The P2P networks have been working on trust within their networks, but unless they become the AMAZON of P2P, people will begin to demand that their virtuous data is partially theirs, and easily portable. More on Data to the people another time!

Gate is actually the basis of the Vaux Logo

Despite focusing most of my writing efforts on my blog, and keeping up with the world via my twitter the year-end letter to Vaux angels is a tradition well worth continuing. I’ve cribbed the best of it here…

 Discover. Develop. Deliver.

These three words are scrawled across everything I do for Vaux. They are three parts of my personal mission to success as entrepreneur and angel investor, which I had the honor of mapping out in a 2012 white paper for the Family Office Association  “Angel Investing for the Family Office” . I took a hard look at the process of building a foundation on the long journey from inception to exit, and nowadays I plan my week based on these categories. I color code each meeting in my outlook. They might as well be scrawled on my bathroom mirror in lipstick. They are the cycle of life for Vaux les Ventures and the angels that have supported these endeavors for nearly 10 years. Here’s what these simple words mean to me:

Discover is about being very focused on what you can do well, and what markets will have an impact that can generate angel returns. Big market trends that people don’t yet see, or are unwilling to accept. Trends that will obviously converge, but no one knows exactly when. It means being early and brave, but it also means being patient to find the right mix that can sustain the long march. This is where the DNA of the business is set: habits formed early are virtually impossible to break. Many people in the business call this “deal flow”, and I did too for a while but I soured on the term as too many IB ‘s and VC’s (both of which I have been) over-use it. Having a well know criteria for how to invest and who to invest with seems to do very well in attracting the right types of people. So does being a good guy. But it’s about discovery as much as it is about network. And that discovery includes markets and their real problems as well as solutions and the best team to build them.

A recent example of this would be my work on WellAware, the mobile health solution. I’m as committed as ever to the trend of mobile devices having profound affect on health and wellness. And I truly believe that very simple data can have tremendous impact on lives. The Wellaware team did a tremendous job developing the platform for this theory to play out, but certainly overshot the MVP standard. What we need in 2013 is more cycles with large user bases to refine our solution, likely in the mobile environment.

Develop is where the entrepreneur (in anyone!) takes over: translating a vision for a product solution into a product itself, and testing it with users to see if the darn thing works. It takes tremendous amounts of courage, persistence and luck. Some attempts are ridiculously off the mark. Ironically, more often there are overshots than undershots when going for the minimally viable product. And users are rarely the viral dream everyone hopes for- more like a block-by-block struggle to get to a vantage point where people notice you. But more than product and users, the team is the big part of the develop picture. Entrepreneurs have a passion for building things are not always Schwartkoffs when it comes to leading people. And that is where the coaching and mentoring foundation is laid. Capital begins to show up at this point, as we have baked enough of the risk out of the opportunity for larger sources of capital to begin to show interest. That too is a major challenge in this phase, and if you grow fast enough, it never ends.

[Major edits here from the angel letter. Sorry, that's not public.]

The poster child for the develop phase is certainly TrustCloud, which just 9 months ago had product solution in search of a problem, no user base, and a team that had already endured a few pivots. Such are the risks of being early! But the saving grace was each of the founders used the sharing economy and saw what it could deliver, as well as its limitations. Something had to give, we thought.

And 2012 was full of such breaks, as TrustCloud found its core team, delivered a product and began building users at an impressive clip  (10x from July to December) after the Wall Street Journal picked us up. Check out the product here, or the very impressive Facebook TrustCloud user group (which tracks bugs and promotes the product passionately). The Company rolls into the New Year with a new Peer Protect insurance product to couple with it’s ever growing number of sharing networks.  Kudos to the indefatigable and imminently coachable CEO Xin Chung, who details the year here:

 I shared keys to my NYC apartment on Airbnb, rides through San Francisco in a Sidecar, and my workload with TaskRabbits. I’m not alone– people worldwide are sharing more than ever with millions of room-nights booked, cars rented, and dogs walked by reputable strangers. The movement is called The Sharing Economy, Collaborative Consumption, or as Mary Meeker calls it, living Asset Light. (this is a great read! Don’t miss it!)

 Flush with VC funding, the movement scaled fast in 2012– but not without growing pains: A quick look at recent sharing history would give anyone pause before sharing with a stranger. Home sharing market leader Airbnb had a redux of its 2011 EJ incident with the so-called airbed & brothel snafu where a Swedish apartment was literally pimped-out. Carsharing had it’s own collisions with the luxury carsharing service HiGear shutting down due to thefts, car sharer RelayRides’ liability issues with a fatality crash, and regulatory fines for on-demand ride-sharers.

 These events highlighted that trust between strangers in peer-to-peer marketplaces must keep pace with their own rapid growth. In the offline world, hotels have long adopted star ratings, rental cars are licensed and insured by brands spend billions to give consumers confidence to buy. Since online, peer to-peer marketplaces powered by micro-entrepreneurs don’t have time to brand themselves or vet strangers, they are much less efficient as buyers and sellers waste time sizing each other up, figuring out a schedule and even haggling over price before committing. Trust can make these transactions much faster, and insuring the risk is something we look forward to. Read more at TrustCloud’s Blog.

Deliver is where all the hard work pays off. That would seem like a triumphant moment, and I’ll allow myself a few. But as I have matured it has become a little more bittersweet. Here are companies we have built from scratch, communities that started with a handful of people, angel capital that came in for under $1M pre money. And despite some intermittent liquidity opportunities, in some cases these companies have futures that remain bright(er). We have seen large that we turned down; we may see 2x-3x-4x from here (or of course, we may not). So parting with some or all of the ownership isn’t as easy as “see ya later”. It’s an asset, with a value that has to be managed detachment that is at arms’ length, hard as that may be. We also live in a world of high risk, so those precious few windows of liquidity opportunity have to be considered when they are open.

[More major edits here from the angel letter. Sorry, that's not public.]

In summary, I guess I feel every venture I have been involved with has contributed to the next. Things I have learned about the Discover phase have allowed for better Develop results. Those few short peeks at liquidity in Deliver have been viewed with a paradigm that allows the whole group to consider individualized risk and reward before deciding on liquidity. And of course, the success through the process has allowed us the opportunity to feed the beast, return to what we do best, and further diversify with another opportunity.

I am extremely grateful for the opportunity to work in the field that I do, side by side with talented entrepreneurs, backed by caring and value adding angels that ask good questions and have the patience to help realize the vision I had almost ten years ago. We’ll see great opportunities in each of the three key Phases in 2013. Drop me a line and we’ll discuss which ones best fit your criteria in the days ahead.

All my best in the New Year,

Meet Fake Grimlock

Mary Meeker just called it: Sharing is now a megatrend.

In her wildly popular bi-annual prognosis, Meeker points to the demise of asset-heavy life especially among 20 somethings wherebye sharing economy and  smartphones free time and money, creating an asset-light generation.

So how does this relate to virtual dinosaurs and dating? Hang on, let me tell a good story. Dialing it back a bit, I was watching Cat in the Hat with my son this morning and began to wonder about how that famous tech character might teach us something about a this big trend, now that Mary called it. Suppose I pose these questions abut the tech world’s favorite virtual persona Fake Grimlock… as only Dr. Seuss could:

Would you meet him in a mall? Would you pass him in the hall?
Would you let him drive your car? Would you let him drive it far?
Would you let him watch your pet? Would he eat them, hmm, sure bet?
Would you let him tutor the kids? Could you, would you blink an eyelid?
Would you let him sleep upon your couch? Would he scare you with those teeth- Ouch!
Would you date him late at night? Would you lend him money? Right!

Which means, essentially, if you were going to do a “Sharing Transaction” with an unknown Peer, do you trust the person behind fake grimlock? He’s extremely well known in a small circle of tech entrepreneurs (and deservedly so- he’s hilarious in a CAPSLOCK kinda way). But my point is, there are millions and millions of Fake Grimlocks out there.

From Spencer 323232 on gMail to Pineapple88 on EBay, people have for more than a decade created and maintained personas and avatars for everything from virtual gaming to very real Craig’s listings. Taking it back to Dot.com days, we used to hear the reason the internet was popular was … no one knew you were a dog. People could go online (Chatrooms!) under any handle they chose and behave pretty much with impunity. It was the digital equivalent of turning out the lights at a teen mixer. Stupid ideas came and went, as did plenty of fortunes and not a few great companies. But the ability to take on an alias, or even build an avatar in another parallel world lingered as a quaint benefit from back in the day. To some gaming sites, it’s a hell of a business that virtual world.

But now comes along Social, Mobile and Local where a billion people share their profiles, activities, photos and innermost thoughts with perhaps way too many friends. Privacy was redefined, or its boundaries were pushed out by the devils favorite vice, vanity. Rachel Botsman called it early with her Colaborative Consumption moniker, and subsequently has talked about trust within peer networks a lot. Now, as big data companies are starting to realize this data is meaningful, strong voices are pointing out that people should own their own data. Tim Berners Lee is one such voice, having started what I call the “Data to the People” movement with this Guardian interview. Add to this a rich mix of a green consciousness, underemployed/over-indebted college graduates and a sluggish economy and you get the Sharing Economy a/k/a the very more wordy Collaborative Consumption. Al it needs now is some glue, or as Neal Gorenflo recently said in a post to Shareable Magazine the dramatic transformation of the economy that’s needed is not going to happen until a large coalition begins to work together.

This is precisely why companies like TrustCloud, Connect.me  and MiiCard are helping stitch together a trust and reputation metric for the Peer economy. Basically, in 2012 everyone knows you are  dinosaur, and if you are transparent enough with it, more and more people are ok with it. So, for argument’s sake, let’s say Grimlock does not want to reveal his identity, but he wants to claim credit for all the good things he has done online. He has a ton of influence and follows (you can see that from twitter or Klout) but maybe he also contributes to Stack Overflow and helps out on GitHub under Grimmy22. Maybe he maintains an ebay account where he is top rated as a seller, but under FakeyBoy101. He has a few verifiable email addresses, and actually lives somewhere under the name Human B. Good. What if Human B Good claimed all that data and consolidated in one place- without actually divulging that he was Grimmy22, FakeyBoy101 or any other avatar. But he claimed the credit for all the good things he does for the community under whatever name. If he was transparent enough to verify and share his human identity, he’d be golden, or the human behind him would be. And all without blowing the connection to the mysterious Grimlock. Here’s my point: thousands of people every week are coming to that conclusion and getting TrustCards.

So… let’s look again at these peer transactions

Would you meet him in a mall? Would you pass him in the hall? 

This is the perfect CraigsList question. If Grimlock offered me $100 cash for my old iPhone in some dodgy exchange in the mall parking lot, it’s a pass. To much risk there. But if Human B. Good made the same offer (and had claimed all the virtuous data Grimock threw off), it would be a different story.

Would you let him drive your car? Would you let him drive it far?

This is the GetAround/Relay Rides/ Ridepost question. As Anotonin Leonard’s partner Benjamin Tinq (both OuiShare guys) remarked, “Ten years after Jeremy Rifkin wrote The Age of Access, shared mobility is fundamentally changing the way people think about car ownership, among other things. Especially the younger ones, to whom owning a car has lost its appeal of independance, which is now embodied by electronic and social media devices. So you want me to hand over the keys to  a $30k asset so Grimlock and his monster buddies can go up skiing Vermont for the weekend, and he will give me… $30 per day? Can you say asymmetrical risk? And for some extra credit reading, has anyone really looked at their insurance coverage when you turn your car into a small business. The answer is pretty disappointing (and the backup from the sponsoring sharing network won’t be good for much either, especially as that risk scales). But Human B. Good give me a better feeling about his identity, interactions and behavior with his TrustScore. Perhaps things would have been better for HighGear had they such a system in place. RideShare is already doing this, and more will follow I think.

Would you let him watch your pet? Would he eat them, hmm, sure bet?

Talk about precious assets! I would not turn Baxter over to Grimlock for fear of dinner! Rover.com is already onto this, and has trustscores flowing out to their 70,000 dog watchers nationwide. Essentially, people Human B. Good would get the job, and Baxter would come home safe (and incidentally, my home would be safe, seeing as how Human B. Good has the keys to the house).

Would you let him sleep upon your couch? Would he scare you with those teeth- Ouch!

This one comes right out of AirBnB’s book- and Wimdu, LoveHomeSwap, HomeAway, InterHome and lots of others. While millions of room nights have been booked, as the early adopted give way to a more mass acceptance of “crashing on the couch”, so to will a demand grow for “who is this”, and from both sides of the transaction. AirBnB has had its “Ej Incident” and the “Hookers on Holiday“, which at the very least left a bad taste (sorry) for the hosts. I’ve heard there are plenty more where those came from. But there is risk on the guest side as well, just ask the poor blokes who wired in advance for their Fun and Sun Holiday in France and got… (sorry) just pictures for their trouble (the house did not exist), and the hosts, well what do you think? Again, no keys in this scenario for Grimlock. Human B. Good, more likely.

Would you date him late at night? Would you lend him money? Right!

So after the roundup of the “Sharing Companies”, it makes sense to imagine the other places that a trust and identity system could help other Peer economies. While I have heard stories of young ladies throwing themselves at Grimlock at his personal appearances, I’m not so sure that is scalable. Dating is the ultimate peer transaction, and one where a few simple verifications would do a world of good. To wit: a) does the guy really make $100k+ and b) are those photos of the girl recent or retouched? Likewise, peer lending could be greatly enhanced with a similar solution. Of course, the incidence and transaction data that flows back through the intake API becomes crucial to the richness of the scores.

So to wrap this one in a bow… there is a great saying about trust and context: I would trust my dog with my life, but not with my hamburger.

Grimlock has done a good many great things for our tech community across a few social networks. He is known to the community, and he adds to it. And that’s fine for the virtual world. But for the rest of us, so much of our lives pass between the virtual and real worlds. And many of us have piled up so much virtuous data, it’s time to start harvesting it, claiming it and organizing it in one place that makes it useful to a variety of networks.

We all have our data from our own versions of Grimlock out there. Start using it.

 Full disclosure: I mention TrustCloud here. I am an angel investor in same. 

The Social Network is a hell of a movie, but the real people upon whom the characters were based have stated that the film’s version of the founding and growth of Facebook was overly dramatized. And appeared way more fun than it actually was.

Face it, entrepreneurship is hard. Angel investing is doubly hard. While we read about spectacular successes, one can hardly keep up with the many outright failures preceding them. The thin veil  can really only be perceived once you are on the right side of it-it’s practically see through! But if you are on the wrong side, the thin veil might as well be a brick wall.

Someone once said the two best traits an angel investor can possess are a strong stomach and a sense of humor. The strong stomach will tolerate its share of quick deaths from being too early, too late, poor execution or leadership, lack of funds, or just tons of competition. The sense of humor will come into play when you attempt to tell your God which element of your portfolio is going to be The Big One. God will invariably laugh and throw at least one thunderbolt, wreaking havoc with your “sure thing” — but turning your also-ran into a winner. (No kidding, it’s happened. But to protect the innocent, we won’t name those we feel were luckier than they were skilled.)

Other sources of angel heartburn include those frustrating periods of illiquidity…the fast pace of technology which upends business models and proprietary positions quicker than at any time in history… the global markets bringing competition to one’s door on a massive scale… the high valuations of exposed deals,…the lack of influence when part of a syndicate…the competition with other angels (and now, VC’s). The list goes on.

The angel game can be summed up in the words of the “advert” placed by explorer Ernest Shackleton (1874-1922) ahead of his Antarctic expeditions (none of them successful, by the way):

“MEN WANTED FOR HAZARDOUS JOURNEY.

SMALL WAGES, BITTER COLD, LONG MONTHS OF COMPLETE DARKNESS.

CONSTANT DANGER, SAFE RETURN DOUBTFUL.

HONOR AND RECOGNITION IN CASE OF SUCCESS.”

And yet, we do it.

EO: Great Group of Entrepreneurs

This excerpt is serialized from a whitepaper titled Angel Investing for Single Family Offices (SFO’s) by The Family Office Association and Vaux les Ventures. For a complete copy, visit the FOA website. 

Any SFO considering allocating a portion of their assets in venture toward angel investing has to acknowledge the significant risks in the market. One sobering take from the US Small Business Association is that roughly 80% of small businesses fail in the first year, 10% in the second and 5% in the third, leaving a paltry 5% of new ventures that even qualifies to deliver a return for investors. I am a member of EO (logo at left), a global organization with 8,000+ members that fosters entrepreneurs, and the odds are just slightly better there I think.

Sticking with the digital media businesses discussed in the last section, here’s a brief summary of the early stage venture risks associated with this sector:

Operational Risks are legion in startups. First out of the gate is execution on the development of the product. Many products and services simply fail to launch, whether due to poor specs, loose design
concepts, or from just plain misjudging a market need. Another common problem is never solving the cold start challenge and acquiring users. Assembling talent, accessing sufficient capital, maintaining differentiating advantages over competitors, and a go-to-market strategy are a few more risks to consider.

Timing Risk — also referred to as Luck. Often, an entrepreneur’s vision has merit, but market conditions have not yet gelled to support it. Frequently, capital is wasted on development and/or marketing in
anticipation of a developing market. When the tide doesn’t rise in time, the company is left high and dry. One example? The many mobile/ social networks that tried to deliver hyper-local advertising audience and failed. In the meantime, Gowalla and FourSquare entered the market just as mobile and social converged, and were propelled to higher and higher market caps. Likewise, any mobile/social solution launched now with similar attributes would be too late and face heated competition.

Funding Risk can be mitigated by an SFO in the early stages of the company, but in our digital media example, additional capital will be needed — or at least easy to acquire –in order to scale the business. A good example of funding risk affecting returns would be the inability for mobile ad networks/ platforms to raise capital before mobile was “proven” viable (see AdMob’s sale to Google and Quattro’s sale to Apple within a 6 week period). Before those landmark deals, funding sources constantly questioned whether there was a “real” market in mobile, citing the struggling networks who hadn’t succeeded, despite $250,000,000 of combined capital. Several early stage companies faltered for lack of capital, and several other investors suffered dilution from large downdrafts in valuations. An SFO can, of course, prolong the agony by continuing to fund (Fred Wilson’s famous quote here is “I have a 0% mortality rate- I just keep funding!”) but the effect on returns when others do NOT fund, or fund at lower prices, is undeniable.

So, if you are considering angel investing with your SFO be sure to match the risks with the rewards. There are more of the former than the latter!

 For a complete copy of the complete paper, visit the FOA website.