Mistakes That VCs Cause Founders To Make

VCs get a bad rap, but I’ve always enjoyed talking with them. They see a lot of stuff, so, they are great sources of market information. It’s true that they sometimes screw up companies, but I don’t think it is in the way most people assume. It’s rarely that they are greedy, forcing you to take more money than you need or selling a company that shouldn’t be sold. I think the mistakes are of a different category – advice that lacks business context. Founders often take this advice too seriously, and often have their own biases that are stupid, just like the VCs, but let’s look at some examples.

Channel Partnerships

Founders, particularly first time founders, often have this same idea that one massive channel partnership will make their business suddenly jump to hypergrowth. I’ve seen it across my investments too. “Company X wants to sell our product, and even though we are a 5 person company, they think it could $20M in revenue next year for them.” I’m sure somewhere, at some point, this has worked, but usually it’s death for the startup. Why? Because the startup runs out of money before Company X ever makes a sale. A deal like this might take 6-9 months to finalize even if Company X really is into it. Investors see this over and over, and every founder thinks their situation is unique and so, as an investor it gets old explaining why this is a bad idea.

That said, there is a flip side to this. Investors often overly favor the last go to market model of their best portfolio exit, which is stupid because GTM really needs to match your market and buyer and product. But I believe investors overindex on direct inside sales. They say things like “own your own destiny” which is entirely true unless your buyers like to buy through an existing channel. I could write an entire post on what to look for to figure this out but suffice it to say VCs often recommend you sell direct and build a brand even when it’s a bad idea.

Luckily, back in my Backupify days, we had a great Board member who gave us good advice on channel sales. In our first year of rolling out a channel program, we signed up 65 channel partners and they were 3% of our revenue. I told the Board at the end of the year we were shutting down the program. He said “wait, has any partner sold anything?” Three partners had. He said “fire the other 62 and focus on those 3 for a year.”

It seemed stupid to me. If 65 partners can only sell 3% of our deals, how will 3 sell anything? But those 3 sold 9% of our deals the next year. We were too distracted with too many partners, and so we learned, with these 3, how to really do a channel deal. Then we started to expand slowly and when we sold the company, the partner channel was 30% of our revenue.

Buyer Personas

Warren Buffett always says “never mistake precision for accuracy.” I think this happens with personas. Investors always want to hear that “we target B2B companies 100 – 500 employees that use MySQL and sell to the head of I.T.” It’s so crisp and clear. And sometimes, you can do that. But often in new markets, you don’t know where the adoption is going to come from, or sometimes the market will support a very horizontal product, or the buyer profile is psychographic instead of a demographic, but investors like to push you to a clear demographic profile.

At Backupify, we had 9000 customers when we sold, and our largest customer paid us $360K per year, and we had hundreds that bought one seat and paid us $30/year. What mattered wasn’t size or industry, it was whether or not you thought backup was important. We sold to “the broccoli eaters” as we called them. There are people who always wear their seatbelts, floss their teeth, file their taxes in March, and eat their broccoli. Those people also love to backup their data. That was our market. Investors often push entrepreneurs to “focus” when it’s too early to actually do so.

Hire The Stud

This is probably the worst mistake investors make – pushing entrepreneurs to hire some marketing or sales or engineering stud who led XYZ product at ABC big company. It’s almost always a bad idea. That person is almost never the right fit, but every first time entrepreneur feels pressure to do it. It’s compounded by the fact that as a first time CEO, you feel constantly incompetent because of everything you don’t know, and these people seem to have a lot of answers, but, they almost never work out. They can’t deal with your stage and size. Investors though, feel a lot better if they are around.

My point in writing this is to give some examples of specific areas VCs influence founders in bad ways. I also want to show that it isn’t that VCs are morons (although some are), but that they are giving reasonable advice that is just often out of context. It might be great advice at a different stage or size.

Synthetic Social Media Via AI

One of the favorite parts of modern video games, for many people, is designing their avatars.  I’ve been thinking about this because I’m looking for AI to create an area I call “synthetic social media.”  But so far I haven’t seen any companies in this space.  Since it doesn’t exist, I don’t know exactly what shape it will take but let me try to explain what I mean.

In Japan, there is a synthetic pop star.  In many immersive video games, like Second Life, people use them as a way to escape and be someone else in a virtual world.  I think AI will allow us to combine these two ideas and create “friends” who act the way we want and do the things we wish they would do.  

Imagine a platform that allows anyone to create a virtual pop star.  You design your avatar, give it a name, and then AI can write the music.  You could say you want it to be 40% Rolling Stones, 10% Taylor Swift, 20% Beastie Boys and 30% random other mix, and the AI can write a song that sounds like that blend.  Now the avatar can perform concerts or shows for your friends, singing the songs it wrote.  The most popular songs and concerts (and thus avatars) develop followings.  And it isn’t just in music.  This could work for art or video content – anything digitally created by humans that AI could step in and perform reasonably well at.

Now it gives you the chance to be friends with, or be the manager for, this synthetic AI start on a social media platform that will be mostly synthetic identities.  If you aren’t talented enough to sign and play music, your avatar can.  You can live vicariously through it, and many people will.  Longer term, you could see the idea expanding into sports, and even into the workplace to some extent through synthetic ai workers.  It’s out there but, it feels like a logical extension of where AI is going, and the time is right to set the seeds in motion for phase 1 of such an industry.  

If you are building something along these lines, please reach out as I’d love to invest. 

Does Customer Development Really Matter For Startups?

I was chatting with someone the other day about customer development and I asked a simple question. Now that customer development has become so common among venture backed tech startups, has it moved the needle at all on outcomes? I don’t have any hard data but, it seems to me that just as many startups fail now as did before. And, anecdotally, in my own angel investing (74 companies) it seems that the more obsessed a founder is with customer development, the less likely they are to build a big successful company.

I want to explore a hypothesis today, one that some of you will hate, but will make others of you nod your head and agree. I hypothesize that customer development hasn’t really worked out all that well, and has led to many small outcomes and companies that won’t die, and thus doesn’t fit the venture model. This, in turn, has led to the worship of the visionary entrepreneur and is why we sometimes get bad situations like WeWork was a few weeks ago.

When people say “customer development” they mean a few different things. I mean the more formal version of it as laid out in Steve Blank’s book Four Steps To Epiphany. I think Steve was actually on to something, but like most ideas, it was summarized and bastardized until it became generic and mostly wrong.

The problem is, talking to customers has some value, but it’s not a panacea. Customers often don’t know what they want, or they want a problem solved in a way that is stupid, wrong, not scalable, or not repeatable. Listening too much to customers often gets you stuck in a rut where you do a bunch of services work. Or more often, it gets you stuck in a local minimum with a handful of customers that have your specific problem and desire your specific solution.

Blank’s book actually gets you out of this – he has 4 major steps, and one of them is “customer creation” but, it seems like 95% of what is written about customer development is just about making sure you talk to customers before you build anything.

Here is my hypothesis.

  1. Customer development was bastardized from a really nice smart process into “interview customers before you build anything.”
  2. As entrepreneurship became “cool” circa 2011 or so, and everyone wanted to start a company, there were too many interviews with people who wanted niche solutions, but these interviews (if a few people agreed) were proof that it should be built.
  3. People without vision started using metrics and “data” to iterate their way to success via customer feedback.
  4. But it never worked and didn’t move the needle on outcomes overall. All we got was a bunch of walking dead startups that were really lifestyle businesses.
  5. Smart investors realized this tired of it and thus and started being drawn to big visions and the entrepreneurs who swung for the fences. (For the record, I personally think it’s better to swing big and miss than to swing small.)

What should have happened, and what I think Blank intended, is that companies that found product-market fit but then realized they:

a) couldn’t reach customers cost effectively

b) were in market with a small TAM

c) couldn’t find a scalable repeatable business model

These companies would re-trench and start with a new product for their market. But that didn’t happen. They adopted the YC “don’t die” philosophy and, well, now you have a bazillion 3 person companies clinging on for life support. And you have a bunch of VCs who grew up in the customer development age and think that a lean company clinging on for life support is what they should be looking for.

All I know is that, in my own experience running companies and investing in them, sometimes they just pop. It’s often hard to explain why. The timing matters, and the it’s a function of all the pieces lining up at the right time. But when they do, you know it. Until they do, you just keep trying stuff. I don’t think it’s a good idea to just stay small because it doesn’t fit the venture model, and if you want to raise venture, you have an obligation to try to go big. (Note, there are many paths other than venture, and those are all good too, but, if you take VC, it’s about going big).

I’d love to see some numbers if they exist, but, my guess is the customer development wave hasn’t improved returns for VCs or success rates of startups. It’s hard, and the factors for success are complex. But feel free to tell me in the comments why I’m wrong.

The Coming Rise of Synthetic Data in AI

More and more often, I am hearing startups talk about “synthetic data.”  I’ve seen my existing startup investments start to use it, and I have seen entire companies formed around it.  So, what is it?

Put simply, it is data created by a machine.  Now, why would we do that?  Imagine that you want to train a machine vision model to identify a Tesla.  Now imagine you only have 10 pictures of Tesla’s to train on, so you need a bigger data set to train a better model.  One way to get a bigger data set is to go get thousands of more Tesla pictures.  Or, you could consider doing some simple manipulation to the pictures you have to create new pictures instead.  

For example, maybe you don’t have a picture of a red Tesla.  You could photoshop one of your other pictures to make the Telsa red, and add that red Tesla to your data set so you model performs better at classifying Teslas.  What most people use synthetic data for is to test under different conditions.  They take an image and change the lighting, shadows, etc to simulate different conditions so the machine learning model learns what an object looks like from different angles.

A common use of synthetic data now is to build data sets for autonomous vehicles.  You could create an entire machine generated city, drive around that city obeying traffic laws, and feed that data into the autonmous vehicle model.  This allows you to simulate things that may be harder to capture in real life (e.g. a car running a stop sign).

Now, synthetic data isn’t always good for a model.  In NLP applications, one of the criticisms is that synthetic data sets generated for training are often very simple (because our language generation techniques are still weak compared to other types of AI).  So training a model on all of this language data fails to capture the nuance and vagaries of messy real human language.  But in other situations, like machine vision, synthetic data tends to work really well.

From a business perspective, there are a few use ways to think about synthetic data.  First of all, can you use it to generate new variations of things in ways that are valid for training.  Secondly, can you use it to label data about things that humans no longer need to label?  And finally, should you create the synthetic data yourself, or not?  

My current hypothesis is that synthetic data will mostly be done by a few third party platforms in a market that develops into an oligopoly.  I think the way that software debugging works today:  report a bug -> code a fix -> test on a staging environment -> deploy to production and verify, will be the way a synthetic data workflow evolves.  It would look like this:  report a model failure (e.g., model doesn’t detect things well at night) -> use a synthetic data platform to generate new items for a data set that increase the data for that problem (what things look like at night) -> rebuild model -> test model -> deploy new model to production.  Someday it will be push button easy.

This means if I am right, synthetic data business opportunities will come in 2 flavors.  The first is synthetic data for common objects, where there is lots of data.  These platforms will win by being the easiest to use, connecting to the most workflows, and having the most common options for data generation.  The second is cases where generating the synthetic data is hard because of the nature of the problem space and the lack of existing data sets to start with.  This will lead to specialized providers who can master specific domains.

If you are working on AI, soon you will need a synthetic data strategy.  And if you are company in the space, please reach out if you are looking for investment.

What Ethan Zuckerman Could Teach Googlers About Debate Culture

When I read recently about Google’s attempts to corral internal debates, I thought the way Ethan Zuckerman handled his leaving the MIT Media Lab was a very good model for how to handle debate in general. I’ve met Ethan twice while sitting on panels together and have always been impressed with how he handled himself. On one of the panels he even criticized many of my personal views about AI and the news media, but did so in a way that was very factual and respectful.

Here is the key text I like from Zuckerman’s response:

That’s okay. I feel good about my decision, and I’m hoping my decision can open a conversation about what it’s appropriate for people to do when they discover the institution they’ve been part of has made terrible errors. My guess is that the decision is different for everyone involved.

The decision is “different for everyone involved.”

As someone who has spent a lot of time in debates over the years, one of the things I’ve noticed is that the reasoning behind the debates, in general, has gotten worse. People rarely take Zuckerman’s view that rational people can come to different decisions or conclusions about the same thing that happened, or a stance on a major topic. I suspect if most college students today had to write a resignation letter from the MIT Media Lab, they would demand that everyone else resign too, and the lab shut down, or something like that.

What struck me about Zuckerman’s response is that he doesn’t demand anyone do anything else. He is mostly concerned with his own behavior and feelings, and he acknowledges that others may feel differently and that’s ok. It is an extremely mature perspective in today’s world, and I wanted to highlight it because I feel like it should be the norm, not the exception.

I’ve had a lot of friends leave Google over the past couple of years, as people say “it’s not the same.” I know some of their consternation is due to the attitudes of Googlers, the way the debates happen, and the my-way-or-the-highway debate types that often dominate these discussions. Maybe Googlers could learn something from Zuckerman about respect, perspective, and maturity.

Hiring, Reputations, and Why Backupify Was Really Successful

I remember doing reference calls on the very first executive I tried to hire at Backupify. I was 31 years old, a first time CEO, and had never hired a senior executive before. I had a candidate, and I mined LinkedIn for 3 people that had worked with him before to do reference checks. The reference calls went like this:

Person 1: Yeah he was fine. I’d work with him again. Not much to add.

Person 2: Oh he’s awesome – a great boss. I loved working for him and I’d follow him anywhere. I’d love to work with him again.

Person 3: That asshole? I hate him. I would never work with that !#@!%#! again.

Now, you might think this is a bad sign, but, I think most people that have done a lot of hiring will tell you that it is hard. Even candidates who come with 3 glowing recommendations may not work out, and may not do great work at your company. Sometimes people with mixed references like this just happen to be opinionated and sometimes rub some people the wrong way.

I remember another time when I hired a programmer for our marketing team because he wanted to move into a marketing role. He was terrible at it. After just a few months I fired him. I told him he sucked at this role but, I think he would be great at a developer relations role, and I recommended him to another company I knew with such an opening.

He wrote a really nasty blog post about me, and Backupify, and how terrible the culture was, and how he never should have gone to work there. Then he interviewed at the place I referred him and he got the job. Three weeks after he started, he was in the audience at an event where I was a panelist. He came up afterwards and hugged me, and said this new role was such a good fit.

Hiring is hard. Part of the reason it is hard is that we rely a lot on people’s reputations. A big part of the hiring process at most places is the reference checks, but, I’ve found reference checks to be almost useless. I basically just do them in case someone says the candidate did something highly unethical, but, other than that, I’ve learned that it is difficult to untangle someone’s performance from their situation. So whether or not they did a great job somewhere else may not matter for your company.

Why Backupify Was Successful

Backupify struggled from 2009 – 2011. Our primary product was initially consumer focused, then SMB focused on gmail backup. If you hear people talk about why we ultimately had a 9 figure exit, it was because we hired this or that person, because we finally figured it out or “cracked the code”, or maybe I finally grew into a good CEO and made the right decisions. But you want to know what really happened? The market moved in our favor.

I was sitting at Google’s partner conference in 2012, and almost every announcement or session or presentation was about Gdrive. Google had come to see Dropbox and Box as competition and was going on all-in on Google Drive. I called a management meeting for later that day and walked the team through it all and said we had to change the strategy to focus the product and the marketing on GDrive. Suddenly, customers who were meh about Gmail backup were putting their key documents in the cloud via Gdrive and were very concerned about backing them up. Our revenue curve took off and 2 years later we got acquired.

But the key lesson here was, we didn’t have any great vision. We had some great people, and they did make a difference, but, none of them had some key insight that changed the trajectory of the company. It was a lot of little insights, and blocking and tackling, that all added up to success. The real breakthrough – the reason that we were successful, was out of our control. The real reason was – the market moved in our favor. We were already doing a Google Docs backup, so following this Gdrive movement was easy.

There are a lot of companies like this. It’s not that the team doesn’t matter, it does, but, the real key is what is happening in the market and whether you are well positioned to take advantage of that. Good teams find that spot in the market, if it exists. The Backupify team was great, but the market really made the company.

And that brings me back to hiring, and reputations. Some people are just in the right place at the right time. Some people are awesome, but in bad markets or bad companies. Some people ride the coattails of the awesome people, and get an undeserved reputation.

When I moved to Boston in 2010, I had that experience. I’d meet with someone in the startup scene who would say “oh, you have to meet person X – he’s awesome.” Then before I’d meet person X, someone else would say “that guy? don’t waste your time.” It was hard to figure out who was “good” and who wasn’t. There are very few people that are considered rockstars, across the board, by everyone.

The lesson here, and the reason I’m writing about this is that, when you go to raise money, VCs will talk trash about other VCs. Some of it is true, some of it isn’t, but it’s all contextual, and you probably don’t know the context. When you go to hire executives, you will hear many different things. Some of of it is true, some of it isn’t, but it’s all contextual. You get my point right? Reputation is contextual. Some people have very stable reputations because they have been in very stable contexts.

Sometimes you just have to dig in and take chances on people, employees, executives, and investors. People change and adapt and learn. But some don’t. So, reputations matter, but, be careful. Do your own diligence, and don’t be afraid to take risks on people who are unproven.

What Horses, Watches, And Bookstores Can Teach Us About Why Automation Won’t Kill Jobs

A few months ago I spoke on a panel, and I was asked a question that I am always asked about AI and automation – will it kill jobs? And if so, what do we do? The answer I gave surprised many people who said they had never heard an answer like this before so I thought I would write about it here.

Here’s a heuristic that will guide the way – things we no longer need don’t always go away. Sometimes they die briefly, but then are resurrected as status symbols.

Bookstores

When I was working on my MBA in 1998, my business school professors were freaking out because they had no idea what business was going to look like when the Internet really took hold. I had a professor tell us that in 5 years all brick and mortar retail would be dead, and that we would only shop online. Obviously they were very wrong. If you take bookstores as an example, you might be surprised that while Amazon initially put a big dent in the bookstore industry, there are now more bookstores in the U.S. than there were before Amazon. The algorithms of Amazon are super efficient but, they don’t provide the serendipity, the community, or the curation we sometimes desire.

Watches

I remember playing golf with a friend in 2007 who said “wow, you still wear a watch?” He told me he had no need for one because he had a cellphone and it always had the time. The cellphone was, for a while, definitely killing the wristwatch, but much like independent bookstores, it appears that watches are starting to come back as more of a status symbol than ever before.

Horses

Two hundred fifty years ago, everyone owned a horse. That’s how you got somewhere. When cars came around, it didn’t kill off the horse industry altogether. Instead, horses became expensive status symbols. To own a racehorse, or to participate in equestrian events, it it’s own culture and community filled with mostly wealthy people.

So what does all of this tell us about AI, automation, and jobs?

I believe that as jobs get automated away, employing people to do a thing, instead of robots, will become a status symbol. Humans are always competing with each other for status, and that won’t stop. Bookstores, watches, and horses didn’t go away, although they did change in different ways.

But, some things do go away forever. For example, no one washes clothes by hand now that washing machines were invented. How do you explain that?

My theory is that there are two kinds of jobs. There are jobs machines are better at, and will always be better at. And then there are jobs that really can’t be done much better, but could be done faster or more efficiently. by a machine. The latter category jobs will emerge as a status symbol if you have a human still do it. Those jobs will pay well because they now become “luxury services.”

If I think forward and see some new jobs emerging as a result of AI automation (data curator, data annotator, model trainer, AI designer, etc), and see some jobs becoming status symbols as mentioned above, and also factor in that hybrid human-AI partnerships will upskill some low skilled workers and enable them to keep working, I’m actually pretty bullish that at least for the next few decades, we don’t have a problem with automating jobs away. There will be economic upheaval, and some industries will be like the clothes washing industry and suffer pretty greatly, but, at the macro level I believe the story will actually be all right.

The Half Court Ventures Story: What I’ve Learned From 4 Years of Angel Investing

Backupify was acquired in December of 2014. In June of 2015 I made my first angel investment. Along the way, I started a fund with my friend Todd Earwood, and learned a lot about investing. This post chronicles that path.

Deciding To Angel Invest

The first thing I did post exit was talk to lots of smart people about angel investing. If you do this in Boston, where I am based, most people say this… “don’t do it, you will lose all your money.” Time and time again I heard a story where, someone made a bit of cash, then they spent a year studying angel investing, looking at deals, figuring out their strategy, and then pulled the trigger, doing 4 deals in their first year of investing. Then they waited and watched while 2 went out of business, 1 became the walking dead, and they got squashed out in a recap of the other one. Almost everyone tried to talk me out of it. “You’ve worked too hard for this money, don’t lose it” was a refrain I heard many times.

But. I was 38 years old. My theory was that I could lose all of it, and that would be entirely ok. I don’t have a lavish lifestyle, and I don’t really want one. (People are always surprised I drive a 2009 toyota tacoma stick shift). My strategy was to work and invest as aggressively as if I had never made any money at all, figuring that even if I lost everything, I would learn a lot, increasing my ability to hopefully make it back.

I was lucky that 3 of the best angel investors in the world were investors in Backupify: Jason Calacanis, Chris Sacca, and Dharmesh Shah. I talked with all 3 of them about angel investing, and they all gave me advice that was very different than what other people advised. All 3 said that to be successful, you have to do a lot of deals. 20 was the number they threw out. I was told that if the first 15 bombed, still do the last 5. Do 20 deals.

The second major piece of advice was to brand myself in a way that I would get good deal flow. One reason many angel investors fail is that they don’t see the best deal flow, so all they see is second and third tier investment opportunities. This piece of advice was part of what inspired me to start my AI newsletter. It has been, and continues to be, a very good source of deal flow.

The third piece of advice was to focus on size of possible outcome over likelihood of possible outcome. This kind of ties back into Nassim Taleb’s idea of playing games that favor convexity. If you do it right, your hit rate can be worse than average but your hits payout disproportionately, so you end up fine. More on this later.

Setting Up Half Court Ventures

The idea to setup a venture fund wasn’t mine. Some of my original angel investors in Backupify were based in Louisville, KY, where I am from, and they reached out to ask if I was going to angel invest. When I said yes, they said “you will see deals in Boston, NYC, and San Fran that we will never see here, please throw some of our money into them along with yours.” This was easier to do with a fund structure, so, we created Half Court Ventures. It turned out to be a $3M fund, but I was the largest LP. As the fund was getting setup, I realized I wasn’t going to do this full time and may need some help, so I asked my friend Todd Earwood if he would be a general partner in the fund as well. Todd and I have done a bunch of business things together over the years, are close personal friends, and have made and lost money together on various things, so there is a lot of mutual trust. Plus, our skill sets are very complementary. (You can see Todd’s presentation here on telling AI stories.)

We chose the name Half Court Ventures because we both love basketball, and Full Court Ventures was taken. But over time, we evolved the story to say that it references a half court shot, which is difficult to make, but still possible, and more likely with practice – similar to startups. When we tell you that story though, you will know now that it’s a myth. The original naming story is that we were just not that thoughtful about it.

Half Court Fund 1 made 48 investments in 3.5 years, in mostly AI companies. It did so well (on paper) that the LPs all wanted to come back and do a second fund, so we just did the first close on Half Court 2.

Deal Flow, Evaluation, And Investing

All in all, I’ve made 68 early stage investments as of the day I’m writing this post. 55 of them are through Half Court, via fund 1, fund 2, and our Angel List syndicate. The other 13 were personal, either in friends, companies founded by people who worked for me, or weird non-venture style stuff. Half Court stayed focused on AI.

Angel and Seed stage investing is nerve wracking. Companies are a rocket ship one year and flat the next. They are dying, then suddenly raise massive rounds. We’ve seen companies get large markups, then crash, and we’ve seen entrepreneurs pull magic out of a company on the verge of death. The only thing that is consistent is that whatever the entrepreneur tells you will happen, will most definitely not happen.

At these stages, there aren’t many metrics to use to judge the company, and even if they have some metrics, they are usually meaningless. I don’t do much competitive diligence, because I’m not sure it matters at this stage. Smart entrepreneurs will navigate those dynamics. Mostly I look at teams and markets. Is the market big? Will the team figure it out? If what they are telling me doesn’t work out (because it often won’t) are there tangential spaces for them to move?

We tend to evaluate deals based on what I’ve learned from reading Nassim Taleb’s work on convexity. I know all the things that can go wrong in an early stage company. I’m not trying to mitigate those risks. I’m trying to figure out that in the unlikely scenario that everything goes right, how big can this be?

At the angel/seed stage, pretty much every idea looks kinda brilliant and kinda dumb. I could craft a story for why it will succeed or fail. So, I try not to waste time figuring out what could go wrong. That said, I also tend to stick to things that I already know a bit about, which helps.

Our deals come from a bunch of places, but the best sources tend to be my newsletter, and existing portfolio CEOs. One of the things I’ve been focused on, and am very passionate about (and will write about more on this blog) is AI hardware. Half Court has already invested in Mythic, Rain, and Koniku. I think investing is a lot about finding the trend everyone else is missing, and AI hardware is one of those trends.

Lessons Learned

It’s really hard to know, 4 years in, how much we’ve been lucky and how much we’ve been good. Ask me in a decade and maybe I will have a better idea. At the moment though, Half Court 1 is doing really well, despite the fact that we made a ton of mistakes.

  • We were easily taken in by charismatic entrepreneurs who had no grit, and easily gave up when things got tough.
  • We took on (and continue to take on) syndicate risk, meaning we’ve done deals when the company has no lead. We’ve been the very first check into 9 deals (usually just $50K) and almost every deal we have done has been pre-revenue, many pre-product. The results have been mixed. Some entrepreneurs don’t close their rounds. But others we get into because we’ve already committed, and the lead shuts out new angels.
  • We’ve done deals that would have been good but the valuation was bad.
  • We didn’t reserve much capital for pro ratas, and we missed chances to invest more in some of our best deals.
  • We’ve been burned by SAFEs (still hate them) when entrepreneurs have a walking dead company and the investors have no way to even force a conversation about what’s next, or when someone doesn’t honor the original spirit of the SAFE. It’s just this no man’s land of legal rights. Convertible notes or equity make a deal waaaay more attractive to us.
  • Your handful of big winners really do drive returns more than anything. Everyone says this and my experience is the same.
  • Some entrepreneurs just make things work. I was the very first angel into Bulletin.co, and it was entirely based on the gumption and grit of Alana and Ali. They have been through multiple ideas and business models to get to their current success. Finding these entrepreneurs is hard. Always invest in them when you can.
  • Sometimes I invest in someone I really like even when I hate their idea. I think of it as getting to know them so that even if this company fails, I’ll get a shot at their next one.

A side note about big exits – it seems like their really should be a different way. There are tons of good tech ideas that aren’t venture scale, and could be nice businesses sold for $25M. But when you do a $10M cap SAFE on a slide deck, there isn’t an opportunity for an investor to make much money on that $25M exit. I don’t understand why so many companies get funded on roughly the same terms despite being vastly different businesses. Why aren’t there more $1M on $3Ms? Or $2M on $2M pre? If you did a 2 on 2 and got to cash flow breakeven on that, sold for $25M in 5 years, the founders would each make $6M (assuming 2 co-founders), and investors could get a 6x. Everybody wins. No one is financing that model.

How Do You Have Time To Do This?

The biggest question I get is how I have time to do this. I run Talla full time, and I have two school aged kids, and I write posts like this. It’s actually not that hard because I don’t have many other hobbies. I watch zero television except for college basketball season, and I don’t even have a Netflix account. So instead of “netflix and chill” I do the “read decks and chill” on a friday night. And I try to involve my kids in it a bit. They’ve met a lot of the entrepreneurs I’ve invested in, been to dinners with some of them, and I hold a quarterly AI poker night at my house that 15-20 of them will usually attend. I let my kids hang out at those because I think entrepreneurs are good role models for them.

Also, I believe it helps me at Talla. We are in an early market, so seeing the insides of so many other AI companies gives me ideas, and makes me smarter about the market. I will say my investors are split on it. About half would tell you it’s made me a smarter CEO, and about half would say it sucks time away from Talla and is a distraction. Boston is more of a do-one-thing-only tech community so, my Boston investors tend to be a little more on the “this is a distraction” side than my Silicon Valley investors.

And finally, when you get a process down, and stick to areas you know, it can become more efficient than you think.

In Closing

I think early stage investing is incredibly fun and rewarding. I actually think growth stage investing would be too, but, I can’t really play at that level yet.

If you are an AI entrepreneur, I hope you will reach out and send me a deck. If you are an investor and want to collaborate on deals, please reach out as well.

If you are new to angel investing, and want to chat, I’m always happy to share my experiences.

Welcome To Coconut Headsets

I’ve been blogging since 2003, when I wrote the Businesspundit blog, which I sold in 2008. Then I moved to coconutheadsets.com, but in 2014 moved to Medium, feeling like it provided better distribution for my thoughts. I don’t really like it anymore so I’m moving back here as my primary source of writings. I’m also the same Rob May that writes the Inside AI newsletter. I run Talla as CEO, and am a partner at Half Court Ventures, the fund I started with Todd Earwood. We are the most active AI seed investors on the East Coast.

If you want to know what Coconut Headsets means, read up on cargo cults. I chose the name because in startups and investing, there are many erroneous ideas out there that follow a similar vein. I try to break those mindsets. I hope you can find something on this blog you disagree with, that challenges your thinking. Otherwise, I haven’t done my job.