Interview with Kirill Makharinsky: Investor in TokBox Edit this post

In our fourth episode, we interview Kirill Makharinsky and learn what factors can statistically predict a company's future success.

Kirill is the CEO and Co-founder of Enki and previously co-founded Ostrovok and Quid. He is an early investor in fifteen startups, including TokBox (acquired by Telefonica), AngelList, and RoboteX.

Here are a few of my favorite lessons from this interview:

  • Invest in people that still have something to prove, despite having already achieved success. This could be an entrepreneur that had a modest exit but felt they could have done better. It could also be key employee at a successful startup that wants to show they can start a successful company themselves. Kirill gives several examples at 23:00.

  • Ask yourself “would I want to work for this person?” Great founders need to be able to recruit and keep great talent. When you think about working for them, notice what gets you excited and what gives you pause.

  • Active advisors can help predict a company’s chances of success. Kirill studied data from tens of thousands of startups. Two factors helped predict which startups increased their valuation over time: the founding team having achieved past success and the quality of advisors and employees. Convincing a talented advisor to spend time (even just 1-2 hours a week) on the company was a good indicator of success.

Learn more about Kirill’s investments on AngelList and follow him on Twitter.

Here's a full transcript of the interview.

Tyler Willis: [00:10] Hi everybody, I'm Tyler Willis. I am an entrepreneur and an angel investor, and this year, I'm your host for season one of AngelList Radio. In our first season, we're interviewing different investors, and we're learning how they invest, and what's made them successful.

[00:23] Today, I'm joined by Kirill Makharinsky. As a founder, Kirill has helped build YouNoodle, Quid, Ostrovok, and Enki. He's raised tens of millions of dollars, he scaled Ostrovok to over $200 million in annual sales, and he's also invested in several companies along the way.

[00:38] I want to warn you before we get started, this episode is long. We ended up talking with Kirill for almost two hours, covering a huge variety of topics. We covered how to identify a great founding team, something he has a lot of data on from the YouNoodle and Quid days, and probably has thought more about than the average VC.

[00:55] We talked about founding and investing internationally. Kirill has built companies across San Francisco, London, and Russia.

[01:01] We also talked about the non-financial benefits of investing, so what tools his investing activity has given him to become a better founder and CEO. I looked for things that I could cut out to make this shorter, and I just couldn't find anything. I think it's all really great material. With the warning that it's long aside, let's go ahead and get started.

Tyler: [01:20] Before we dive into it, maybe you can walk us through what was the start of your career? How did you get to today?

Kirill Makharinsky: [01:26] I guess the career is quite different from most. I was born in Russia, grew up in the UK, ended up going to a whole bunch of schools. I think actually quite a varied background helps you in the future understand people better from different backgrounds. That was definitely an asset of mine growing up.

[01:49] I ended up getting into Oxford, where I studied maths, and I focused on the applied side of the things. I realized about a couple of weeks in I wasn't going to be mathematician. In the Soviet Union, most people think that the main values is driven by being in academia or working on space stations.

[02:15] A few weeks into studying at Oxford, I met some of the folks from Silicon Valley who came over and spoke at an event that was hosted at Oxford. That's when I realized that the biggest value in terms of impact on people is to build technology right now.

[02:31] It's the biggest lever for making a difference and impacting the lives of...Back then, it was millions of people. Now, we're talking about hundred of millions or even billions of people. It's a completely different scale now. The landscape has changed, which has made it even more exciting.

[02:47] I tried to get involved with starting companies while I was studying, once I realized this. Even though it wasn't a for-profit company, the main entity I got involved with was the Entrepreneur Club at Oxford.

[03:03] Again, it wasn't a company, but, even though I had to manage 10 plus folks who aren't paid. I had to persuade investors who would definitely not going to get a return, like of an angel scale, to invest in us and help us and drive things forward. It was great practice for actually starting a company.

[03:23] Through that, I also met Max Levchin, the founder of PayPal. I was lucky enough for him to invite me to join his company Slide, which he started after selling PayPal to eBay.

[03:34] I think four days after my last exam at Oxford, I did actually finish my course. It was only three years, I did a master's in three years. But I did manage to finish it. I moved over to San Francisco three or four days after my last exam. Initially did a bit of everything, but I ended up focusing on product and analytics there.

[03:55] About a year and a half after I joined Slide, I teamed up with the guy who I helped start the Entrepreneur Club at Oxford with, Bob Goodson. He was the first employee at Yelp. We started a company called YouNoodle. We initially were building tools to help grow entrepreneurial communities, actually, very similar to what AngelList is doing, but without a focus on actual fundraising transactions.

[04:28] One of the tools we built was, and I led the development of, was called the Startup Predictor. We actually analyzed data in about three or four thousand companies to build a simplified model of what kind of factors would influence a future valuation. We got a lot of coverage for that, about 30 or 40 thousand companies filled in the 55 or so data points.

[04:54] That was a fascinating time, just on this, pouring over the data of about 40,000 startups to understand what actually makes a difference and what doesn't from, not an anecdotal point of view, like most of the industry is run, which is the reality, but actually a more algorithmic and mathematical.

[05:13] Off the back of that, we realized the value in the data was in capturing the trends and data from those companies, which were mostly hidden. We ended up building what became Quid, so we rebranded, and started building a very high quality B2B product that would be useful for corporations and governments to make sense of private company and technology trends.

[05:39] That's what Quid is doing now. It's doing very well, raised about $69 million. The product still, the product is exceptional and it's used by a lot of blue chip companies and governments to understand who they should partner with, who they should care about, who they should buy. I was at Quid full-time for about four years. Still a minor shareholder there.

[06:07] Then I teamed up with a friend of mine who was actually my first angel investment. My first angel investment was in a company called TalkBox, which exited to Telefonica, but the company was run by a friend of mine who I started the company in Russia with. We didn't want to specifically move to Russia, but the best idea we had at the time for a high-growth business was, building out the first trusted-travel brand for the Russian-speaking world.

[06:39] We started that in 2010. Scaled quite well. Obviously, a lot of mistakes along the way, but the company is on a pretty decent track and growth has actually accelerated in the last 12 months since the Russian crisis. Starting to expand internationally and hopefully we'll get to about a billion dollars in sales within three years or so.

[07:04] This year, the start of this year, I started a new company focused in the professional education space. I just believe the barriers are way too high to learn on the job. Aside from the firefighting that you do on the job itself, all the other learning is just incredibly inefficient so we're trying to make that more efficient.

Tyler: [07:28] I want to get into some of the other things first, but what are some of the ways that you can make learning more efficient?

Kirill: [07:37] I think you got to look at, what are the barriers that you need to get over, or what are the humps you need to get over before you start learning? One obvious one is just that thought of, "OK, I guess I should invest in myself. Where do I get started?"

[07:57] The first barrier is not to have that thought at all. What are the products that will just be part of your life in other ways, but as an aside you'll be learning without realizing it? One thing that I was discussing with friends of mine is actually, you can make an argument that the biggest education company in the world is Twitter.

[08:20] Even though it's very inefficient in terms of structured education, it's something that you read through in a very lightweight way and every now and again you learn something. You stumble on an interesting article or you read an interesting thought from some of the people you follow, and that's how you learn. But you don't even realize that you're learning, like you might be thinking you are if you read a textbook or a video lecture and so on.

[08:47] That's the first. Obviously, there are other barriers like just a lot of noise and a lot of time needed to get through a textbook or a video lecture. The third thing is cost. To do a proper training scheme for the companies [inaudible] investment is just incredibly expensive and there's a very bad feedback loop to understand which of the, right now, 10 to 15 percent of those training programs are actually effective.

Tyler: [09:17] Part of the reason I ask that is you've had a fairly prolific career so far, and still very early in it. You've started and run and helped build more high-growth companies than I think most people have over the last 10 years. What do you credit to that? How do you identify the ideas that get you excited? How do you figure out where to go to next? What makes it so that you can operate at 10x the normal person's speed?

Kirill: [09:50] I think it's different for everyone. I think if I say something that sounds relatively smart about what drives me, I think that might be totally different to anyone else. That's actually [inaudible] to investing. The best deals or the best companies are those where it's something unexpected. You have to almost re-learn everything you've learned on the standard.

[10:09] But in terms of productivity and drive, I think it's about thinking long-term. For me, what's really important is if you can't communicate in a crystal-clear way what you're doing and why long-term, first of all, it's hard to motivate yourself, but just as importantly it's hard to motivate others and hard to build resources around you, which essentially is what differentiates a good entrepreneur, versus a weaker one.

Tyler: [10:37] Do you have a crystalline approach to how you describe to people why you do what you do long-term?

Kirill: [10:42] Yeah. You said I've got a prolific record. It's all relative. This is the beauty of what we do, where you have such outsized returns for the smallest company. I think the two companies I've started before, they're both doing very well. They've revenues in the $10 million plus range and they're still growing very well.

[11:03] But I look back at them, and look at, first of all, there were a huge number of mistakes made, that I think were core, that fundamentally hindered the trajectory of the companies early on. Then secondly, also, they were working on products where I personally would not have honestly have said, with hindsight, I would be happy to work on those for the rest of my career. Right?

[11:28] For me, I think from a financial point of view, I'm pretty lucky to be in a position where I, in theory, don't have to work again. But, I mean, I have huge amounts of unfinished business as an operator. Right?

[11:40] Because I feel like, OK, what if I set up a company with the right parameters without those things that hinder the growth? What if I work on something where I would happily spend the rest of my career on it? For me, it's building technology to make people smarter, more effective. Right?

[11:55] When you start thinking long term, and super long term, it completely changes the decisions you make short term.

Tyler: [12:01] When you think about super long term, what's the time frame that you're thinking of?

Kirill: [12:04] Well, I mean, I think that you need to be realistic and that you can't, you need to understand that some things are just far too unpredictable. You need to look ahead in terms of development of a product in the scale of years.

[12:25] But I think that you can set up a few true norths and few principles that are always in place and that will stretch forward, whatever, for some people, it might be 10 years, but for others, 20, 30, 40 years. Right?

[12:43] The problem I'm addressing, which is, building tools for what I described as the knowledge age is, I see that as a kind of 20, 30 year journey. Right? Beyond that, it's, then we get into things where a lot of smart people defer in their opinions on whether we'll, to what extent artificial intelligence will impact that and so on.

[13:07] But either way, hopefully by that time frame, we'll be sort of a key player in that space.

Tyler: [13:11] Got it. Clearly, you said unfinished business as an operator. You have a lot of focus spent on your operational debt. How do you split time between running your business and being an investor? How do you think about that?

Kirill: [13:25] Yeah, I mean, I don't really think of myself as an investor per se in terms of allocating capital. I've certainly scaled down how many companies I invest in since I've been working the company.

[13:40] Actually, I think this year, I don't think I've made any investments in 2015. I think all my investments were basically in 2013 and 2014. Right now, I'm mostly focused on building out the product wing, which is incredibly time intensive.

[13:58] But having said that, I think the kind of companies I am looking at now or would be looking at, I guess, fall into two camps.

[14:09] One is where I don't need to do any work to understand whether I want to work with the entrepreneur, so I would have to know them already. The investment of really getting to know someone, which I think is a blocker to making an early stage investment, is not there anymore.

[14:30] The second camp, those companies where I think the learning experience of talking to those entrepreneurs within those initiatives would be actually helpful for my current company.

[14:42] Those are the kind of companies I would be looking at in the short term. But obviously, in the medium term, once things are more stable at the company, that might change.

Tyler: [14:52] Got it. You think in the building mode, you think there may be like a cyclical effect. When you're really heads down, focused on building something and it's new and you've got to get it off the ground, it requires more energy, you have to devote more energy to it. But in the periods of time when you get out of that, you may have more time to invest.

Kirill: [15:09] Yeah, I think as an entrepreneur, the hardest thing is getting to product/market fit, which, actually most people don't really understand what that means, which is building what your audience or your market wants at solution scale. Right?

[15:28] Getting over that hump is the hardest thing as an entrepreneur. A lot of very smart and capable entrepreneurs have failed in getting over that hump.

[15:40] Actually, once you have a track record, a lot of entrepreneurs get complacent. They just think, "Oh, it's just a matter of time. It's just a question of when [inaudible] ."

[15:47] They don't actually think from a fundamental point of view, OK, they just remember that they did it before, or maybe they stumbled upon it before and they think they can do it again.

[16:01] I think that you need all the kind of focus and the time investment you can to sort of get over that hump. That's why I think you've got to be sort of laser focused on that.

[16:14] Any conversation I've had with companies would be something where it would help me get over that hump, at least in the short term, is understanding, OK, what mistakes have others made. What are the reasons why, what are the kind of products or features that are related or similar to me, and what have they learned. Right? Those conversations are very useful.

Tyler: [16:38] Got it. You said that getting to know someone is really key to making an early stage investment. I'm assuming that means you predominantly invest only in people where you've gotten to know them and you really believe that they're likely to win. Is that a fair statement?

Kirill: [16:51] I think it depends on the stage of investment. Certainly for things, before, prior to getting product/market fit, prior to traction, prior to revenue, I think that's an absolute necessity. I think the main conclusion, which was quite interesting, from the work I do at Startup Predictor was actually how important the team is.

[17:17] I actually, when I did analyze angel investments, went to pretty extraordinary lengths to dig into that, I think much more than anyone who...

[17:25] Even an investor who says the team is important, I think they don't actually dig into enough, into some of the vectors that would determine whether that team where the founder and the CEO is capable and strong enough, or ambitious enough, or their aims are in line with what the investor thinks is important.

[17:46] Certainly, before product/market fit, certainly before revenue at sufficient scale, I think that's something that's important. Not just in a sort of gut feel, but I actually have five or six parameters that I would dig into, and that would be, blockers if I feel there are red flags on any one of specific to, is this team, and in particular, founder, capable of building what their market wants at scale?

Tyler: [18:16] What are those parameters?

Kirill: [18:18] There are a few, one without, hopefully, biasing towards any potential future companies I look at to just hack those together, so I won't say too much. But there are a few factors that I think are interesting and maybe some first time investors might overlook.

[18:41] The first vector is just, I call it the ability to not die vector. How good are you as a team and a founder to get through any situations and adverse circumstances? There are a few data points that can be helpful.

[18:58] First of all, having any kind of result with a previous startup, or company, or project, obviously, is helpful to understand can this person actually drive something through to completion.

[19:12] Even, for example, in the case of a company that's doing well. How do they deal with those circumstances? Did they sell the company? If not, why? If they did, what was the outcome and so on?

[19:26] Any examples of persistence. The fashion word is grit these days, which is basically just an explanation of in situations where the natural human instinct is to flee, how has that founder reacted? What have been their true colors in those situations? That's one.

[19:51] A second vector I think is really important is what the team, and in particular the founder and the CEO, what are they aiming for?

[20:01] I think the companies that I've done less well with, as an angel investor, were ones where the founders were perhaps very, very accomplished, but they were aiming for something which wasn't in line with what I felt they could have been aiming for, should have been aiming for.

[20:18] Perhaps they were just in for an exit of a certain variety, which is never a good idea, in general, unless you know something that the rest of the market doesn't. Perhaps they are aiming for something, a market, which is completely different to what you think is right for the product.

[20:40] The long-term aims of that founder, I think, are really important, both in terms of qualitative direction but also quantitative aims.

[20:50] One of the differences in Europe and the US is still this difference of what founders aim for, which I think is quite fundamental. In the US, I think there's more this mentality of building a platform company, which now is something worth $10 billion or over if you get it right, at the right scale.

[21:10] While in Europe, it's still much more focus of application, and getting to hundreds of millions of dollars is seen as a home run. That's a second vector.

[21:22] A third vector in terms of team is how able are they to build resources. Like I said, starting a business isn't actually very hard in terms of actually getting things going, and doing the paperwork, and coming up with an idea. Everyone's got ideas. The hard thing is building resources around you.

[21:44] First of all, building the biggest resource within you, so finding the motivation to actually execute. Also, build resources around you in terms of other people. A very important thing is, are they able to find advisers, people who will invest their time?

[22:01] Investing money, especially if you're very wealthy, it's not very difficult, especially if you have emotions involved with the investment. What is much harder is investing time. What are the caliber of people that they've persuaded to part with their time, even if it's an adviser, even if it's not full-time? That's quite indicative.

[22:23] If they can't project why someone else should be helping them, it's going to be infinitely harder to then scale to a team and persuade them why they should be working at that company.

[22:39] The last thing in terms of team I can think of for now is the emotional drive. Is there a point to prove? Is there something that is sitting deep inside them that will mean that they will not let go until they pursue their goals?

[22:58] One interesting trend I've seen, hopefully will be the case with my company now, is founders who have started companies which are worth somewhere between $20 and $100 million. They've made some money. Some have made enough money to not work again.

[23:18] Usually, I call those the value of injustice, where something has gone wrong, where the company could have been worth several billion dollars, but they exited or they were pushed out of the company for whatever reason around that stage.

[23:37] Notable examples is my friend Garrett Camp from Uber. Sold StumbleUpon, one of the companies I didn't invest in but would have done if I had started angel investing. He showed me the demo of Uber I think a year or two after he sold StumbleUpon.

[23:57] Plenty of other examples of entrepreneurs who exited companies with 20, 30, 40, 50 million dollars. They feel, and usually rightly so, that they have the skills and the ability to build a very large and scalable company, but the timing wasn't right or they made various mistakes on a fundamental level that stopped them from doing that.

[24:21] They have a very big point to prove. They want to build a big, billion-dollar company. That's an interesting little hack for investors is find those people that clearly have shown the ability.

[24:36] The other type of person that has a point to prove are those that have been in a rocket ship, but maybe they weren't a co-founder. They were, for example, head of growth or had a very influential position and were very important in the success of the company where the founders made a huge amount of money, but they were just underneath. They feel, "I can do this myself."

[24:59] For example, Sprig was like that. The founder there was, I think, the head of growth for Lift. Those are the things on the team.

[25:11] Those are the things I find important, but I think one of the important things for first-time investors, or any investors, to understand in a clear way, write down what are your principles and what are your guiding principles, in particular with respect to the team.

[25:26] Not just in terms of understanding is this a good team, but be more systematic and structured about it. What defines, for you, a good team?

Tyler: [25:36] I really like that idea of looking for folks that have something to prove, an emotional drive attached to it. In fact, I forget who said it, and frankly, they probably wouldn't want their name attached to the quote anyway, but I heard somebody once say they've never made money with well-adjusted founders.

[25:52] They're really looking for people that are willing to push through and go the extra 10 hours a work week after the hundred-hour work week. They really deeply want something there to prove.

Kirill: [26:04] If you're not well-adjusted, naturally, I think, there's going to be some people that think ill of you or there is something strange about you.

[26:18] I don't know any founders who have built great companies that don't have something strange about them or don't have something that quite a lot of people would think is crazy, or immoral, or just not something they would want to participate with.

Tyler: [26:34] Sure. Do you, personally, have any red flags that are, "I'm not going to touch that." How do you judge? You say immoral, for example. People criticize Jeff Bezos for instilling an incredible work culture, and running people into the ground, and grinding it out. I think, frankly, that's true of almost any high-growth company.

[26:55] Are there things that are red flags, either from a morality perspective or from a personality perspective, where you wouldn't invest in a company if you saw a founder with a certain behavior?

Kirill: [27:05] I think every founder is different. Specifically for me, you've got to take each person on face-value and understand their background. The main takeaway or main message that I would recommend thinking about is do, though, understand what are your guiding principles.

[27:26] If it's important for you that certain things don't happen, then write those down. Think about those, and then just stick to them.

[27:34] My main learning in my first year or two from being an angel investor is that it's essential to stick to your principles. Do not be seduced by things which, on the surface, seem very attractive like low valuations, or potential exits around the corner, or other things like that which, in a private company setting...

[28:02] I think Michael Morris wrote recently about these sub-prime unicorns. One feature of a private market is that you can distort information and get away with it somewhat.

[28:15] The version for the early-stage companies is little white lies like, "We'll be raising money soon," or, "We have this exit around the corner," or, "This celebrity which we have on-board is invested and actually going to add value." You've got to be careful with those.

[28:30] Do not be seduced by things which would contradict your principles. The companies that I've invested in where things have not gone as I've wanted have precisely been the ones where I've looked back at them and said, "You know what? These violated my principles, but I went ahead with them anyway," and it was irrational.

[28:52] I was seduced by things which looked good on the surface, and I ignored my principles.

Tyler: [28:57] When and how do you or should you, would you recommend, people reevaluate those principles? They're going to write down a list of all the things they believe. Obviously, we all have bias. Investing is the art of unlearning the bias that you have. How do you go back and reevaluate your principles?

Kirill: [29:17] I think you have to reevaluate constantly, and not just in every deal you make. Every single conversation you have with someone smarter than you...By the way, I view every single person smarter than me. Every single person has something to offer.

[29:32] In talking to any person, even though they might be less knowledgeable than you in some vectors, there's something they will offer you. I view it, often, as a game or exercise. What can I draw from that person that they know that I don't? There's always something.

[29:49] With every single conversation like that, it's a new data point. That is a potential for reevaluating your principles. I think you have to revisit them all the time.

[30:03] The thing I love about the technology industry and the early-stage company startup industry is how subjective it is. There is no formula. Everyone may have their own, and I do have my own, guiding principles, but you have to reevaluate them.

[30:25] I think every single company and every single team that you meet, you have to almost try to relearn what you've learned before and evaluate them on a case-by-case basis.

[30:37] It's helpful to have a framework in place, but that's not a formula. You've got to use that as something to remind yourself so that you don't go astray.

Tyler: [30:47] Take us back to your first investment. TokBox was the first one, right?

Kirill: [30:50] Yeah.

Tyler: [30:51] Walk us through. How did you decide to make your very first angel investment?

Kirill: [30:57] TokBox was quite a unique case, because I wasn't actively investing at the time. What happened there was we were in the beginning stage of starting YouNoodle with Bob. I had spoken with the founders at TokBox, Serge and Ron over there. We had talked about myself joining the team, potentially as a junior co-founder.

[31:33] Things moved along quite quickly on their end. They got a term sheet from Sequoia, and suddenly the junior co-founder went down to first employee. The equity compensation falls quite dramatically under those two definitions.

[31:53] I decided not to join them, but I said, "Look, I love what you guys are doing, and I think you guys are a great team," so I decided to invest instead. It was a very small check, I think it was something like $10,000.

[32:14] But it was actually my first return. I mean, it's obviously not a huge amount of money. But they did exit.

[32:19] That was quite a unique deal. That was a more, I had done quite a lot of due diligence on the team without realizing it was due diligence, purely because I was friends with him and also because I had considered working with him.

[32:36] That was a pretty good way of getting to know the founder.

Tyler: [32:40] I've heard somebody else in a conversation we had actually off the podcast said that when they say that they would consider going to work for a founder, that's when they want to write the check.

Kirill: [32:49] Yeah, yeah.

Tyler: [32:49] Right?

Kirill: [32:50] Yeah, I think that's a very important, actually, that's one of the things I didn't mention is, in terms of ability to, in terms of testing whether a founder is able to draw in resources. One sort of principle I ask, "Well, would I want to work for this founder?" Right?

[33:09] Actually works the same as an entrepreneur when you're considering hiring someone is what would it be like for me to actually work? What would I learn from them and what would that experience be like? I think it's the same with investing. A good test is, would I want to work for that person?

Tyler: [33:27] Did you know at that point that you would want to invest in more companies?

Kirill: [33:31] No.

Tyler: [33:32] Or was this kind of just a one-off?

Kirill: [33:34] That was a one-off. I mean, that was back in 2007 or '08. I didn't really start investing into any other companies until 2012 or 2013.

[33:53] I never really approached investing into companies from the format of, "Look, here is the capital I've allocated. I'd like to build a portfolio." I did not approach it as a fund manager would.

[34:12] My main motivation to investing, which I started while I was still working at Ostrovok, the incentive was purely to learn and to stay in touch with Silicon Valley, because I'd left San Francisco in 2010.

[34:31] Once we built sufficient scale where I felt an investment in talking to founders, to potentially investing in it was worthwhile, that the main incentive was to stay in touch with the Valley, was to understand what kind of companies were being built there.

[34:49] A great way of doing it is investing, because first of all, you get a huge amount of information about those markets and how things are developing and what trade-offs they're making, what are the things that they're thinking about that's not written about in PR. Because, I mean, from my experience as an operator, what actually happens in a company is very different than what's out in PR.

[35:12] Just reading TechCrunch and all the blogs, actually, I think, gives you, at best, a very just kind of the icing on the cake kind of picture. But at worst, actually wrong information around what is actually happening in the company, what kind of trade-offs they're making.

[35:35] One of the benefits of investing, aside from the financial side of things, is to really understand what is really happening in those companies, what are the trade-offs that are being made. That was the main incentive for me, is to stay in touch and learn about markets that I cared about.

Tyler: [35:51] When you decided to start investing more actively and you're investing predominantly in maintaining relationships and information, understanding these things, did you allocate a certain percentage of your assets? Did you kind of have a number in your mind of how many deals you'd do or how much money you'd put out there?

Kirill: [36:09] Yeah, so I think that was one of the mistakes I made. One of the pieces of what I say to give to first time investors is, that it's quite easy to get carried away.

[36:21] I think, I mean, I'm a very, I guess, aggressive operator in terms of I either do something or not at all. When I do it, I go full throttle on it. Which I think serves me well as a founder.

[36:37] But I think I ended up investing, at the time, about 90 percent of my liquid assets into startups, investing in quite a lot of deals.

[36:50] I think I fell into the trap that actually, many, many entrepreneurs do of just assuming that, I think Paul Graham actually wrote about this recently, of the kind of default alive versus defaulted dead situation, where founders often think that money will keep coming from investors. They don't actually realize that situations may change. It's actually harder to raise when you have less runway.

[37:15] I fell into the equivalent of that trap as an investor. I think I would have probably invested half as much.

[37:25] Actually having said that, maybe I should reject my own criticism of myself. Because in the Elon Musk mentality of, let's just go all in, well, maybe it'll end up well. Because basically, maybe I wouldn't have made so many investments I didn't make. I didn't think I would have invested in AngelList otherwise.

[37:49] You know what? Maybe it was fine. But it's certainly not something I would recommend unless you do have kind of your guiding principles in place where even if you lose all of it, you might be in trouble.

[38:03] I think a general assumption of angel investment, main learnings are, you've got to assume that it's a very, very long term investment. I mean, sometimes, that exit around the corner does actually pan out. Usually that's not because they're aiming for the exit, but just because they're building great stuff.

[38:23] Maybe you'll get lucky. But you've just got to assume that it's a 10 year investment. Also, just assume that if you do get any of it back, or if you get a good return, it's a bonus. Right?

[38:34] As long as you assume that you may not ever see it again, and then treat investment like that, I think you'll be in good shape. I certainly, probably, even if I get zero return, which is not going to happen, but if I get zero return on the investments I made, I think it would have been worth it just from the learning and the benefits to my own companies, so.

Tyler: [38:56] That kind of class of investments that you made early on, 2012-2013, and then obviously, the TokBox much earlier. Do you expect to get financial return from that? Will that be, is that looking like it will be good and you learned a lot, so in the future, it may be great? Or is it looking like it may be bad, or great?

Kirill: [39:17] I think it's too early to tell, because it's only about one to two years in. But I think all but two of the companies, so I think I've invested about 16 companies and all but 2 of them have raised full on investment at high evaluation.

[39:38] I think you can't really judge until a company is four to five years in. I think it'll be clear in a couple years' time. But there'll be a healthy return on, I would say half of the companies I invested in.

[39:57] But it really depends on the one or two companies, the best performers, how well they perform basically determines whether you just get your money back or you double your money back or 10 times your money back. Right?

[40:17] I think it all depends on that.

Tyler: [40:16] Let's talk about that a little bit. You mentioned something before we started recording around that kind of anti-portfolio. This being, especially as a seed stage investor, being more about upside risk, missing out on the huge home run deal, because the huge home run deal could be 100 to 1,000 to more times your money back.

Kirill: [40:39] Yeah.

Tyler: [40:41] When you're evaluating an investment, how do you think about, when is a risk worth taking?

Kirill: [40:49] I would propose not to think of it that way in terms of, there are two words there that I would suggest investors to think about things.

[40:57] First of all, evaluating a deal. I think the best companies and deals are the ones where I'm not evaluating them per se. Before I even talk to the founder, I've essentially made up my mind. Right?

[41:08] It's less of a valuation, more of doing your legwork beforehand to understand is this something that you want to engage with. Then just making sure it's, there's nothing that's out of left field with respect to what you found out before.

[41:26] The second thing is...What was the phrase you used? You said evaluating, there was...

Tyler: [41:33] When it's a risk worth taking.

Kirill: [41:35] Oh, a risk worth taking. The other thing that I would kind of disagree with is just viewing it as something risky, really, as well. I don't really view investing into early stage companies as a risk precisely. One of the reasons is if you abstract the fact that you're going to get value from it, irrespective to the financial side, then it's by definition not risky.

[42:04] Then the other thing is, I really do believe that, it's a game of investing into the right people. I think just like any sort of good country, over time, the value of that is going to increase. Maybe you'll get the value, not from that company, but in other ways unexpectedly. But I don't really sort of see it as risky.

[42:27] But having said that, [inaudible] your question, a few things I realized in terms of the companies I have not invested in, which might be interesting for first time investors to think about.

[42:44] One is that notion of trying to find the people in your network or trying to get access to people in the network who have got a point of view, who've already built a company with certain scale. They know they can build it. They've had that exit of about $20 to $50 million or something in that ballpark.

[43:05] For me, that was the Uber example. I was talking to Garrett and he was demoing the first version of Uber to me, at, I think it was at a summit series conference, before I started investing. Right?

[43:21] If I had started investing, I certainly would have said to him, "Look, I'd like to invest in my $20,000," what, I think it'd be something like 20 or 30 million, at least by this point. That's one example.

[43:37] Try to find those entrepreneurs who have already built something of value, but they have a point to prove and they have the potential to build something of 10 to 100X that. That's one thing.

[43:53] Two is, the way I found Snapchat pretty early on. I didn't invest in, again, this was before I was investing. But I would have actively pursued them as a result of this finding if I had been.

[44:10] I asked a couple of very smart operators in the Valley the question of, what are the companies that you've heard of that are getting tremendous traction but no one knows about it. Right? What are the companies that are getting incredible engagement or traction, but most of the broader community does not know about?

[44:39] I heard Snapchat from one of the sources, and actually sort of reached out to the founders. But again, I wasn't investing at the time, but I would have actively pursued that. That obviously would have been an aspect, actually, investment.

[44:52] A third category falls, it's more early stage, but the company Sprig, which I didn't invest in, because I didn't get to know the founder well enough. But he was someone who'd been quite instrumental in, I believe was quite instrumental in Lyft growth. He was head of growth there. He thought that he could build similar growth as a founder.

[45:17] I didn't get to know him well enough, so I missed out on that deal. But that's another sort of frame, what you think of that.

[45:26] But more generally speaking, my thesis, more generally speaking, is to find and invest into companies where I know something that the broader investment community does not know about. Right?

[45:42] On the early stage side, that's more focus on the team. What do I know about this founder or this team that is a secret, per se? That's where it comes in. Have they got a point to prove? Have they shown that they can really be persistent and all those vectors I talked about earlier? Dig into those things that maybe the broader community would not know about.

[46:07] On the more medium stage level, once there's already traction, like in the Snapchat case, is, find out what is the secret of traction that no one else knows about. Right? Once everyone already knows about it, that's already going to be a deal that's either out of your reach or already going to be priced accordingly and so on.

[46:28] The second thing is look for traction where people, or the broader investment community may not know about it.

[46:35] The third thing which applies to, I guess, later stage companies, which was the case for me at AngelList is, look for a structural market movement where maybe the broader community doesn't know about that.

[46:47] In the case of AngelList, I had invested before they had made a dime of revenue. But it was clear that if they had accomplished their aims, and from my point of view, just continued along the journey, it would have resulted in a structural change in how the market was run. That's another kind of secret to look out for.

Tyler: [47:08] One of the things about this is, it's very active. Right? You're going out and having these discussions and identifying these companies. You're talking about it as, I would have pursued that company. Right?

[47:18] You identify your point, before I talk to the founder, I would have already made up my mind. I'm really at that point, just double checking my work.

Kirill: [47:27] Right, right.

Tyler: [47:31] How do you find those? You talked about kind of how you find those companies. But how do you view kind of having to be that active? Or is it something that you're doing as a natural extension of your job, of your social community? Or is it something that you're, hey, I'm going to spend 15 hours this week actually hunting for companies?

Kirill: [47:50] I think it should be a natural extension of what you do already. Obviously, if you're building out an investment firm and trying to train people, then they have to think about ways of mimicking that in some way.

[48:08] But I mean, most of the investments I've made have been into people who I knew already.

[48:14] When I say I made up my mind already, it was a case of, "Look, the next person that company starts..." Unless they're doing something where I literally can't add any value or I think they've completely gone-off the rails or they're just not doing something that I find interesting to read about once a month when they send me an update.

[48:33] I always say, "Look, the next company this person does, I'm going to invest in." Right? I think that's quite a common thing in that.

[48:39] That's what I mean by I've already done the work in terms of getting to know that person and that founder. Sometimes if I know them slightly less, maybe it takes some investment to get to know their current situation, what's going on there.

[48:54] But on the very early stage stuff, building out a network and understanding founders before you make a decision is, or before you read the deck for their company is, I think, something, it should be a natural extension of what you do on a sort of regular basis.

[49:17] That's why, I mean, if you're completely new to the investing space or if you're not in the technology community, I think a main focus would be to build out that network, build out the relationships with people who already have that network.

[49:33] The first thing I would do if I didn't know anyone is find smart investors and co-invest with them. Try to understand what trade-offs they make, what are their theses, so that you can make your own over time and then adjust them over time.

[49:55] Try to find those secrets, like, that I talked to, at least I look for. But find your own secrets, or things that you, for you on your guiding principles, even before kind of the deck is sent to you.

Tyler: [50:10] Did you do that or do you still do that, where, do you have co-investors that may identify a company and kind of point you in the direction of it?

Kirill: [50:18] Yeah, I have a few friends who basically send me things that they're investing in and I might be helpful for value added. I certainly was more active in that a year or two ago.

Tyler: [50:30] Sure.

Kirill: [50:31] Now, I'm obviously more focused on my current company. Unless it's someone I know already quite well, I usually just pass on the deal.

Tyler: [50:42] Tell me an example of, so tell me the Sprig story. That seems like a good example of, it fits your principle of somebody who has something to prove, that's an interesting company, interesting space. It's clearly done quite well since then. But your stated point was you didn't know the founder and you didn't have the time to get to know them. Tell me that story.

Kirill: [50:59] Yeah, I think that was, I had met them either through an introduction or through AngelList. I was very impressed by the founder and clearly they fit the category.

[51:14] But I think there were two forces there. One is that, one of my guiding principles, with respect to the team that I didn't mention is that I think it's important for the founder to have an emotional connection to me, as well.

[51:33] I think that's one other piece of advice I'd give to sort of first time investors is, what, why does the founder need you, per se? What value add?

[51:45] Because this is helpful for two reasons. One is, if things go really, really well with their company, then it's easier to, for example, get more than your pro rata or get your pro rata. Or, and being able to invest your pro rata or above pro rata in companies that I doing, starting well is the most valuable thing you can get away with as an investor.

[52:11] Or if you're looking for maybe an operating role, and the company suddenly lifts off, you have a good relationship with the founder and maybe you have an opportunity to even work there, if that's what's interesting to you.

[52:28] The first reason is, in the case of upside, you can actually get value from that and not be squeezed out in any way or form and so on.

[52:35] The second reason, if things go very badly, so the other side of the spectrum is, then, you're less likely to essentially be screwed or essentially much less likely to be treated unfairly or badly and so on.

[52:52] I had not met the founders. We just spoke over Skype. It's important for us to have met in person. It's important for me to understand that I would actually be useful from an emotional point of view, but we just didn't have the time to do that.

[53:20] But that's fine. It's important that if you stick to your principles, and you miss out on a company, despite the fact that you stuck to your principle, it doesn't mean you have to change your principles. That's the beauty of the fact that you can't get everything right. You've got to think long term rather than on the individual, being worried about things that you missed out on.

Tyler: [53:55] There's a very interesting dichotomy that you have to walk between. On one end, the only one that matters is the one you hit. If you hit Uber, you can make 99 bad investments, and you've still got brilliant returns. On the other side of it, though, it's not like baseball. You're not punished for the swings you don't take. So you can take your time, especially if you view this as a 30 or 40 or 50 year activity, it's about staying in the game long enough to get what you want out of it.

[54:26] You talk about something important. It's kind of technical, but I want to go into it a little bit, which is you want the emotional attachments because it allows you to maximize upside. In the event of an upside point, you talk about can you get pro rata or more than your pro rata. Can you hop onto the bandwagon of something? Can you double down on something that is clearly succeeding? How do you think about maximizing upsides?

[54:50] Something in your portfolio tomorrow goes...Or let's call it after you find product market fit for your current business. If something starts looking like it's on a tear growth curve, what are some of the ways that you would want to look at maximizing your upside?

Kirill: [55:04] I think it depends on your situation. Everyone is different. I think that you need to think about what are the things that you're interested in and how that might be useful for you or the company to [inaudible] .

[55:18] If you're seeking purely to get a financial return as an individual, maybe you could explore ways of investing at or above pro rata. Another thing, it's much easier if as an individual you think, "They're about to raise a very large round. Yes, there's a lot more upside. But you know what? For me personally, it's the right time to actually exit." Once you're close to the founder, it's actually much easier to negotiate a deal where the incoming investor buys your equity in here for example and so on.

[55:52] Thirdly, if the investing you're doing is perhaps to build a track record for a fund you want to build, that's another use case. Maybe it's important for you to actually talk to the founder to evaluate which investors will be useful to them to raise from, actually help them on that front, which may be beneficial for you.

[56:12] Or if you're actually doing investment but you'd be interested in joining in a senior role or a senior role in that company, it's obviously maybe you can start a discussion with a founder of how can you help, if that's a company you may want to work for. So it depends on your situation, and obviously it depends on the company. The main takeaway is if you have an emotional connection with the founders and the CEO, it's easier to execute on your aims.

Tyler: [56:45] I want to take you back to the YouNoodle experience a little bit. You spent a lot of time analyzing what drives valuation, what are the things that really affect the outcome of a start-up.

[57:01] I think the first time you and I met was maybe around the work you were doing there. We were talking about what are some of the signals that might indicate a company is truly great. What are some of the signals? What did you learn that was surprising in that work that may inform your investing now?

Kirill: [57:16] I think the main surprise is how little makes a difference, or how few factors. There are two that essentially stood out, at least from the data. It seems, apparently, significant. First of all is what kind of outcome the founders have achieved before, so this again comes back to this is less a point to prove, but the fact that the founders have shown that they're able to get to a certain amount of steps and not die. Then for the next company, they're able to take those learnings and actually scale that 10x.

[57:56] Starting a company with an exit of 20, 30, 40, $50 million, that is absolutely huge relative to someone who hasn't started a company, because they've been through those steps. They dramatically lowered the likelihood of basically falling over on those initial bumps, which are the hardest in the start of a company. That's one thing.

[58:23] Another thing that from our data did make a difference is the impact of really high-value advisors, even if they're not full time. People who are relevant are actually investing time. We're not talking about advice every now and again, but someone who's actually actively investing at least an hour or two every week. Someone who's actually actively involved in helping the founder avoid the mistakes that they've made before. That's another thing that really matters.

[58:57] For example, one of the investments I made was into calm.com, which is a company similar to Headspace. They're doing very well. Alex Tew, the CEO, founder, he managed to persuade Michael Acton Smith, who had a very successful gaming company, still has, to be very actively involved. Not full time, but very actively involved in it.

[59:21] That's an example of something where founders managed to persuade someone who has been through that journey to be sufficiently involved, even though they're not full time, to help them avoid some of the early stage mistakes.

[59:35] That's the second thing. Then the final third thing that's worth mentioning is the more qualitative aspect of what your aims are.

[59:45] If you're aiming to a $50 million exit, I mean, it's, your chances are very, very, very slim that you'll build a billion dollar company. If you're aiming more in the kind of billion dollar range, obviously, that's going to be realistic and in line with the kind of market you're going for and what you've done before.

[60:11] Obviously, if you're a first time entrepreneur and aiming for $100 billion and you don't understand exactly [inaudible] to get there, you probably shouldn't look into that too much. But that's probably better than aiming to sell for $5 million.

[60:26] This is much more qualitative, and obviously, it depends on a case by case basis. But there is some signal on, quite a strong signal of, what are the aims of the founding team members and the CEO in particular.

Tyler: [60:39] You said that, you've made that distinction a couple times of, you really want to analyze the team, but then you have, you really want to go deep on the CEO. How do you kind of weight the importance of finding these characteristics in a CEO versus finding them in the broader team?

Kirill: [60:58] I do think that over time, as you get more experience -- and maybe my opinion on this will change -- but I do think that having a very strong CEO who has the power to execute on his or her aims is an essential aspect of building a great company.

[61:21] I think if you look at every single truly great company, even if there had been more than one co-founder, there's been one person that's ended up being the dominant force.

[61:39] I really believe in understanding and digging into what are the motivations, what are the aspects of a personality of specifically the CEO? What are they aiming for?

[61:51] Then the rest of the founding team is more, I view it more as an ability of the CEO or the co-founders he or she is working with, their ability to build resources around them.

[62:09] The quality of the, it's like the case of, I think the phrase, "Behind every great man is an even greater woman," right, or phrases similar to that. But the point is, who do they surround themselves with in order to build the foundational blocks of the great company.

[62:30] Often those people are sometimes even more impressive in certain dimensions. But if he or she has decided that they should focus on that, then...

[62:42] For me, I think that the main pillar is, what are the aims, what are the abilities, what has the CEO done before and what is he or she aiming for. Then what kind of founding team they built and how does that characterize the foundation of the company.

[63:02] It's a very qualitative thing. But digging into exactly what trade-offs the CEO made and what kind of decisions he or she made in building a founding team is very important.

Tyler: [63:14] Are there particular questions you ask as part of that? Or is that something that you're just observing as they're building it?

Kirill: [63:23] I think all the questions that would be asked would be different, depending on the company and depending on the CEO themselves and depending on the situation. But I think it's worth digging into, understanding what kind of team members they do not want to work with.

[63:41] Also, I think it's important to understand as an investor, what does the CEO think of fundamental things which are core to the company, because for those parts of the business, they need someone who feels like a co-founder, who has both the ability and the motivation of a co-founder and the founding team.

[64:02] I think as an investor understanding what the CEO thinks is core to the company long term, and is that in line with what you think is the case. I think that's important, and I think it's important to understand how they assess people, what questions they ask of people they're considering hiring. Are they rigorous enough in understanding to what extent how well the abilities of those founding team members are mapped to what's needed for the business, and so on?

[64:41] There's a long list of questions, and actually just understanding and asking the right questions around how the CEO thinks about choosing team members is quite important.

Tyler: [64:50] Can you give me an example of, and maybe in a company that has exited already, so that you're not giving away trade secrets, can you give me an example of analyzing what's core to a business and then making sure that you have the right person in that seat?

Kirill: [65:05] Certainly in our case, so in the case of building tools for professional education, in our company, the first thing comes to mind is that we're actually looking for someone who has experience and ability to build out a curriculum for what needs to be taught to knowledge workers, in particular our case software developers. That's might be someone who's academic, who has a Ph.D. in specifically knowledge acquisition. That's quite different to any other company, right?

[65:45] A typical setup of a company is someone who's able to guide the vision and hustle to get resources together which is usually the job of the CEO. The second thing is ability to actually build the product, and the third thing is to deliver it to users in a way that is through the interface that would make sense for them. It depends on the company. If you're investing into a company that's digitizing meditation, for example, as is the case of Calm, you probably need someone on the founding team who understands, in their case, the interfaces.

[66:25] What should the voice be of your teacher, of your meditation teacher? Who has the experience of sufficient experience and understanding of the offline space that you're disrupting in order to disrupt itself? Or if you're building a robot company, another one of my investments is Robotek, you probably need someone who has an understanding of the hardware involved, because that's a product. It may be different from company to company, but those are the three pillars that you want to think about.

[67:05] Do you have people in the founding team that are able to build the product, and that depends on the kind of product you're building. Is there someone in the founding team that's able to build the right interface to deliver the product in the right way to users or to companies if it's a B2B company? Thirdly, what are the support systems around the CEO to help him or her to execute in the right way? It's different from company to company.

Tyler: [67:33] Do you want to see that completed before you feel confident, before you feel confident in a CEO's leadership, for example. Do you want to see those things completed or is this more like an emotional trust in the fact that that CEO can essentially get it done?

Kirill: [67:52] I think as long as you're on the same page around who the CEO plans to hire, what he or she thinks is core to the company. As long as you're on the same page about that, that's important.

[68:08] I think a big red flag is if you just fundamentally differ with the CEO as to what is core to the company, because if they don't think it's core, they're never going to find someone who has that kind of co-founder mentality for that part of the business, which may be a killer.

Tyler: [68:28] I want to move into a couple of quicker questions, feel free to give as long an answer as you want, but I think these are just a little bit getting into more some of the tactical details. When you were actively investing, what percentage of the deals that you saw would you actually invest in?

Kirill: [68:49] It depends on how you define saw. If you go as far as talking to the founders, I would say something like probably 50 percent. It's quite high, because I did say before that I essentially make up my mind before I actually talk to the founder. Obviously there are some reasons that I don't end up investing as result of the discussion, or because I just didn't have the time to get to know the founder well enough. I would say it's somewhere, maybe a bit less, somewhere between 30 and 50 percent.

Tyler: [69:29] How would you define the stages? If the final decision stage is talk to the founder first, and then make the decision, what are the stages before talk to the founder?

Kirill: [69:38] There are several stages. Again, I think my experience is quite unique in the sense of I would call myself a more passive investor in the sense of I came across opportunities where I was in a position to make investment without detailed research. In the case of the team, it's someone I knew already quite well, in the case of traction it's something I heard of that traction through usually a friend of mine who is investing in the deal or advising the company.

[70:14] In the case of a secret of where the company could be, that's just a piece that I came up with from understanding the data around the company, like the case of AngelList. I think I'm quite unique in the sense that I didn't actively pursue deals. Were I to do that, I think the first stage would be identifying the things that you think are good hints for the kind of companies you want to invest in. Two is just trying to access those companies in the way that works for you.

[70:52] If it works for you in building out a network and talking to as many people as possible to find those companies with hidden traction or the team members or the founders that have built the companies, then do that. Maybe for a lot of people now, AngelList works in a great way, and you can set up various filters and parameters in a smart way to do that. Then the next step is figuring out how to start a conversation with the company founder. Is that through a contact, is that through AngelList?

[71:31] In my case, it's always been either directly where I already knew the person or it was a close contact of mine who would persuade the founder that it's an absolute must-have to have me as an investor, and I will add a lot of value. Those are probably the strongest ways of doing.

Tyler: [71:51] What are the most common ways you add value, what do you think of as being your super power?

Kirill: [71:57] For me, I've found that I'm pretty good at two things. One is almost being...and this is especially the case for a strong CEO by themselves, who are either a sole founder or are part of a co-founding team but they feel that they're the driving force in the company, which makes for the best company.

[72:30] The first thing is almost being an agony aunt to the founder where they can just talk through their problems with a fellow entrepreneur, fellow founder, just to partially vent, but also get feedback on the decisions, the tough decisions they've already made and they would want that kind of community or fellow or entrepreneur to say, "Yes, you're approaching this in the right way."

[72:58] For me, the best advisors I had are those where they helped me think through a decision that I've already made, essentially, but made me feel more confident about it so I ended up executing it in a more optimal, or more aggressive, or quicker way. For example, I wouldn't say who the founder was, but in one case, he was just talking about his CTO in terms of the problems that he was causing in the company, and what was going on there and the various turmoil.

[73:30] There were pros and cons of keeping him, but I could sense that he had already made a decision to let him go. The result of our discussion was to essentially just accelerate the process of that. Once he had actually done that and let him go, first of all, it wasn't as bad as he'd thought it would be, things actually turned out to be fine afterwards. Secondly, he wished he'd done it earlier.

[73:53] Having that conversation to actually say with someone who's not emotionally tied to that particular situation and judge it at face value is quite useful. The first bucket is basically talking through tough decisions with a fellow founder who has faced similar situations before.

[74:14] As an operator, I've been on one hell of a rollercoaster with two companies where we scale very quickly, where we downsize, had to let go of 80 people in one day, had to pivot completely in different directions, we had situations of where we had to raise millions of dollars just to make payroll in three weeks' time. Things that when I was reading Ben Horowitz's book, "The Hard Thing About Hard Things," for me that was just scratching the surface of stuff that I've experienced as an operator, so that's why I related to it. Talking through some of those things with a fellow founder is just very valuable.

[75:02] The other thing is around building a team. I feel I'm quite uniquely placed in terms of being able to help a founder decide how they should think about the structure, how to build the team, also how to close key hires. So I've actually actively helped founders I've worked with before actually close key hires.

[75:30] It's much easier to be brutally non-humble about the company they may be joining if it's done from a sort of separate angle. Actually the best investors I've had are those that have actually helped with hiring as well.

[75:47] Those are the two things, one is talk through problems that a fellow founder and CEO of a fast-growth company has faced before, and two is help build the team.

Tyler: [76:00] You built companies in Europe, and in the US. You talk about the difference in mindset of even maybe not the 99.9 percentile, but the 95th percentile entrepreneur here is aiming for a smaller outcome than the 95th percentile in Silicon Valley. You've invested in both places. What are the big differences you see in Europe and the US, and how do you think about investing in each of those markets?

Kirill: [76:29] I think the main thing is not to invest into the 95th percentile, or even the 99th. The barrier is much high to do that in Europe, that's reality. I think a key difference between Europe and the US right now is there are two key differences. One is there are fewer platform-type of companies being built out in Europe right now. The biggest companies which are the billion-dollar private companies are more applications.

[77:02] Maybe they're thinking about how to build a platform, but in America, there's much more of a mentality of, "What is the platform we would build?" Now those companies, by the way, are getting very good at internationalizing quite quickly. You've got Uber, and Airbnb have definitely gone against the grain of what US companies felt before, where they feel it's quite hard to compete in other places outside the US.

[77:24] One is this difference between platforms and applications. The other thing is there are fewer exit opportunities here for companies at sufficient scale. The best thing that can happen to Europe is that there would be a few really large companies that we created that would provide the exits between the $100 million range and the $1 billion range, but that's just not the case in Europe at all.

[77:54] I think the unfortunate thing, or the good thing for the US I guess, is the companies that will provide that in Europe are going to be specifically the US companies, because they're becoming much more aggressive at setting up entities here. For example, the Facebook office in London, it's not just a satellite, it's actually growing very, very quickly, as is the Google office here in Europe, both in Dublin and Zurich.

[78:19] We work at expanding a lot in London. It's quite possible that those really, really big companies that may provide the only opportunities for European companies might actually be US companies, ironically enough.

Tyler: [78:33] That's an investor, what is an operator? You decided to build this company in London, why?

Kirill: [78:39] I think that for the first time this wasn't the case three or four years ago, but for the first time there is a sufficient development talent here in London to build a great engineering team. This isn't the most important thing, but it's actually cheaper than in New York and San Francisco right now, and materially. We're talking 30, 40, 50 percent cheaper, that's a big deal when it comes to thinking about the room where you need before you get to product market.

[79:18] I think in my case specifically, aside from costs, there are two. One is I am in this unique case where I have very strong networking in Europe, and I actually think that just like we did with Ostrovok in Russia, we built this reputation for a company as the best start-up to work for in Russia. I think I have a good chance of doing that, the same thing, in London. Obviously, in the US, that would be different and much harder.

[79:52] I think there was a Stack Overflow study made that actually the highest rated developers in terms of quality are actually right now in London. There's quite an active pool of really high quality developers.

[80:06] The first reason is that I think I can build best development team and engineering team I can build is actually in London. The second reason, actually given the nature of my business that I'm doing now, which has a B2B business model around it in terms of helping make people more effective in companies, I actually like the fact that I'm not in the Silicon Valley bubble in terms of talking to companies. In my [inaudible] , for example, and they thought it out in Salt Lake City. That's the kind of company in the Valley people would not think of that even as an opportunity.

[80:44] Once you talk to more normal companies, it's the equivalent of what Snapchat are doing. You've got to talk to normal people, normal teenagers to understand how they behave. The equivalent in enterprise is talking to normal companies who are outside the Valley who are less like start-up type of companies where not 80 percent of developers are really cutting edge developers, but maybe 20, 30 percent by their own self-admission, and companies are generally larger and more slow moving.

[81:21] Understanding those more typical companies I think, from a geographic point of view, I think it's better to be in London because I have access to Europe and US, but also Asia's not too far away. That's I think more meaty, and the short-term reason I think the best engineering team I've built is here.

Tyler: [81:40] Thinking back to the difference between 2007, 2012, today, obviously, you invested in AngelList because you thought it's changing some of the market conditions. How is today different than when you started investing? One of your former employees called you up and said, "I'm going to start writing checks." What do you think would be the difference in their experience versus your early experiences?

Kirill: [82:11] There've been a few fundamental shifts which are quite interesting, that are happening in the market right now. One is that there's certainly early-stage investing is far more competitive, and there is competitive just in terms of capital allocated. Early stage companies are I think it's something like three or four times more capital being invested into early-stage companies, so it's much easier to raise capital early on.

[82:48] However, the amount of capital hasn't really expanded at an equivalent rate for the series A and B level. There are a lot more companies raising money early on that will end up not getting to product markets. Understanding that I think is quite important if you're a first time investor, is don't fall in the trap of just investing into something because everyone else is. Make sure you're still investing into a company that irrespective of the market cycle would make it, and would become successful. That's one trend.

[83:27] Two is actually as a consequence, because certainly I've seen this in the Valley is actually the definition of series A is changing. A lot of the companies I'm seeing and friends of mine that are starting, they don't actually need to be able to raise three, four, five million dollars, which you would several years ago need an institution for. Now actually a lot of them are just raising it from angels or really early-stage funds who essentially behave like angels, or they raise it from AngelList.

[84:08] Often the institutions are getting pushed back until there's actually real traction, not just in [inaudible] , but actually in revenue as well. That's another thing that's structurally changed.

[84:25] Those are the sort of things that come to mind. I don't really view the fundamental things as anything that really changes, it doesn't matter what happens in the market, I think that if you stick to your principles, I think by definition the principles you stick to are ones that are kind of market movement agnostic.

[84:51] Things that don't alter irrespective of any series A crunch, or respective of the capital available to build companies. That's why I think you've got to amend those principles over time, because markets do change. Then you realize, "OK. Wow, things have changed. Has this changed my principles? Yes. Then maybe my principles are wrong."

[85:13] To be honest, I don't think much has changed. If you're investing out of Europe or outside of US for the first time, some of the principles of how things are done in the Valley are getting transferred for the first time. You can get outsize returns outside of the US for the first time because there are so many forces that are pushing to it becoming so much easier to start a company in general.

[85:48] Those are being transferred not just within Silicon Valley, but outside as well. Some of the things, for example, the knowledge that's being dispersed by a [inaudible] , for example, about what are the ways of not dying as a company, that's something that any entrepreneur can read -- even if they're in Jakarta, in Moscow, or wherever they are -- through their medium of choice.

[86:18] The other big shift is the number of developers it's growing 30 percent every year. The number of people who are getting computer science degrees and want to be developers is growing an astonishing rate. Thirty percent a year over five years is a healthy multiple. That's how you're going to keep continuing.

[86:36] Those are some of the fundamental shifts as an investor. You make of what you will, depending on your principles and what you care about.

Tyler: [86:48] A lot of the things that you're identifying that you have relied on as you've built out both your operating and your investing career stem from the fact that you're steeped in this. You spend 100-hour weeks thinking about just building large, important tech companies.

[87:09] What would you tell somebody who doesn't have that experience if they wanted to get into tech investing?

Kirill: [87:15] Start spending those 100-hour weeks.

[87:17] [laughter]

Kirill: [87:19] Surrounding yourself with people you can learn from is the best thing you can do, just to be able to co-invest with them, and understand what trade-offs they're making, what are their principles, what are the mistakes done, conducting these interviews with people who have done this and, ideally, with people who want to ensure that you're going to be successful, so will let you co-invest into the best deals, not just the ones they can't.

[87:55] Surrounding yourself with operators and investors who have done it before and keeping, pushing that agenda is the most important thing. Aside from that is starting a company and trying to raise money yourself [inaudible] the best.

[88:20] With a few notable exceptions, it is possible. But it's very hard to be able to understand how best to support entrepreneurs unless you've been an entrepreneur yourself. Operating experience is fundamental in most cases.

Tyler: [88:44] Who are some Angel investors that you've seen, that you think are very good, that you wouldn't have expected to be good at this? They're not the brand name. They're not the crazy background or the PayPal mafia. Who are the people that are almost unpredictably good at this?

Kirill: [89:02] It depends what you mean by unpredictable. I'd have to come back on who are the ones where I had no idea that they would be successfulness. Putting that aside, I'll give two answers. One is the category of investors who are maximally sticking to their principles and are maximally aiming to help the entrepreneurs they're backing.

[89:30] The founder of AngelList, Naval, he was the first to invest in Ostrovok. From my experience with him, even though he's very careful with what time he invests into which companies, I could see that he has guiding principles in terms of how he helps entrepreneurs and what decisions he makes.

[89:56] I know his Angel portfolio results have been pretty stunning and one of the reasons he's managed to get into Uber, and Twitter, and others. The first category are investors like that, who have defined their principles and definitely lean in the camp of maximally helping entrepreneurs even if it's on a short-term basis detrimental maybe to their returns.

[90:20] That's how you get into the best deals. It's by having the best entrepreneurs knowing that you will be helpful in a variety of situations, and you will make the right calls. They just want to be associated with you. That's the first camp.

[90:38] The other class of investors who have been spectacularly successful -- this is the equivalent of saying, who do you define successful in general -- it's those people that are happiest even though...For me, any Angel investor who, irrespective of their return, feels like it's been a net gain for him or her from an experience perspective and doesn't regret anything is a success.

Tyler: [91:10] Let's say you had to give somebody, that person who didn't have any experience, control of some reasonable chunk of your net worth that was going to be used to invest in technology. What would your guidance be to them before letting them write a check? What would you ask them to learn? How would you train them to do this?

Kirill: [91:29] Can they write a check without my involvement? Is that how I want to train them?

Tyler: [91:35] Yeah. Let's say you have to trust them fully.

Kirill: [91:44] Just clarifying those two things, one is what are the principles under which we absolutely stick to no matter what, and what are the things that are interesting? Usually, is the case, but that person would have the authority to ignore, in the case of a special nature.

[92:07] Talking through and writing down to understand exactly what those things are just to make sure we're on the same page of that is super important. Then the second thing is the process for pursuing and finding the companies that fit those criteria. What is the process for finding companies where no one knows about traction that's out there?

[92:31] What is the process of finding the company founders who have been playing a key role in this rocket ship company, but they're leaving to start a new company? How can we get knowledge of that within our network or otherwise?

[92:46] How could we find those companies where the CEO and founders have already exited for the 20-100 million? How do you quantify their point to prove? How do you find those companies?

[93:05] There are three stages I would want to train that person. One is understanding, getting on the same page of the principles and what we care about. Second is how to find those companies who fit those criteria. Thirdly is how do we build an emotional connection with the company and the founders so that we can add value, and they care about our participation?

Tyler: [93:35] I want to wrap this up, because I want to be cognizant of your time. You've been gracious with it. Quickly, before we go, I want to come back to a question I asked earlier, which is you talked about the principles and having to reevaluate your principles on a consistent basis.

[93:54] Is there a principle through your investing that you've had to unlearn or change? Or you feel like you've really changed the way you invest from maybe 2012 to how you would invest in 2015?

Kirill: [94:10] The biggest things that I learned, first of all, is not be seduced by things that go against your principles, no matter how fantastic they sound, no matter what the potential short-term gain is. That's something you practice over time.

[94:27] As a human being, in terms of your personal happiness, we all know which things we shouldn't be doing, which things we think are sinful or that deter our long-term happiness, but we do them anyway because we're just human beings. Then we practice and train over time to either cut those things out or be happy with our imperfect selves.

[95:05] One thing is to train over time to stick to your principles despite various seductive things that appear good on the outside. Two is, over time, you learn really how long a game it is. It's a really long-term game.

[95:31] Thinking of investing not into companies but the people, not just because they're the ones that will determine the company, but because you want to be building alliances with those founders.

[95:43] If you found a first-time entrepreneur who you think is exceptional but hasn't got the ability or isn't quite building the right product or building a billion-dollar company, they might exit for the $10 to $20 million. Their next company might be the billion or two billion. Building an alliance and [inaudible] , you're not just thinking about that deal.

[96:04] This is the fundamental difference and the thing that non-startup investors confuse with startup investing is, when you invest in public markets and when you invest into various complex structures, and you have the investment banks, they analyze specific deals.

[96:21] If you take a step back and actually look at investing into individuals that you want to be building an alliance with, that will serve you well in the startup investing space.

Tyler: [96:38] Finally, let's say there's somebody listening right now. They're on the fence about investing, and they're not sure if it's for them or not. How would you recommend they decide?

Kirill: [96:56] Investing into startups is a great way to learn about companies, to understand what trade-offs they're making, what challenges they're facing, what markets they're going after, if that's either something you're conceptually interested in, or it's something where you want to be working, building things within that area, or you just want to be the first ones to access their products and try their products.

[97:23] It's the best way to learn. If you do it in the right way, and your top investments make the outsize returns, it is a [inaudible] investing where you can get very high outsize returns unlike any other asset class.

[97:45] If that's interesting for you, and you're willing to put up with the main downsides of the fact that -- not downsides, but it's a feature rather than a bug of investing in startups -- it's a very long-term investment, so you should assume, if you get something back, it will be a 10-year investment.

[98:09] You should assume that if you don't get it, you should assess it in the frame of were you to not get anything back, is it worth it for you anyway, which is very different to how you would trade stocks or think about it like that. Those are the things to think about.

[98:32] One is, can you handle the long-term value from it, and is the value for you really long-term? Secondly, is the value not necessarily financial but more...What is the value of getting that nonfinancial as well, because that's something to think about.

Tyler: [98:50] Certainly, in a field where median returns are negative, you have to imagine that some of the returns people are getting are psychic, or otherwise informational, or something.

Kirill: [99:02] I view it as something where even though my companies I've invested done pretty well and, hopefully, over time, I will keep improving and sticking to my principles, I feel like I've got a lot more value from a nonfinancial side so far certainly, given that I'm two, three years in. Hopefully, in eight years' time, I'll be to say I got great return as well. But I view that as a bonus.

Tyler: [99:34] If people want to learn more about you and what you're doing, how do they find you online?

Kirill: [99:41] I'm Kirill on Twitter, K-I-R-I-L-L, @kirill. I'm also on AngelList, so Kirill Makharinsky, if you want some notes to spell my name, or you can find it through Twitter. I'm active on Twitter, AngelList, and also Quora.

[100:02] I've been most of this year in building mode, but now I'm starting to write more again in and around the problems that we're trying to solve. I'm pretty active on Twitter, Quora, and AngelList.

Tyler: [100:14] Is Enki live, if people are interested in learning software development?

Kirill: [100:22] It's in the App Store. It's invite-only right now. We're starting our PR push imminently. We'll probably be widely available around the turn of the year. We're more focused on people who already have a basic level of understanding of software development.

[100:44] We're probably going to, in the medium term, focus on and get content for other topics for people in the financial industry and so on. Right now, we're focused on people who are already in companies, working on using Java and JavaScript. We're building a daily workout for them to get better every day.

[101:04] [background music]

Tyler: [101:04] Excellent. Thank you so much for joining us.

Kirill: [101:07] Thank you.

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