Interview with Parker Thompson: Partner at AngelList Edit this post

We interviewed Parker Thompson and learned from his attempt to raise a new venture fund and how he wants to support more professional investors on AngelList.

Parker recently joined AngelList as a Partner and previously ran the San Francisco office for 500 Startups. Some of Parker's investments at 500 included AirPair, Breather, and Mayvenn.

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

  • Companies that successfully get to a series A have generally raised $2M–$3M. Some companies raise this amount across 2-3 discrete rounds, while some of them raise only one seed round. Starting at 8:05, Parker talks about the difference between Pre-seed, Seed and Series A.

  • Talk to the next round investors to figure out what metrics you need to achieve for the next round. Founders that are raising a seed round should talk to Series A investors in order to understand what you need to achieve with your seed round. At 14:53, Parker shares the questions he'd ask next round investors.

  • Focusing on pro-rata may no longer be a good strategy for Angel Investors. Exciting Series A companies can easily raise at valuations of $50M or higher and are still risky investments. With less variability on price at the Seed round, your risk-adjusted returns are often better investing in the seed instead of in the A round. Hear more at 19:29.

  • You have to take risks, but if you can't articulate the risk you're taking, you don't understand it well enough. Parker describes his investment style at 46:40 and details his investment in Mayvenn, a hair-extension marketplace that went on to raise $10M from Andreessen Horowitz. The best investments are often when the founder sees an opportunity that you don't, but where you really understand some underlying part of their business.

  • Institutional LPs often won't invest less than $10M in VC funds and need a lot of proof to invest. Parker talks about his unsuccessful attempt to raise a fund from institutional LPs at 68:38. Because of their large minimum check size, these investors usually need to see really strong paper returns (>10x), a clear track record of cash returns, or a really differentiated investment thesis.

Today, AngelList also launched Intros, which helps founders get introductions to top investors. We're doing a follow-up interview about this product and Parker's stint as Startup L Jackson on Anchor.

Learn more about Parker's investments on AngelList and follow Parker on Twitter.

Here's a full transcript of the interview:

Tyler Willis: [00:10] Hey everybody, I'm Tyler Willis. I'm 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 trying to learn how they invest and what's made them successful.

[00:23] I'm excited today to be joined by Parker Thompson, who's joined as a partner at AngelList. At the time of recording, he's five days on the job. Previously, Parker worked at "Pivotal Labs" in "500 Startups." In 500 Parker helped build the San Francisco accelerator and invested in over several hundred companies in two years there.

[00:43] Today we're going to talk about raising funds, going pro as an Angel, at least what that means on AngelList. We'll also talk about how Parker learned the market for early stage investing and a host of other topics. Parker, thanks for joining us.

Parker Thompson: [00:55] Hey, thanks for having me.

Tyler: [00:56] Before we dive in too deeply, tell me a little bit about the new role. How did you come to join AngelList?

Parker: [01:02] I suppose, like everybody, I've known Naval for quite a few years in the Valley. He was actually an early client of ours at Pivot Labs where we built the first version of Venture Hacks, which is now AngelList.

[01:18] I've confirmed with the engineers that none of our code is still there anymore. That's probably a good thing at this point. We've been talking for years about what he's been up to, what AngelList could be and is.

[01:29] I'm sure you saw the announcement of the new CSC Upshot fund. AngelList is in this really interesting place right now where what they've been doing has been super exciting. The foundation is there and now they really need to scale it up.

[01:47] Naval gave me a call. I sort of joke he made me an offer I couldn't refuse to solve this really interesting problem of how do we take this thing and massively expand it to go help a bunch more startups.

Tyler: [01:59] For the people that are not familiar with the CSC thing, what is the CSC deal?

Parker: [02:04] Actually, for even people who saw the headline there may be some misunderstanding around it. People are saying, "Hey, AngelList raised a $400 million fund." That's actually not true. AngelList is a platform. The goal of the product, the reason it exists, is to help startups.

[02:21] It does that by empowering syndicate leads to go, and invest, and spend time, and put more money into these startups than maybe they could if they were writing 5, 10K checks on their own, and to help people who want to invest, but don't have access, connect.

[02:37] The CSC Upshot fund is a $400 million fund that was raised. It has its own managers that are separate from AngelList. They make their own decisions. Their mandate is to invest this money through the AngelList platform and through these syndicate leads.

[02:54] What it represents is an opportunity to get smart, professional money connected with smart angel investors and put that money to work in those startups. It's a super cool opportunity because if we can get more money into these startups through very smart people we can get those startups a lot more help.

[03:17] Get those angel investors involved in more startups, or involved more heavily in the ones that they work with. I think that's pretty cool.

Tyler: [03:24] Nice. I want to come back, and maybe we'll talk through some of the generalities of how you got here in your career and the history, but let's go deep on CSC for a second because really interesting.

[03:34] The idea is that you're going to get more capital behind some of the better angel investors so that they can amplify or multiply their impacts. Instead of writing a 10k or a 25k check they're now able to write several hundred thousand dollars. Is that an accurate statement?

Parker: [03:51] That's true. There's another component to it, which is...there's some folks out there who maybe haven't done angel investing that are phenomenal. We talk all the time in the valley about value add, almost to the point where its cliché.

[04:05] There are a lot of people out there who have a lot of wisdom. Maybe they work with companies informally now. There's also an opportunity there to get those people involved and get them on the cap table.

[04:18] That represents an opportunity to do something that's not directly analogous to what's already happening. there's both those things. There's putting more money behind angels who are doing this now and helping them do a little bit more of it.

[04:29] Then there's bringing more angel investors online, which, arguably, is the way the early stage is going. A seed fund now is a $3 million round. It's when you've got 500K or a million dollars' worth of revenue traction.

[04:47] What does it look like before that? there's an opportunity at that early stage to have people get involved who are already involved in a way that's better for the companies and maybe better for them, as well.

Tyler: [04:58] Do you see that as being additive? Is this money that is coming into the ecosystem that didn't exist before? Is this replacing this preexisting source of capital?

Parker: [05:07] It's an interesting question. Naval is very sensitive to not bringing too much money into the ecosystem because...I don't think that there is a bubble at the early stage. Certainly, there's discussions around price and discussions around where the market's moved in the last few years.

[05:23] From my perspective, we've changed the names of what we call these things. A seed round is what used to be an A. Yeah, they're at higher prices but that's because the companies are further along. Now there's this notion of pre-seed.

[05:37] There is the risk that if you do this wrong it's a bunch of additive money. It inflates values and distorts the market. No one sees good returns. I don't think that, right now, that's the risk because AngelList is driving this and sensitive to it.

[05:53] I would say that done correctly, it's additive in the sense that it helps the ecosystem. It brings more people into it but without, hopefully, distorting the market.

Tyler: [06:04] Do you envision most of this being pre-seed, to use the new buzzword, types of investment? Is this stage agnostic? Is it more of the seed or what you would say used to be an A?

Parker: [06:14] As you mentioned, I'm day five and a lot of this thinking is still evolving. Frankly, it wouldn't be an interesting problem if we knew all the answers. We're going to try to figure this out. What you're going to see AngelList doing is focusing across stage.

[06:30] You're going to see some pre-seed. You're going to see some seed. You see some series A. If you look at the deals that are happening on AngelList already, these are all the deals that you see. There's a few other things that AngelList does with SPVs and so on.

[06:45] The product is oriented around early stage investing. where the companies need the most help. That's where angels can be most additive. By the time you get to the point where a company has a board, and they have a built out executive team internally...

[07:00] I don't really like the term "adult supervision" but people use this. By the time you get past the chaos phase you've got an institutional board. You've got a good executive team. You don't need as much help.

[07:12] You usually know what your product is. You know who your customer is. You have a rough idea of how to run each of your major departments. There are cases where those companies want people involved. AngelList is an appropriate vehicle for bringing capital into those companies later stage.

[07:28] It's not negative, but the organizational mission and where you get the most value is when you're a founder and you've got an amazing idea. You're ready to work your butt off. You need some feedback from somebody who's been to that rodeo before.

[07:45] I'm personally very passionate about seeing how we can get more angels involved at the earliest stages of these companies.

Tyler: [07:53] Perfect. Very quickly, let's set for the archeologist that's listening to this five years from now. Let's set some normative values. What is a pre-seed company these days? What's the value of a pre-seed company?

Parker: [08:05] That's a good question. Round names are awful. We talk about series A. We talk about seed. We talk about pre-seed. When I talk to seed investors I don't like to give them a pass on this seed versus pre-seed thing. I like to joke with them that it's true seed because it's like what they used to do.

[08:25] Pre-seed, to me, is a company will come out. There'll be a great team. They'll have an idea. Maybe they'll be building a product. They might be as far as product in the market but for lack of a better way to think about it I'd say the first 500K into a company, you'll often see that be a pre-seed round.

[08:43] You'll see a company raise 250K to 500K and put their heads down and work for 6 to 12 months. Usually that's a few founders. It's two or three people. They'll go do that. They'll get a product in the market. Obviously exactly what metrics matter for that seed around are going to depend on the industry. We could talk through some of that.

[09:03] What you see today is you see people going into what is called a seed round. It might be two million dollars. It sometimes is three million dollars. Then you sometimes see this thing on the back end of that now, a seed bridge or a post-seed, whatever you want to call it.

[09:20] What I see in the market today is that companies that successfully get to a series A have raised between two and three million dollars. Sometimes that's more discrete rounds that are pre-seed, seed, post-seed. Sometimes that's one and done. That might be a million and a half. That might be two and a half million dollars.

[09:39] It's not like there's one thing anymore, but at some point they get to that institutional capital that's the two or three hundred million plus fund that's doing true series A investments. By that point they've raised three million in total.

[09:55] Let's say, for a SaaS company, maybe that's a million dollars ARR. Over the course of two, three years raising two or three million dollars you've gotten to one to three million dollars ARR. Then you go big time. You get that institutional board member and go from there.

Tyler: [10:13] You've got a lot of these different distinctions between companies. Whether it's seed, or pre-seed, or A, or whatever it is. It seems like it boils down to what does the company accomplish with a certain set of resources, or a certain set of money raised, or maybe even time spent.

[10:30] What are the things that companies really have to figure out in order to raise an A round?

Parker: [10:36] These days you need to get to a point where you have clearly demonstrated that you've built something people want, and that it demonstrates a significant amount of value on a unit basis. We made this SaaS software. It makes our customers a million dollars of incremental revenue a year.

[10:57] That's pretty compelling, if you can also look at the market and say, "OK, you've only got five customers, but there's five million of them out there." You're making a lot of money. The market for that is big. If you can get to that point, you can go out and raise that round to go scale that, but you need a surprising level of data around this.

[11:18] To give you an example, I had a company that I invested in as a seed company. It's a nursing SaaS company, without getting into too many specifics about the company itself. They had a phenomenal product, a phenomenal team.

[11:33] I knew them really well. They had some hiccups along the way. They'd raised a couple million dollars in their seed. They got to a point where it was working, but they'd had some hiccups maybe three months before.

[11:44] They didn't have enough trailing data. They really needed six months of trailing churn data to go raise the A. They didn't have that data. We actually had to sit down and do a bridge round. They needed some time.

[11:55] I sometimes talk about the difference between the faith that you have in your own company and what an investor's going to look like. It's a hard thing for entrepreneurs because they know it. They feel it.

[12:07] "This is working. Why can't you see it?" They get frustrated when you're sitting down, talking with them. I try to help them have empathy for the investor. Look at it from their perspective. Again, the next company that comes through the door is going to have that churn data six months back.

[12:23] You've really got to have conviction if you're going to invest in these companies without data. Maybe at the highest level, that's the distinction that's important to understand, that series As today are quite a bit about data, generally speaking.

[12:39] There are cases where that's not true, but if you're an entrepreneur who's never built anything before, and you don't have a big network, and so on and so forth, you're going to have to walk in with data.

Tyler: [12:51] Your first couple million bucks are generally from convicted investors who are paying you to run the experiments?

Parker: [12:57] No one wants to take risks. We call it risk capital, but your seed investors want to see a few customers often. They want to see a basic team in place, a good founding team, and a few customers.

[13:10] By the time you get to the series A, they want to see it a lot more fleshed out in terms of, "Hey, we've got regularized pricing. We have sold this thing in a replicable way that people who are buying it actually like it. They're using it."

[13:25] When you're going to pour five or ten million dollars into a company at this point, you want to know that that's about scaling it. You don't want to pour water into a leaky sieve.

Tyler: [13:34] Knowing that this changes every three to six months, what are today's A round metrics? What should a company be aiming for at the A round?

Parker: [13:43] It does change, but I don't know that it changes drastically. people focus too much on the flavor of the month. The general advice I give to startups is to say, "Go and actually talk to the next round investors."

[13:58] I talk to a lot of companies who are trying to raise a seed round. The first question I ask them is, "What do you think your series A metrics are?" Most of them haven't actually thought about it. I don't think that makes sense.

[14:09] If you're raising money in your series A, it should be that that money is to buy yourself some resources to achieve a set of goals, and those goals actually map to your series A and the metrics that you need to hit there.

[14:22] I don't understand how a company can decide how much -- we're talking about two or three million dollars -- that's not like, "Well, because that's what people do." It actually makes a lot of sense to sit down and think about your series A.

[14:35] Because in my case, I invest pretty broadly across categories, I'm not always the best person to ask specifically what those metrics should be. I'm really looking at these companies and saying, "Is this a great team and a giant market, and do I have a little bit of inclination that this thing, um, is awesome?"

[14:53] I don't have to think too precisely about those metrics. I'm investing a little bit different criteria. I encourage startups to go actually talk to those investors. This is a good thing in general. If you can get in front of series A investors, or seed investors, if you're raising a pre-seed, and say, "Hey, here's what I'm working on."

[15:12] What do you think I should be thinking about? What metrics do you think I should be targeting? What do you think the right KPIs are, and what do you think the market is going to expect from me when I get to the stage where I'm ready for you?"

[15:24] They're smart people. They've seen a lot more than you. They're going to give you some good feedback. It's a very low pressure conversation for them, because you're not asking them for money. You're asking them for feedback.

[15:35] You're going to come back to them hopefully having hit those metrics that they think are interesting. To your point, it might be that -- I said two million ARR, but by the time you come back two years later, the market is three million ARR -- but I was directionally correct in my feedback.

[15:54] To the extent that it's a lot about the narrative, and the team, and so on, if you've built a good relationship with me as a series A investor, that actually probably is OK, anyway, or you go, and you raise that seed bridge.

Tyler: [16:05] I think that's exactly the right answer. I want to poke on something, though. You said I don't have to worry about that as much. Your metrics are broad. You're investing across categories. You're looking for semi, to put it bluntly, sorry, nebulous things.

[16:24] Is it a good founder? Do I have an inclination that it's awesome? Is it a big market? How come you have the ability to invest on those gut feelings without having tons of data? Is it because it's a different valuation?

Parker: [16:36] I don't want to be cavalier about it. You want to be thoughtful. You want to have a thesis as an investor. The further along a startup gets in its lifespan, the more it becomes a spreadsheet problem.

[16:49] When I started investing, there's this cliché, it's all about the people. Intellectually, I'm like, "OK, that makes sense." Then you do it, and you realize it's absolutely true. People pivot. The companies change what they're doing. The market changes around them.

[17:06] Good people stay good. Big markets stay big. Exactly what your go-to-market is, what your specific product is, those things absolutely change. For me, it's finding really smart people, working in a space where, if they win, it's going to matter.

[17:26] This is a podcast, in some ways, for angel investors, a big mistake that early stage investors make is investing in companies where when they win, they lose. What I mean by that is the market was never that big.

[17:42] Great, they're hustlers. They kicked butt, but it's still this it's never going to make more than five million dollars a year. That's not a venture scale return.

[17:50] When you look at the failure rate and the risk profile of these things, to some extent, if all you said was, "I'm going to invest in great people, um, working in giant markets," that would probably be a very simple heuristic that would get you a long way.

[18:05] Obviously, you can do better than that. You can look at the products that they've built. the products that they built reflect on their ability to execute, their ability to grind. Again, they're going to do this whether I approve of it or not.

[18:18] That's actually compelling. Seeing them having built something is compelling. In my mind, a mistake that angel investors make is trying to compare these startups quantitatively. For example, you have a startup.

[18:32] You were at an Involver. I'm not sure when you guys raised your first money, but I would almost guarantee you that the startup had the same level of risk in it when it had a thousand dollars of revenue and ten thousand, and maybe possible ten thousand and a hundred thousand.

[18:48] I can't necessarily compare you quantitatively, the hundred thousand dollar revenue run rate, and the ten thousand dollar. I really need to look at it go, "OK, let's look at this revenue as a reflection of what the founders are doing. Let's look at it as a data point in determining what the degree of value we're delivering to the customer is."

[19:08] We're trying to figure out, "Are you really smart people? Do you understand the problem, and are you working in a big market?" I don't think that's a spreadsheet problem. fairly qualitative.

[19:19] It's one of the biggest mistakes early investors make when you get started out, to try to make it a quantitative problem. I wish it were science, but my gut is that it's more like art.

Tyler: [19:29] Do you take more risks than a series A investor? You personally, investing in...

[19:33] [crosstalk]

Parker: [19:34] It's a really good question. about it a lot. I go back and forth on this. I actually think that, in a lot of ways, as a function of where the market is today, seed investing represents a better risk-adjusted return.

[19:48] Part of the reason for that is the series A funds are very large these days. They are very price-insensitive. I'm generalizing. There are some exceptions to this. There are great funds, like Benchmark, for example.

[20:03] They're very disciplined. They've kept their fund small, and for very good reasons. there are other funds that have gotten very large. What I've seen in the seed and series A market is that there are a lot of series As where I have not taken pro rata because I perceive the risk-adjusted return on that investment to be very low.

[20:24] The reason for that is that there are funds that price these rounds for optionality on the B. If you've got a billion dollars to deploy, and you're putting five million dollars into the A, that check actually isn't relevant from a returns perspective to your fund.

[20:39] If I've got a $10 million fund, let's say, or a $20 or $30 million fund, and I'm writing my last check, that check actually matters a lot. I've got to make a decision whether I'm going to deploy 5 or 10 percent of my fund into that company. They're talking about am I going to deploy, often, a much smaller percentage.

Tyler: [20:58] That's a good point, but let's pick on people in particular, so we can give some examples.

Parker: [21:06] We'll start a beef here?

Tyler: [21:07] Exactly. Are there seed funds, or even A round funds, that are billion dollar funds? Is that true today?

Parker: [21:17] There are a number of them. A few that come to mind that are in that range are. Accel's a really large fund. Lightspeed has a fairly large fund. Andreessen has, I believe, the biggest venture fund, series A VC fund on the planet.

[21:33] For what it's worth, they've done a few of my series As, and Andreessen, they get a lot of shit for being price-insensitive. Actually, less true in practice than people think. There are certainly other funds that are buying their way into deals.

[21:54] You see that dynamic in the market, where companies -- rightly so -- are thinking a lot about who do I want to work with? For funds that are not at the top of that list, they compete on price, rather than competing on who the partner's going to be in the fund.

[22:10] As an early stage investor, you've got to be cognizant of that dynamic. Peter Thiel has said, as a result of his Facebook experience, he's like, "You know what? The higher the price is, the better the deal is."

[22:22] It's provocative, but it's nonsense. Every check that you write represents a risk-adjusted return, and you've got to have your own thesis and clarity around what you think that company is worth.

[22:35] The advantage that you have, as an early stage investor is asymmetric information. You've known this company for two plus years, and that series A investor is moving very quickly these days on that deal.

[22:48] The common wisdom is, "You know what? You buy in early so you can make your money on pro rata." A weird thing about the early stage market these days is that's not necessarily so.

Tyler: [22:58] Why is that?

Parker: [23:00] For the reason that I mentioned, that the A rounds, that often the funds are priced by very large funds. For two reasons, one is that second check is not always as a good risk-adjusted return as the first check because of the pricing.

[23:14] Also, the multiples in the seed, if you're investing at a $5 to $10 million dollar valuation, and lot of these hot series A deals are happening at a $50 to $100 million plus...I saw a deal that was priced as 70 post recently.

[23:27] It was an interesting company. It was a company where I looked at it and said, "You know what? I wish I would have seen this at the seed. It would have been very interesting to do at the seed price that was maybe around five, six million dollars."

[23:40] I could see this being a hundred million dollar company. Who knows? It could be bigger than that. The price at the A was around $70 million. The company had not figured out its unit economics. We're talking about negative gross margin business is a hot thing in the blogosphere right now.

[24:00] This was that company. You're like, "OK. Like, these are great founders, but they're about to raise $20 million. They haven't figured out their unit economics, and they're going to scale the crap out of this thing that they haven't nailed yet."

[24:15] There are those deals that are happening, and you need to be sober about them. At the seed stage, it's a little bit more appropriate that you have some open questions around the unit economics. That's what we are investing in.

[24:28] We're putting money behind people trying to figure out what that product is. In my opinion, given the profile of you're writing a $20 million check, there's a lot more risk in those companies, relative to the stage that it seems like they're at than maybe what we're looking at.

Tyler: [24:47] Let's step back a little bit. Your title is partner at AngelList. What does a partner at AngelList do?

Parker: [24:54] This is the cool things to call folks these days. You call somebody a partner, and then they can do anything. AngelList is an interesting company. It's a very flat organization. It's very much come in and help out, and figure it out.

[25:08] Roughly what I'll be doing there is I'll be working with existing syndicate leads, bringing on new syndicate leads, trying to help mature the product so that we can deploy money at scale. what's really changing in the next era of AngelList -- and I'd say this is a real definitive point with this new fund -- is scaling up to institutional capital.

[25:34] If you really look at where AngelList is today, still most of the volume that's done is in the Bay Area. Not unsurprising. It started with Naval's network. we'll keep the focus on tech. That's what AngelList does really well.

[25:49] I'm really excited about scaling to other vibrant startup geographies, really being much more inclusive, in terms of outreach to angels, going out to people and bringing them onto platform, and maturing the product, so they work better.

[26:04] That's what folks at AngelList are already thinking about. My mandate is to come in and help them think a lot more about that stuff.

Tyler: [26:13] When we talking about the CSC deal, you talked about the two options. One is amplify the people that are already doing this. The second is bring new people in. Who are the types of new people you'd like to see on the platform?

Parker: [26:26] This is something I've got to give Dave McClure at 500 a lot of credit for. Dave's basic thesis is take smart people that normal venture capitalists wouldn't hire, and give them a checkbook and they'll do great things.

[26:41] That's a simplified version of it. You need to give those people support, and you need to be thoughtful about the people that you find. thesis is broadly true. There are a non-usual suspects that can be great early stage investors.

[26:55] For me, that profile is maybe someone who's an operator. They've been working in or around startups for many years. They know people that are starting these companies. I'm sure you have friends that have started great companies, and you knew them before they did.

[27:10] They came and pitched you the idea. They said, "Hey, here's this crazy thing I'm doing." You said, "Oh, that's an interesting idea." There are a lot of those people out there. We can work with those people to say, "Hey, how would you think about angel investing? Would you like to help these people and have a little bit of skin in the game?"

[27:27] Because you're already helping them. The way that I look at AngelList is AngelList is really this three-sided marketplace. You've got these startups, you've got these syndicate leads, and you've got this capital. The capital has no access.

[27:43] If you're an LP, and you're trying to deploy $400 million, the problem is it's really hard to deploy that across a bunch of seed funds. AngelList solves that problem for them. The way that it solves that problem is by finding these people with access. Who maybe are existing angel investors, or maybe who are people with access who don't think of themselves as such, and activating them.

[28:04] Saying, "Hey, look. You have this access. This is a win for the LP to deploy money through you into these companies. It's a win for the company because they're getting you more involved, and it's a win for you because you get some economics on that deal."

[28:19] That's something we're really talking a lot right now. Hopefully, I'll have something intelligent to say about it in six months. Maybe I'll come back and tell you it was a horrible idea, and I was all wrong.

Tyler: [28:33] Are you reinventing the venture model, if this works, to blow up the traditional partnership model, and you now move to a world where you've got a bunch of individual "partners" who all have the same LP behind them, for example?

Parker: [28:48] AngelList isn't directly competitive with the firms. People talk about it that way. Everybody wants a controversy. If you look at what AngelList is doing today, AngelList is really building the bottom of the pyramid.

[29:06] If you think about what a venture firm does, a venture firm does a bunch of stuff. It trains partners. It raises capital. It sits on boards. It supports those companies. We talked a little bit about Andreessen earlier. they're doing some phenomenal stuff, thinking about reinventing the firm as an agency.

[29:25] If you look at AngelList today, there's a bunch of stuff these firms do that AngelList doesn't do. There's no reason that there are parts of that AngelList couldn't do, maybe in different ways, maybe in the same way.

[29:36] It's an overstatement to say, "Hey, AngelList is going to kill the venture firm," and certainly, it's not going to happen tomorrow. You may find that there are people who would otherwise have started funds that can do what they want to do with AngelList.

[29:52] In that sense, it may attract partners who would have otherwise joined a firm. I think of Chris Sacca. If you know the story of how he raised money for Twitter and set up all these funky funds around Twitter. That was really his foray into venture capital.

[30:09] You could imagine that today happening through AngelList. You could imagine an alternate universe in which Sacca were doing that today, and he didn't end up with lowercase capital.

[30:20] I actually think that venture funds provide a lot of value in the ecosystem, certainly as you go downstream. I'm really excited about figuring out how we work better with them, as opposed to how do we take them out.

Tyler: [30:34] Specifically, back to what you said around the non-usual suspects. Your summary of McClure's thesis, give people who don't look like they could hired by a venture fund checkbooks. A, for those folks, it seems like online investing gives them maybe a lower barrier to entry.

[30:58] They can get started working on smaller deals or doing personal investments. They can get started investing 100K in an early stage company. There are starting to be things like aggregated capital that will find them.

[31:10] You were talking about CSC. We've talked to Dustin from Maiden Lane, which is another similar point. It'd be interesting to talk about that in a second. For those folks that are not the traditional suspects, venture is a fairly un-diverse world.

[31:26] Letting folks who don't fit the mold of the traditional partner play in the game, my guess is a lot of those folks will fail, but some of them will succeed. It's the "let a thousand flowers bloom" model.

Parker: [31:40] A venture fund has some leeway. We talk about this, like there's old cliché that's like you've got to crash a few fighter jets when you get started in VC. A John Doerrism. That's challenging as a platform.

[31:52] We are working with these funds. Those funds don't necessarily want to fund your fighter jet crashes. That's something where we're trying to figure out, what is the best way to give these people an on-ramp. I'm super interested in finding the non-usual suspects.

[32:11] It would be phenomenal to go and bring some diversity into venture capital on a number of different axes. We've got to do that in a way that is good for companies and good for our LPs, good for the LPs that are backing these syndicates. That's a hard problem. If you've got suggestions, feel free to throw them my way.

Tyler: [32:32] It's one thing to fund a few fighter plane crashes for one person, but to fund the first three deals that are probably the worst deals you do for a whole universe or class of students is tough.

Parker: [32:44] What AngelList is doing today -- to talk about this, if you're interested in doing this as a listener -- we say, "Great. Come on. Let's raise the syndicate." You actually go and raise some money from friends and family or whoever.

[32:59] Then these platform funds, these CSC Upshot or Maiden Lane, may choose to back your deal. What they do at the beginning is they start to look at each deal. What I would love for AngelList to help you do is have other people look at that.

[33:12] I come from Pivotal Labs and think about pair programming in a lot of stuff that I try to do. We used to pair on stuff, and you get better at it. It's actually a great way to do investing. If they're going to look at each deal individually and yes or no it, but the goal is to get to a point where, "Hey, look. These funds trust you."

[33:32] They don't want to be looking at every deal. That's not how they're going to scale to deploying 400 million. The goal is to give you some support as we onboard you, but get you to a point where you have a lot of leash.

[33:44] You go to maybe do five deals, maybe start a little micro fund, and then we can review it more periodically. I think about it as training and supporting these people who are deploying capital. Of course, some of them are going to do well, some of them are not going to do well. That's always going to be this game.

Tyler: [34:02] I like that Doerrism. Doerr may win the award for best ridiculous venture quotes. I quote Doerr twice or three times a week at this point. [laughs] The other person about is the one you mentioned, is Sacca. For at least my understanding of his story is he raised a very small initial fund, something on the order...

Parker: [34:23] Eight million dollars, I think.

Tyler: [34:24] It was six or eight, one of the two. Something on the order of what you see micro VCs today doing, the home brew guys.

Parker: [34:33] His first fund, yeah.

Tyler: [34:34] His first fund was very small, but he happened to hit a bunch of winners in it, Twitter and Uber.

Parker: [34:38] Phenomenal, best fund of all time.

Tyler: [34:39] IRR is insane.

Parker: [34:41] Respect.

Tyler: [34:42] Then he did a bunch of special vehicles as that scaled. The thing is, with a six million dollar fund, he puts the money into Twitter, but he didn't have the ability to go pro rata all the way up. He was very aggressive.

[34:59] He set up secondary purchasing vehicles, SPVs, and all these things. For the Sacca-like person, who's very clearly a talented, once-in-a-decade, if not generation, investor, for that type of person, 20 years ago, he would have joined a firm.

[35:21] Five years ago, he started his own firm. You're seeing that play out in the market today, where a lot of people who are starting, instead of going to Kleiner or Sequoia or Benchmark for their first venture job and joining as a partner, instead they're starting their own funds, at least seed stage investors.

Parker: [35:36] You're seeing a lot of that.

Tyler: [35:39] I wonder if, with all the stuff you're talking about now, AngelList doesn't make it so easy to have the underlying infrastructure of setting up a fund, setting up SPVs, etc., that that person really never needs to join a firm.

[35:52] It's removing the benefit of joining a firm, or at least decreasing the pain that you would have to deal with. Frankly, a lot of the reason people don't start funds today is because they don't know LPs. They don't know how to go through the SEC regulation and fund formation, and all of that.

Parker: [36:11] It's a pain. They don't want to run the back office. They want to work with companies. Again, today, there are things AngelList can do. It works for a subset of these people.

[36:19] If you want to do a couple million dollars a year, maybe a little bit more than that, you have an existing angel track record, there's going to be a way, and you want to be a one person firm, AngelList can support that pretty well right now.

[36:33] It's great for you. You don't have to run your own back office, if you don't need management fees, these sorts of things. what AngelList can't do today -- we talk about what it does in the future -- there is actually a good reason for management fees.

[36:46] You can go, and you can build out a team. That team can go and support these companies. what Sacca has done, I have a lot of respect for. They've actually kept that fund phenomenally small. We could talk about, "Well, that's great for Sacca, but as an LP, you can't get into his fund."

[37:00] Our job at AngelList right now is let's try to scale up what we're doing. I hope to have this problem, which is we go, and we create the next Sacca. Then our job is to convince that person that they should stay on platform, as opposed to going and starting their own fund.

[37:17] If we look a couple years out, AngelList funds don't raise management fees. It tends to be more deal-by-deal so that there's a high level of granularity around backings and so ons. There's no reason we couldn't do vintage funds.

[37:35] If you think about management fees, management fees are effectively an unsecured loan against your carry. There's no reason we couldn't do that if you wanted to go build a team. If somebody like Sacca said, "Hey, I want to start a fund, but I don't really want to do it. Can you guys do this? Can you support this today?"

[37:51] Our answer would probably be, "No," but hopefully, we will grow with these people that we are turning into angel investors and supporting. It's very possible that a certain subset of those people, some of them never want to go pro.

[38:08] They love building products, working on teams. That's great. Let's do that all day long. Let's do that forever. Some of them are going to want to go pro, and maybe we'll have an answer for them. Maybe they'll go work for John Doerr, because he has better sayings than I have or something. I don't know.

Tyler: [38:27] Doerrisms.

Parker: [38:28] Doerrisms.

Tyler: [38:28] Let's talk a little bit about that going pro. What is the path for an angel investor? What's the normal path for somebody who does end up going pro? How do people get to that level?

Parker: [38:38] Traditionally, it's been either you go be an operator in a successful company, and then somebody says, "OK, you sold your company. Let's pluck you into this fund." That's one path.

Tyler: [38:47] This is into venture, specifically?

Parker: [38:49] Into venture, specifically. The other path is to start angel investing. We talk about Jeff Clavier. He started angel investing. One day, he says, "Honey, is it all right if I go invest a bunch of our money in these startups in a more professional way?"

[39:05] I believe with his first fund, he put quite a bit of the money in, maybe even fully funded it himself. It's degrees. You get to a point where, in Dave McClure's case, the first fund was $29 million. It was everybody and their cousin in the Valley.

[39:25] It wasn't a professional fund. The first fund was -- I shouldn't name names, or people will start calling them -- quite a few successful entrepreneurs who maybe put in 50K or 100K. Then you get a few funds that maybe put in a million or two million for deal flow.

[39:41] You piece it together, and you get a first fund. The goal is to get enough of a track record that by the second fund, maybe you're raising from family offices. Maybe by the third fund, you're raising from institutional capital.

[39:55] A dynamic that actually really matters, and where AngelList can really provide a lot of value is a lot of these funds, the question you have to ask them, which is insane, is what's the smallest check you can write?

[40:09] It's insane that you have to ask that question. If you've got a really good strategy for deploying 2 million, or 5 million, or 10 million dollars a year, it doesn't even matter, because you can't move the needle for the big money.

[40:20] It's a pain in the butt to go raise this money one-off, ad hoc, talking to some family office in Pittsburgh that doesn't know anything about startup. A place where AngelList can provide a phenomenal amount of value today.

[40:35] We'll see. Could we support a hundred million dollar fund? I'm not sure that that makes sense today. It might in two years. It might be five years. It depends how fast we can get our stuff together.

Tyler: [40:45] It may help with that on-ramp?

Parker: [40:48] Absolutely. That's uncontroversial today. The smaller you are, the closer you are to getting started, the better off we are for you as a fit right now. Our job is to keep improving the product so that for the long you are, the better we fit.

Tyler: [41:05] Speak to the person who's sitting out there, maybe CEO of a company. Maybe they exited. Maybe they're successful in scaling and interested in doing some more things. How do they get started as an angel investor? What's step one?

Parker: [41:19] That's a good question. One thing is to think about what level of commitment you want to put in. We talk about going pro. It's actually a full-time job to go out and find startups. most people who are starting, they should probably start by investing in the things that walk through their door.

[41:38] You are the CEO of a company, and you have this great employee. For Naval, one of his employees went and started Instacart. It's a pretty good thing to invest in. You know this person. You know they're phenomenal.

[41:48] They're going to start this thing. You're going to take their phone call anyway. You should think about writing a check into those great people. That's one thing to think about, is where is your deal flow going to come from?

[42:01] Another thing to think about is there's a very high failure rate in these things. If you're going to invest, you should always think about it as burning your money. That's a good way to think about angel investing when you're not going pro.

[42:14] You should think about doing enough deals that you have a portfolio. They talk about portfolio theory, and you should probably think about doing 10 deals. Think about how much money you want to put into angel investing as an asset class.

[42:29] This is a percentage of your wealth that you're putting into this asset class. Go, "OK, well, let's take that amount of money, the amount of money I'm willing to lose, divide by 10, and that's how much money I have to deploy into these companies."

[42:42] It's that's a hundred thousand dollars, and that's 10K per startup, that's actually a place where AngelList could be a really good fit for you. 10K doesn't move the needle for them much, but maybe 100K or 200K would.

[42:53] Let's start to think about maybe you put in 10K, you bring in some of your friends. That's another 50K into the deal. Then maybe CSC Upshot or Maiden Lane will come in and say, "Hey, actually your friend, that's a great company."

[43:07] That's one thing to think about, is what's your financial strategy? Think about your time commitment, both in supporting the companies, and in how you're going to go and source these deals. Most great entrepreneurs, and the person you talk about is the CEO of a successful company.

[43:22] Typically, they'll have some interesting deal flow because they're in the startup ecosystem. Then a third thing I would think about is think about how you're going to get good at this. You can crash two fighter jets, but in an ideal world, you'd talk to somebody who's crashed a few and get some lessons.

[43:39] I know I made some mistakes over the course of my investing, and I've avoided some mistakes with good advice from other people. That's something that I'm interested in figuring out how we do well at AngelList, is if you are an angel, maybe we could talk about some of your deals.

[43:56] If we can give you support and help you do better, be more successful and avoid mistakes, that's a win for everybody. You can do that yourself by calling a friend who invested in your company and saying, "Hey, you know, can you give me some feedback as I'm thinking through these deals?"

Tyler: [44:10] AngelList will do lots of experiments on this over the time, but hopefully things like this podcast or doing a good job of surfacing lessons, and delivering that one-on-one conversations at scale. You mentioned that you made some mistakes. What are some of the big mistakes you made early on?

Parker: [44:30] I would say the biggest mistake that I personally, I intellectually need to avoid is wanting the startup to be something that it isn't, so projecting my vision onto the founder. You can get really excited about what a startup could be.

[44:47] If that founder isn't trying to build the thing that you're excited about, that's not a good investment. You're going to be frustrated with them because you're pushing them in the wrong direction. When that startup comes along that really shares your vision, you're going to say, "Oh, sorry. I invested in this other startup that's in the space."

[45:06] That's a mistake that I've made. Another mistake that I've made is seeing the wrong founders in a great market with the right product. Sometimes you meet someone, and they're not the A plus, awesome founders.

[45:24] You can fix a lot of stuff in a startup, but you can't fix the founders. That's another mistake, where I tend to find that I get super excited about something, and I need to look at the bigger picture. I would say that most of my mistakes have been around that.

Tyler: [45:40] It feels like you actually have to modulate a little bit. When you get overly excited about something, you have to almost remind yourself to go through a more checklist, diligence process, or something?

Parker: [45:54] This is where it's really helpful to pair with someone on this. I like to sleep on deals. I know that I need to sleep. A mistake angels try to make, or investors try to make, is they want to be the last check in.

[46:06] It's a pain for the founders. I hate that, but I want to sleep on it. I don't want to be caught up in the, "This deal's happening today. You gotta make a decision." I'm like, "OK, well, like, if you need me to make a decision in four seconds, we're not a good fit because I need to sleep on it."

[46:21] Maybe I need to talk about it with someone. really helps me make better decisions. You want to balance that with being fast and respectful of the founder's time and whatnot, but typically, if you set the right expectations for them, you tell them what your process is, you can work it out.

Tyler: [46:38] What is your process?

Parker: [46:40] It depends on my familiarity. I don't have a macro thesis. It's not top-down. The bottleneck at the early stage is great people in big markets. The general strategy you have to have, or at least that I try to have, is I want to know a lot about a bunch of stuff, and then be prepared when the future walks through my door.

[47:01] When somebody walks through my door and pitches me something, I'm a believer that I can't know what the brilliant startup is. If it's obvious to me, it's obvious, and everybody would be working on it. You've got to be prepared to see it when somebody walks in your door and tells you a secret that you didn't know existed.

[47:18] You go, "Oh, that actually makes sense. I knew there was this problem, and you've clarified it and presented a solution for me." You get excited about the idea. You convince yourself it's a big market.

[47:30] Then you try to get some information about this team. Are these great people? Are they working hard? A lot of that, you can get firsthand. Maybe sometimes you want to go out and check references.

[47:42] I try very hard to only invest in things that I understand. Security is an example of a great market that I don't understand, so I don't invest there. You can stay out of trouble investing things when you understand, but you may actually need to kick something out to an expert.

[47:59] Actually, like sometimes, if I'm not fully convicted on the value delivered to the customer, I'm like, "Hey, I'm going to call somebody who would be a good customer for you that I know. And I'm going to try to get them to use your product and see what they think about your product, maybe get a couple data points."

[48:14] I don't know. I have a lot of empathy for the entrepreneur. I try to move pretty quickly, because a lot of people try to wait as long as they can. I try very much to make my own decisions. You don't generate alpha being the last check in because you end up missing a lot of the good stuff.

[48:31] You really have to make your own decisions, be out in front, and be willing to be a little bit wrong.

Tyler: [48:37] Really quickly, for the entrepreneur that's listening that is not familiar with investing and investing terminology, what's generating alpha?

Parker: [48:47] Alpha is the extent to which you beat the market. If the market's returning 10 percent a year, and you return 15 percent a year, you have generated alpha. Effectively, as applied to seed investing, you're making better decisions, on average, than the market.

Tyler: [49:03] You're coming, and you're looking for someone, the future to walk in your door, I think, is what you said. Can you give me an example of one that's happened in the past? Who came in and really had a secret that you grokked immediately?

Parker: [49:14] I'll give you a great example. This is a company that's now public, or they're talking about what they're doing publicly. One of my first deals -- and I consider myself lucky to have done this, rather than good -- a company Mayvenn.

[49:29] It's M-A-Y-V-E-N-N. They recently raised their series A. Ben Horowitz at Andreessen led it. These guys walked in the door, and they're these two guys from Oakland. They're pitching a hair extension business.

[49:44] They're like, "Hey, here's this market, right? There's these women. They sell, they, they, they do hair, but they don't retail their own product, right? These African American women, the CEO, his family, was in this business."

[49:56] The way this market works is there's a bunch of mom and pop shops in these neighborhoods around the country selling this product. You go to your stylist. She tells you what to buy. You walk down to the store. You buy this product. You bring it back. She installs it.

[50:13] This is a phenomenally high margin product in a nine billion dollar market. For me, being able to recognize the opportunity in that case was partly about understanding marketplace dynamics. It's in understanding that if they can take this stylist income from $20 thousand a year to 25 or 30, that's an incredibly powerful marketplace dynamic.

[50:35] Structurally, it's like, "What does a good marketplace look like?" another piece of data that really fits in there is if you look at the penetration of mobile phones, smartphones in African American communities and minority communities in general, it's really phenomenal.

[50:54] This is a generation that completely skipped PCs. This is a community that completely skipped PCs and went directly to the smartphone. That's actually a dynamic that few people understand, and there's still a lot of opportunities out there.

[51:07] If you're looking for a business, go think about ways that you could service these under-serviced communities. Then there's this market of hair extensions. I live in the East Bay. I had seen these stores. I didn't really understand what they were.

[51:22] These guys explained it to me. It all clicked. I said, "Hey, this is worth it." These guys had, at the time, four customers, four stylists. They were doing very little business, maybe a couple thousand dollars a month.

[51:37] It wasn't like they had millions of revenue, and it was like, "Great. This is a rocket ship." It was like, "Oh, structurally, this makes sense. This is a big market. It's a fragmented local market." You've got this community that has these smartphones and is under-serviced.

[51:51] You've got these women who you can really empower. This is a win for everybody. The customer gets a better product at a lower price point. The stylist is going to go and make a bunch of money, where they're not making any money on the retail side of this before.

[52:06] It wasn't a slam dunk. Still, you look at all this in retrospect, it sounds amazing. This company's doing phenomenally well today. It wasn't a slam dunk. It was like, "Well, maybe this won't work, right? 50/50, but let's see how it goes." Those guys have been kicking butt.

Tyler: [52:20] What was the biggest risk at that moment in time? Again, we whitewash this after the fact. We forget about all the scary stuff. What were the fears that you had at the moment of writing the check?

Parker: [52:32] At the time we wrote the check, their stylists were doing one or two SKUs a month. They were doing very low volume. That was never going to work. We had a theory.

[52:42] The thesis was, "Oh, the problem here is you're selling the two SKUs that you have. You need some capital to really fill out the catalog, and then this woman is actually going to be selling a lot more SKUs every month, right?"

[52:53] That was a risk. They were going door to door, so there's this question which is, "Hey, where do you get a bunch of these styles? Can we even acquire them in a cost effective way?" We had no idea. It turned out actually that works really well but we had no idea.

[53:09] Then there's this other risk which is you're meeting these people for the first time and it's the nature of early stage investing that these deals happen very quickly. You don't know a lot about these founders and their ability to execute.

[53:23] I looked at them and I'm like, they've been working on it for maybe a year before hand. That's a really positive signal. As someone thinking about Angel Investing, this is why the cheat is to invest in people you know because you don't have to take that risk, but there were a number of risk bundled up in this thing.

[53:44] To me, the biggest thing, we were talking earlier about mistakes Angel Investors make. A mistake is if you don't know what the risk is, if you can't articulate the risk that you're taking, you shouldn't write that check because you're making a mistake.

[53:58] Angel investing, or investing in general, is about taking calculated risks. It's important to write down what that risk is and say, "All right, this is a prudent risk for us to take with our money."

Tyler: [54:10] They walked in. They showed you this idea that you had not seen or thought of before.

Parker: [54:15] And a horrible web-based app. They had no native mobile. Sometimes it's an idea, and a dream, and a little bit of code.

Tyler: [54:20] What was it that made you believe that that was a true statement about the future? A secret as you say. You're using the Peter Thiel parallels there, right?

Parker: [54:27] Right.

Tyler: [54:28] What convinced you that they had a secret that was true?

Parker: [54:31] It wasn't like I knew this was an obvious deal. it's one of those things where it's like baseball. You don't have to be right all the time. In baseball if you bat 300 you're in the Hall of Fame.

[54:44] With venture one Uber and 99 companies you've never heard of is a genius investor. This is something Peter Thiel talks a lot about. Power laws are something that are mind doesn't intuit, so you've got to work really hard to internalize that in terms of how you make decisions investing.

[55:08] It is truly the one winner that's going to generate the bulk of your returns. We were talking a little bit earlier about portfolio theory. That's a very hard thing to internalize.

[55:20] It's almost like one of those things you should write down and look at it, "power laws, power laws, power laws," as you're making these decisions because everything looks pretty good upfront, and a lot of them are going to go sideways, so those winners are going to need a return.

Tyler: [55:36] By the way, the unnatural human reaction to power laws is something that we've heard a ton with everyone we've talked to on this podcast. It's something that almost every great angel who's written about their process talks about.

[55:50] Peter Thiel's talked a bunch about it. Actually, one of the essays that I asked my students to read two years ago, or whenever it came out, was "Upside Risk" by Sam Altman, which was like...actually, going back to a famous Doerrism, you can only lose 1X your money.

[56:08] This is a really hard thing for a lot of people to internalize and understand. You're exactly right.

Parker: [56:13] A book that I'm reading now is this book called, "Sapiens," which is a lot about evolution. There's some interesting data that suggests that that's built into our DNA. As we've gotten to math and we've gotten to building these more and more complex systems. Those are things that we can intellectualize but it's against our basic biology.

[56:34] Math is not in our DNA. It's something we invented beyond that. I don't know. It's interesting to think about that. All these systems that we've built that are wholly human.

Tyler: [56:45] I want to dig into one of the things you talked about with Maven, where you said you are trying to keep yourself wide open and learn a lot about the world so that you can vet whether something is true when it comes in your door.

[56:58] You're not looking for a specific thesis, but rather you're trying to learn what is true in lots of different human experiences. What are the sources of information that you routinely pull in? If I were starting a venture capital job tomorrow, what should I go read or subscribe to or attend? Where are the places you get good information from?

Parker: [57:18] I don't know that my experience is indicative of your average angel investor. I'm super interested in evolutionary biology, behavioral economics, psychology. Particularly for consumer products, what people often get wrong is the motivation.

[57:34] In the case of Maven, it's understanding that the supply side of the marketplace, these stylists, are going to be highly motivated. What's the impact on their income? A lot of marketplace products fail because power users on the supply side can't make it a full time job.

[57:52] That's a dynamic of marketplaces that exist. I came to that from a behavioral economics perspective. Other people looked at these networks and said, "Oh, this is how they work. Power sellers on eBay or whatnot."

[58:07] I have a precise thesis around that, which is a marketplace can't work if the supply side can't make a significant amount of income relative to their opportunities, their alternatives. You see a lot of these fail because they're like, "Oh, hey. We've invented a new way for people who make $150,000 to make an extra $150 a month."

[58:27] I saw a network a while back for sharing power tools. I come at that from a psychology, a behavioral economics perspective. Other people come at it from other angles. There's that stuff.

[58:42] That's fascinating. You should all go read Dan Ariely, and Geoffrey Miller, and Sapiens. I forget the author's name. This stuff is great. You can go read Paul Graham's stuff. There's a lot of blogging today about the inside baseball of venture capital. That stuff can be helpful. Hopefully AngelList can help you need to know less of that.

[59:07] For the entrepreneur my advice is always don't try to be smarter than your venture capitalist. There's a great book, that Brad Feld book on startups, I'm forgetting the name of.

Tyler: [59:17] Venture Deals."

Parker: [59:18] Venture Deals, there you go. A great book. Read that if you're an entrepreneur and nothing else because that's good enough that you'll know all the basics and then try to work with people who you think aren't sketchy. Most venture capitalists, most angels aren't so you should be good.

[59:33] If you're trying to angel invest, I don't know. There's a lot of stuff out there. It's really hard to say, "Here's the canonical work. Go look at it." Read a few things, but people are actually better.

[59:45] If you can find people and talk through the things that you're doing and take advantage of the wisdom of people around you that's probably going to serve you better. We'll have to get offline and come up with a good blog post for this one.

Tyler: [60:00] Cool. We've talked about how you look at an idea, how you're vetting, "Is there a big market there? Does this generally match what I believe to be true about the world? Is it unique? Is it interesting? Are there other people working on it, etc.?"

[60:14] How do you vet the people? How do you know, when you're sitting down with someone for the first time, that this is a...how do you learn that this is a high quality entrepreneur?

Parker: [60:23] It's incredibly hard. The people who are best at that are probably the best venture investors. One way you can do it early is...I said earlier I don't care if you've got $1,000 or $10,000, or $100,000 of revenue, but I can use that revenue, and I can use the product that you've built, to ask you questions that tell me things about you.

[60:48] For example, I really try to figure out in the course of a conversation with an entrepreneur how well and how fast they learn. That's what they're going to be doing for the next 10 years. I ask them questions where I don't even care what the answer is sometimes.

[61:04] I'll give you a good example, actually, of an example I ask. If you come to me with an ecommerce company a stock question I'll always ask you is, "Hey, of the people who buy once, how many people buy two, three, four times?"

[61:15] I actually don't even care what the answer is. It's really interesting because if you got somebody to buy once, they were interested in your product. The follow up question is, "The people who don't buy a second time, or a third time, or wherever your drop off is, why?"

[61:33] The great founders can tell you exactly why. They love talking to people who stopped using their product. They articulate it almost in the form of a road map. "Here are the four problems. Here's when we're going to solve them."

[61:48] You're like, "Awesome. You are learning fast. You're learning. You've got the road map. You're not afraid to put a product into the world that isn't perfect and make it better." That's another problem founders have.

[62:01] It's really hard, to be clear, to...all of the ideas sound great. They all sound awesome. "That's a really interesting idea. I don't know if it's right or not."

[62:12] Unless you have first-hand experience around the problem it's very hard to invest in ideas. When you see the product in the world you get to learn a lot more about the people. That's what I try to do. "Tell me about what you've been doing so that I can figure out how fast you go, how fast you learn, how fearless you are."

[62:31] What's hard to figure out is, "Are you going to do this? Are you never going to quit? Are you..." Paul Graham uses the term "cockroach." I think that's a great term. You see these people.

[62:43] I'm blown away by the founders I see who stick through it through awful circumstances. They hang on by their fingernails. It's hard to see that on the front end. If you've got good tricks I'd love to hear them.

Tyler: [62:57] I don't.

Parker: [62:58] Do you see that, as well? Is that what you see when you talk to startups?

Tyler: [63:01] You know, it is. I want to offer a clarifying point, which is that you're investing often the first check in or the first round in. It is the track record of the company is, by nature, pretty small. The one way you can do it is look at what the founders have done before the company.

[63:23] If you can see that they've been through some sort of ordeal that's required grit in the past, maybe that's competitive athletics, which is an example that gets used often. Silicon Valley is not super full of competitive athletes. It's a weird example to use.

Parker: [63:43] Brian Chesky.

Tyler: [63:45] I talk to people who are, for example, a very good friend of mine. A guy who I've watched throughout his entrepreneurial journey started as a competitive athlete, as a pole vaulter, which is a surprisingly dangerous sport, actually. You think of it as being not that bad. It's actually one of the most dangerous sports out there.

[64:08] If you can find places where people have had to demonstrate grit before. I actually like asking people in a casual setting over beer, what's the hardest thing they've gone through, get a feel for how they reacted to it, how they touched the lows, and also how willing they are to talk about it.

[64:27] I actually think there's an element of, "That sucked, and I don't ever want to do it again." or, "I was really, uh, depressed or had a hard time with this." Being willing and open to talk about that is actually an indicator of strength.

[64:43] Whereas people who whitewash, "Oh, I've never had anything hard in my life," either are lying, or they're untested.

Parker: [64:49] I had a founder -- to tell a brief story -- where he had previously gotten arrested for selling shoes out of the back of his car. He didn't tell me this until well after we'd invested. When he told me this, I'm like, "That should have been front and center."

[65:05] That's a great story. I love that story. You're hustling, selling shoes out of the back of your car.

Tyler: [65:11] This is the difference between Silicon Valley and investment banking. It's like, "Oh, it's not a crime. That's hustling." We've talked a little about how you assess great market, great people. One question I want to ask -- this a common question I ask throughout this, and hopefully we'll get a bunch of different flavors of answers.

[65:30] If you had to give somebody who was completely new to investing control of your bank account, or at least the segment of it that's reserved for startup investments, what would you require they learn before they wrote a check? What would you want the ideal entry into startup investing program to look like?

Parker: [65:48] Boy, that's an interesting question. The way that you invest, the way that you should invest, is you have to do it. It's like entrepreneurship. You can't go to school for entrepreneurship. It's not like, "Go get the entrepreneurship degree, and then you'll be good at this."

[66:06] Angel investing, investing in general, is the same way. I would more think in terms of their mindset. Go slow, surround yourself with smart people. Try to be a student of it. Be a student of the market. Be a student of the industry, and have a long time horizon.

[66:29] Here's my million dollars that I'm going to give to you. Don't spend it all in one place. You might waste the 200K crashing fighter jets before you really figure it out. Advice someone gave to me was, "Write a lot of small checks." I thought that was an interesting piece of advice. Write a lot of small checks.

[66:49] You'll learn a lot, because the emotion on the check is the same, whether it's a 10K check or a 500K check. If you're going to make those emotional mistakes, if you're going to make those market mistakes, if you're going to learn, learn cheap, and then incrementally step up, which is what you see a lot of investors do.

Tyler: [67:05] Would you recommend that person start slow or fast? Should they do 12 small checks right upfront? Should they do one a month?

Parker: [67:12] Slow. One of the reasons I wait for the future to walk through the door, is the bottleneck is not finding 500 SaaS companies or whatever. The bottleneck is great teams working on interesting problems.

[67:26] At the seed stage, you should necessarily have a pretty broad thesis. You can't force it. You can't make all those people walk through your door. I actually think you need to be very patient. The best investors that I know -- the best professional investors that I know -- they have a pace.

[67:43] They raised a fund, and no one's paying them to sit on their butt. They're paying them to deploy that capital. They've got a couple year deployment cycle, two, three year deployment cycle. There are periods where they're well behind pace.

[67:55] They don't feel pressure to deploy the money when great companies aren't coming to them. That discipline is very hard. It's very hard to be disciplined, both because you're very emotional, especially when you've got LPs saying, "Hey, man. Where, where are you spending my money? Why are you sitting on it?" You absolutely can't force it. You've got to go slow.

Tyler: [68:19] Parker, I want to thank you for your time. You've been really generous with it. I do want to get you out of here reasonably quickly, but there's one other thing I wanted to chat with you about, which is you and I prior to recording here were talking about that you attempted to raise a fund not that long ago, over the last year or so, it sounds like?

Parker: [68:36] Last six months or so.

Tyler: [68:38] What was that experience like? You left 500, and you started to raise a fund. What was the thesis around why did you start raising that fund, and what was that process like?

Parker: [68:48] My goal was to raise, as we talked about, you raise a first fund. You raise a starter fund and go prove out a thesis. I felt like there was an opportunity to really go earlier. You see Charles Hudson out there raising a pre-seed fund, or he's in the process of doing that.

[69:04] There's an opportunity at the low end of the market here, the earliest stage of the market, where what I saw was I really liked writing the first checks into these companies. Then I was working with these companies, trying to raise them the rest of their round.

[69:17] A lot of the 500 Accelerator companies, a lot of my seed companies, it's very challenging for them to get that 250 to 500K. I had one founder who literally took 200 meetings to raise a million and a half dollars. Phenomenal company. They're doing quite well now. They'll raise their series A soon.

[69:35] From my perspective, that company was no different when I wrote the first 50K check as when they got, I think, a 750K to 900K anchor check, which catalyzed their round. I don't think there was a lot of difference there, but these founders really struggled.

[69:53] They struggled. 50K isn't a whole lot. It doesn't let you get heads down and spend six months really fleshing out the numbers. I felt like there was an opportunity to go very, very early.

[70:04] The thesis around the fund was really, "Hey, let's go and write 150K to 250K checks in the first 500K that these companies raise. Try to be first money in as much as possible, really get them a lot of hands-on support."

[70:19] A lot of these companies, I love first time founders. There's a great arbitrage opportunity there. They're highly motivated. They're very talented. There's a lot that they don't know, but the great ones learn really fast.

[70:31] If you can get in there and say, "Look. Like, let's get you a couple hundred K. That'll give your founders some time. You don't have to think about the raising the next check tomorrow. Uh, let's think a little bit about what we can do to better position the company to raise, say, that seed round. Um, and let's maybe introduce you to some folks that can put this thing together."

[70:48] I really feel like there is a big opportunity in being the first check into these companies, both for angels and for pre-seed funds. You're starting to see these funds, Notation out in New York, and what Charles is doing out here.

[71:01] I thought that that was really interesting. I went out and talked to a bunch of LPs, friends and family. You start there, and they say, "Great. No problem. We'll support you in what you're doing." My feeling was I needed to get to about $10 million to make it work. My friends aren't that wealthy.

Tyler: [71:17] Why 10? Because of the management fee then allows you to run the fund?

Parker: [71:22] In part. when you're going really early stage, there's obviously a very high failure rate. I believe that you need a big enough portfolio that the math works out. there's a great opportunity early stage to get multiples.

[71:39] If you do 10 companies, for example, you raise a $2 million fund, and you do 10 companies, it's actually very possible that you have all zeros, even if you're a smart person, or zeros and ones, and so on.

[71:50] It's debatable how many companies you need before you can have some assurances, but the knobs are number and variance. The larger your fund -- like if you look at 500 startups. 500 startups is never going to have a suck at 200X fund, but they're also probably never going to have a Zero.

[72:09] They've proven that model proves in my mind that you can have a large portfolio, and have very consistent returns that are very attractive to institutional capital, or to capital in general. The question -- two questions.

[72:28] One is, "How many companies can you support? What's your deal flow look like? What's your time look like?" and then, "How much capital do they need in absolute terms?" The way that I thought about that was I thought I could do about two companies a month.

[72:42] A $10 million fund is about two years' worth of deployments, and I felt like that would give me the ability to put a couple hundred thousand dollars into each of these companies, which is really meaningful in absolute terms to those companies.

[72:52] That was the thesis I went out there with, and I really struggled with institutional capital. You go to these guys and you say, "OK, you've got $5 billion. What's the smallest check you can write?"and they're like, "Well, $10 million. Call me when you're raising $100 million fund."

[73:07] Part of the reason that I came to AngelList was to really work on that problem. Hopefully, what we can do there is build products for folks like me. To some extent, what I bumped up against was, I have a pretty good track record, a couple of years of investing, but it's all on paper, "It's a good market" sorts of things.

[73:28] It's a fair question for investors to say, "Call me when you've turned it into actual paper dollars," whereas an opportunity we have at AngelList is to say, "Actually, that's a pretty good track record. You're a pretty smart person. Let's try to connect you with LPs that can invest in you in a way that actually works for them."

[73:45] Versus the pension fund that really needs to see the five-year plan, five years of history, and these sorts of things.

Tyler: [73:54] The differences of writing a $1 million check versus a $10 million check.

Parker: [73:58] Yeah. If you're an entrepreneur out there, you go into the VC meeting, and it's hard for you to raise money, but it may have been very, very hard for them to raise money as well, so have a little sympathy. Not too much, but just a little bit.

Tyler: [74:12] Similar to Doerrisms. There should be a whole category of Navalisms. One of my favorites is, "Being a venture capitalist is raising pain wholesale and selling it retail," which is good.

[74:24] [laughter]

Parker: [74:24] That is a good one.

Tyler: [74:23] It's funny. It reminds me of a story I heard, actually, at PreMoney, at the 500 Startups Conference for angel investors.

[74:34] There was an LP there who made the offhand comment of, "Gee, let me guess. You're a former founder, you've been an angel investor now for two or three years. You're up maybe, I don't know, five X, seven X, three X, something like that, on paper. You think you're pretty good. You think you want to go pro at this."

[74:53] This is not to me. This is to an audience of 700 people, or 100, or whatever it was. "Gee, you think you can go pro at it, and you wonder if I'm going to be an anchor LP in your fund. I've talked to 700 people like that over the last 18 months." Really, his point was, "You've got to have a very clear either return history, or an insane differentiator.

Parker: [75:18] Yeah, that was the advice that I got -- great advice, and I ignored it -- which is, "Pick something incredibly niche and focus on that." at the seed stage, that can work. We were talking about security, where if you're a security investor, great. You know stuff.

[75:33] I can't compete with you on knowledge, so you're going to get all the best security deals. That strategy can work, but I've always felt like my bottleneck is deal flow. That's arguably everybody's bottleneck.

[75:48] The more you narrow that thesis, the more you have to compensate that by marketing yourself to every company in that niche. Not necessarily my strength getting out there. I'm not as good as say, Hunter Walk, blogging, and some of the other folks that do this stuff.

[76:03] That strategy can work if you really run it in the right way, but my personal interests are pretty broad, and I do well investing fairly broadly. For better or for worse, I said, "You know what? Let me pick the right thesis, and then try my best to explain it." and you get this feedback.

Tyler: [76:20] Got it. This is something by the way, on the concept of going pro as in investor, this is something that a lot of -- whether they're part-time angels, or maybe venture partners, or somebody thinking about their first general-partner role in venture, this is a dynamic of the world they really don't understand. It's how do LPs work and think and operate.

Parker: [76:40] Yeah, so if going pro is crossing the chasm, AngelList is attempting to build the bridge.

Tyler: [76:45] Perfect. I know you've got to go. You've been very generous with your time. That seems like a really good Parkerism to end on.

[76:52] [laughter]

Parker: [76:51] Yeah, exactly. I'll give that one to Naval.

Tyler: [76:55] Thank you very much for your time. This was awesome. There's a list of questions I didn't get to ask, so maybe we'll do a Round Two at some point in the future, six months from now, when you've solved all the problems.

Parker: [77:03] Cool. Thanks for having me.

Tyler: [77:05] Cool. Thanks.

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