Startup Investor School Day 3 Live Stream

Session Overview

• Day 3 of Startup Investor School featured four investors: Elad Gil (angel/entrepreneur), Pejman Nozad (founder of Pear VC), Jeff Clavier (Super Angel/UnCork), Andrea Zurlo (XG Ventures), and Ali Partovi (NEO).
• The session focused on market selection, team evaluation, portfolio construction, and the psychology of investing.

Elad Gil: Market First, Team Second

• Investment Priority: Gil ranks success determinants as: 1. Market, 2. Team Excellence, 3. Team Dynamics (specifically "no-jerks" policy), 4. Founder likability.
• Five Signs of a Great Market:
  • Early Compounding: Companies must show 15-20% monthly growth; 13% growth turns $100k ARR into $630M in four years, whereas lower rates stall valuations.
  • Premium Pricing: Customers paying a premium early indicates product-market fit; cheaper is rarely a winning strategy unless scale is the sole model (e.g., Amazon).
  • Internal Utility: The founding team or investor should be a user of the product, ensuring the problem is real (e.g., Stripe, Gusto, Zenefits).
  • Timing ("Why Now"): Markets can open due to shifting dynamics (e.g., mobile enabling Instagram/Snapchat) despite appearing crowded.
  • Moats: Real moats include long-term margins, recurring revenue, and diversified customer mix; data moats are rare and often overrated.
• Team Evaluation:
  • Product Evidence: Founders must have a demo or product; PowerPoint-only pitches often fail.
  • Speed of Learning: Founders must internalize new information rapidly (e.g., Ben Horowitz/Ben Silbermann examples).
  • Sales Ability: Founders must sell to customers, investors, and talent.
  • Internal Drive: Identifying the specific voice or motivation driving the founder (e.g., a relative, personal passion).
• Common Mistakes & False Signals:
  • Valuation: Angels often care too little about valuation; a 200M exit at $5M valuation yields a 3x return, while $20M valuation yields near break-even.
  • Crowd Following: Just because Benchmark or Sequoia invests does not validate a deal; investors must do independent diligence.
  • Self-Projection: Avoid imagining oneself in the founder's shoes; founders often execute differently than the investor would.
  • Past Context: A founder who failed at one company (e.g., Twitter) might succeed at another due to changed context or incentives.
• Founder Support Strategies:
  • Early Stage: Focus on product-market fit, fundraising, hiring, and culture; support is psychological and tactical.
  • Late Stage: Focus on exec hiring (CFO, GC), board management, M&A, and complex financings.
  • Bad Behavior: Investors should avoid "horse-trading" for favors or blocking exits for personal gain; founders should avoid over-optimizing round structures or misusing company funds.

Pejman Nozad: From Homeless to Super Angel

• Personal Background: Nozad arrived in the US in 1992 with $700, worked at a car wash, and slept in an attic; he later sold $8M in carpets before pivoting to tech.
• Investment Philosophy:
  • Problem Origin: Best founders have a history with the problem they solve (e.g., Uber, Dropbox) rather than chasing trends.
  • Risk Tolerance: Founders should be self-aware and taking risks early (e.g., quitting jobs before the Series A).
  • Resilience: Founders must be persistent; Nozad cites his own story of selling duct tape in Tehran during the Iran-Iraq war as a lesson in not giving up.
  • Paranoia: Healthy paranoia and double-checking decisions are preferred over overconfidence.
  • Vision: Look for founders with long-term missions (e.g., Dropbox's 4-day work week goal) rather than short-term wealth generation.
• Key Lessons:
  • Facebook Mistake: Passed on Facebook's Series B because he focused on lease terms for office space rather than the exceptional founder and opportunity.
  • Investment Strategy: Invest early (pre-seed/seed) and build relationships; leverage personal networks to gain access to founders.
  • Helping Founders: Use unique strengths to connect people; "do whatever it takes" for the founder, even serving tea.

Jeff Clavier: Asset Allocation & Portfolio Construction

• Investment Horizon: Angel investing typically takes 8-10 years for returns; bad news (losses) comes early, and positive cash flow often arrives after six years.
• Risk Management: Do not invest money that is essential for living; allocate no more than 10% of net worth to high-risk startup investments.
• Portfolio Construction Factors:
  • Check Size: Consistency matters; $25k-$50k checks are common for early angels, with $50k as a "sweet spot" for impact.
  • Deal Count: Target 10-12 investments per year (approx. 40 total over a 3-year period).
  • Sector & Geography: Diversify across sectors to avoid concentration risk (e.g., avoiding multiple meal-kit companies); choose between local or global focus.
  • Staging: Decide on pre-seed (building product), seed (launching), or post-launch (revenue) focus.
• Time Diversification: Spread investments over 3 years to mitigate timing risk and avoid investing all capital when the market is hot.
• Follow-on Strategy: Angels often forgo follow-ons in later rounds to maximize the multiple on the initial high-risk, high-return investment, though top deals may warrant follow-on.

Andrea Zurlo: Building a Personal Brand

• Brand Definition: A brand is what others say about you when you aren't in the room; it requires trust, loyalty, integrity, and quality.
• Brand Pathways: Investors can choose to be standalone angels, join angel groups (e.g., Sand Hill Angels), create syndicates (AngelList), or form a branded firm (e.g., XG Ventures).
• XG Ventures Strategy:
  • Origin: Founded by former Google employees (Pietro Dova and Andrea Zurlo) in 2008.
  • Mission: "Ex-Googlers" focusing on disruptive technologies (mobile, social, cloud, analytics) and giving back to the community.
  • Structure: Evergreen fund (own capital), ~10-12 deals per year, ~100 portfolio companies.
  • Differentiation: Focus on "unwavering commitment," operational support, and being accessible (cell phones/emails).
• Brand Consistency:
  • Hustle: Treat angel investing as a full-time job; respond quickly, return emails, and attend events.
  • Referrals: Build a strong network; share deal flow with other investors to avoid "hoarding" reputations.
  • Integrity: Avoid conflicts of interest and ensure the team aligns with the brand identity.

Ali Partovi: The "Three Bs" and Engineer-First Approach

• Investment Philosophy:
  • The Three Bs: Look for a Brilliant founder with a Big idea that seems Bad (to others).
  • Idea vs. Person: Invest in genius founders even if the initial idea is flawed (e.g., Max Levchin/PayPal, early Google); a great founder can pivot to a winning concept.
  • Scale: Prioritize massive potential markets over high-probability, small-market ideas.
• Team & Recruiting:
  • Key Strategy: The primary value add is helping companies recruit top young engineers.
  • Due Diligence: Use coding tests and reference checks (stealth references from previous managers) to validate technical skill.
  • Network: Maintain relationships with engineering students and alumni to feed deal flow.
• NEO Initiative: A new organization to identify and support the top 10-20 undergraduate computer science students, connecting them with tech veterans and investing in their startups.
• Decision Making:
  • Speed: Decisions must be made quickly (days, not weeks) to secure deals; hesitation often signals a "no."
  • Partnership: Investing with a partner (e.g., his twin brother Hadi) provides a necessary "second set of eyes" to counter "love at first sight" bias.
  • Follow-on Challenges: Psychologically difficult to invest large amounts in late-stage rounds after small early investments; Partovi admits to selling too soon often.

Q&A and Forward-Looking Statements

• Deal Flow Sourcing:
  • Write blog posts/content to attract deals.
  • Leverage adjacent non-competitive businesses and peer groups.
  • Cold outreach and networking are still effective.
• Handling Co-Founder Conflict: Early conflicts are often unresolvable and require a founder exit; late conflicts often stem from communication breakdowns.
• Market Expansion: Despite concerns about "vacuuming up" deals, organizations like NEO and YC create more opportunities for angels by increasing the total number of startups and centralizing deal flow.
• Secondary Markets: Buying shares from early employees leaving is a potential opportunity, though liquidity remains low and company control policies vary.
• Exit Strategy: No rigid strategy; exits are case-by-case; the hardest part is often the psychological decision to sell (selling too soon or holding too long).

General Consensus & Best Practices

• Risk Discipline: Never invest money you cannot afford to lose; expect 90% of portfolio companies to fail or underperform.
• Conviction: Invest heavily only when there is total conviction; doubt is a signal to pass.
• Service Mindset: The investor's primary role is to help founders (hiring, fundraising, culture) rather than just writing checks.
• Brand Integrity: Investors must act with integrity, avoiding self-serving deals that harm the company or its other investors.
• Long-Term View: Success in angel investing requires a 10-year horizon and the ability to handle frequent losses for the few massive winners.