Summaries Startup Funding and Investing Investor School Day 4: Tips for Successful Angel Investing with Aaron Harris

This is a summary of a YouTube video "Aaron Harris - Startup Investor School Day 4" by Y Combinator!

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The key idea of the video is that being a successful angel investor involves building a good reputation, understanding investment terms, negotiating wisely, and maintaining honest and helpful relationships with founders and investors.

• 💰
  00:00

  Being a good investor means having a good reputation and generating returns, with a focus on improving the likelihood of a startup's success to get more opportunities to help companies succeed.
• 💼
  08:18

  Respect a founder's time and decisions, keep meetings short, offer to pay for coffee or a meal, and avoid being a jerk.
• 💰
  12:44

  Understand investment terms, negotiate wisely, avoid bad investors, keep your word, sign necessary documents promptly, and bring in helpful investors for long-term success as an angel investor.
• 💰
  19:31

  Don't make promises you can't keep and build a good ongoing relationship with companies as an investor.
• 💰
  27:55

  Be honest and cautious when dealing with founders and investors, pro-rata rights can be valuable but later stage investors may pressure founders to cut back on them, negotiate firmly but remind partners of agreed terms and be understanding, "dumb" or "smart" money can be good or bad depending on their ability to be helpful and build a good relationship.
• 💰
  32:51

  Seed stage companies should update their revenue, growth, burned cash, and balance every month, and once a company has raised over $4 million, it is advised to form a board and write good investor updates.
• 💰
  39:19

  Be aware of unfair investing situations, negotiate wisely, and be honest in recommendations.
• 💰
  46:28

  Early stage investors should not ask for detailed financial projections as it is not helpful in making investment decisions.

Key insights

Reputation and Relationship Building in Startup Investing

• 📈 Reputation drives returns in startup investing, unlike in public markets.
• 💰 The access to good startups is not an open market, as reputation plays a significant role in getting the best prices and deals.
• 💼 Your reputation as an investor is directly correlated to your deal flow and the success of the companies you invest in.
• 🚶‍♀️ It's important for founders to be willing to walk away from a bad investor and seek other options, as there are plenty of investors available and maintaining a good reputation is key in the industry.
• 🤝 Building and deepening relationships with companies is crucial for ongoing success as an investor.
• 💡 Founders who consistently send monthly updates tend to outperform those who disappear for long periods of time, highlighting the importance of transparency and maintaining a strong relationship.

Investor Conduct and Etiquette

• ⏰ "You need to respect their time, do not ask for a three-hour meeting for a new company." - Harris highlights the importance of respecting a founder's time and suggests keeping initial meetings short and concise.
• ☕ "What the hell is the price of coffee? Go the extra distance to show that you want to help that founder." - Emphasizing the importance of going above and beyond to support founders, even if it means buying them a cup of coffee.
• 💡 "Your word is your bond...if you agree to something, that agreement is final."
• 💼 "Get the doc signed and as soon as you sign them, send the wire. Don't even get up from your computer, use hello sign or Clerke or whatever you're using to sign and immediately open your."
• ✈️ "The best transition from kind of wants to invest to shareholder that I have seen there's an investor that comes to demo day who meets with founders does a handshake on the floor leaves like within five minutes of demo day ending and then literally sends wires from his jet as he flies home that night."
• 💸 "Never commit to invest money you don't have to."

Valuable Rights and Strategies for Investors

• 📈 Investors who think differently and go against the curve find not only successful companies, but also get in at better prices and acquire more ownership.
• 💰 Pro-rata rights are one of the most valuable rights for early stage investors, allowing them to continue investing in a company in future rounds without being diluted.

Detailed summary

• 💰
  00:00

  Being a good investor means having a good reputation and generating returns, with a focus on improving the likelihood of a startup's success to get more opportunities to help companies succeed.

  • Learn how to be a good investor by deciding how to act when things happen, as being a good investor is the most important aspect of being a great angel investor.
  • Being a good investor means not only generating returns but also having a good reputation, which is more important in startups.
  • Hedge fund bosses make a lot of money regardless of their behavior, leading to stories of mistreatment and a focus on deal-making over personal relationships.
  • Startups are not an open market and access to good startups is limited to those with good reputations and connections, even in the case of ICOs.
  • Your reputation as an angel investor is directly correlated to your deal flow, and your goal is to improve the likelihood of a startup's success to get more opportunities to help companies succeed.
  • To increase the likelihood of success of companies and get more deals, investors have four opportunities to demonstrate their value to founders: in sourcing deals, meeting and negotiating with founders, closing the deal, and maintaining an ongoing relationship with the company.
• 💼
  08:18

  Respect a founder's time and decisions, keep meetings short, offer to pay for coffee or a meal, and avoid being a jerk.

  • Investors should respect a founder's decision if they don't want to talk and politely follow up later, rather than pestering or stalking them.
  • Respect the founder's time, keep the meeting short and pay for coffee or a meal if things are going well.
  • When meeting with a founder, always offer to pay for their coffee or meal as a gesture of goodwill and to show that you want to help them.
  • When meeting and negotiating with founders, focus on them, ask questions but don't expect them to know everything, and avoid being a jerk.
• 💰
  12:44

  Understand investment terms, negotiate wisely, avoid bad investors, keep your word, sign necessary documents promptly, and bring in helpful investors for long-term success as an angel investor.

  • Understand the terms of investment, as some investors may try to add unreasonable demands, and it's important to walk away from bad investors.
  • Understand the balance of leverage in negotiations, use it wisely, and negotiate in good faith for long-term success as an angel investor.
  • Avoid investors who only invest if they see a lot of other investors have come in, as groupthink usually leads to bad decisions and some of the best companies have been the ones that didn't attract all of the investor interest.
  • When finishing a negotiation, your word is your bond and agreements should not be broken, as it will not go unnoticed.
  • After negotiating and agreeing on terms, follow up with the founder to obtain and sign necessary documents promptly as a shareholder.
  • When investing in a startup, wire the money to the account and immediately bring in helpful investors to create a coalition, but avoid taking on the role of CEO.
• 💰
  19:31

  Don't make promises you can't keep and build a good ongoing relationship with companies as an investor.

  • Don't overload founders with requests and wait for them to reach out to you, and there's an investor who sends wires from his jet after meeting with founders at demo day.
  • An investor committed to investing in a company, but failed to wire the money and asked the founder to hold the check for a few weeks, which resulted in the founder kicking the investor out.
  • Don't make promises you can't keep and build a good ongoing relationship with companies as an investor.
  • Good founders ask for help when they need it and maintain transparency through regular updates, while investors should respect the difference between private and proprietary information and not ask for access to sensitive data.
  • When you don't know the answer to a question, don't answer it, but offer to find someone who can help, and when you do know the answer, offer your help and be honest with founders.
  • Honesty is key in giving and receiving feedback, as it allows for better communication and improvement.
• 💰
  27:55

  Be honest and cautious when dealing with founders and investors, pro-rata rights can be valuable but later stage investors may pressure founders to cut back on them, negotiate firmly but remind partners of agreed terms and be understanding, "dumb" or "smart" money can be good or bad depending on their ability to be helpful and build a good relationship.

  • Respect the limits of your influence and rights, be honest and direct, and proceed cautiously in extreme situations when dealing with founders and investors.
  • Pro-rata rights are valuable for early stage investors as they allow them to continue investing in a company without being diluted, but later stage investors may pressure founders to cut back on these rights.
  • Be firm and reasonable with partners when negotiating, but make sure to remind them of the agreed terms and be understanding if they can't fulfill them.
  • Investors can be either "dumb money" or "smart money", and both can be good or bad depending on their ability to be helpful and follow certain rules.
  • Investors who are willing to build a good relationship and help companies succeed are more valuable than those who are famous or well-known.
• 💰
  32:51

  Seed stage companies should update their revenue, growth, burned cash, and balance every month, and once a company has raised over $4 million, it is advised to form a board and write good investor updates.

  • Seed stage companies usually do not have external board members, but once a company has raised over $4 million, it is advised to form a board, and for investor updates, there is an essay called "Investor Updates" that outlines how to write a good one.
  • A seed stage company should have revenue, growth, burned cash, balance, and update their progress every month.
  • Investors should encourage good founder behavior, but bad investor behavior can harm a company's reputation, although reputational systems are not perfect and there may always be a few bad apples.
  • Founders may feel pressured to take on investors who hold themselves up as brilliant angels, but Y Combinator has the power to protect their companies from such behavior.
  • Losing pro-rata rights is a bad thing for investors because it spreads a negative reputation and information asymmetry no longer exists.
• 💰
  39:19

  Be aware of unfair investing situations, negotiate wisely, and be honest in recommendations.

  • Fight against unfair situations in investing, but know your limits and don't be penny wise and pound foolish.
  • Contractual pro-rata is important for investors, and taking it away is not a good practice.
  • When negotiating investment terms, it's important to know what is standard, what you deserve, and how much leverage you have, as pushing too far can harm your reputation in the long run.
  • Conflicts between founders and investors are rare, but if an investor asks for a recommendation to a company you're not invested in, it's best to be honest and only recommend companies you have invested in.
  • Be honest with people about the type of recommendation or introduction you can provide and say no if necessary.
• 💰
  46:28

  Early stage investors should not ask for detailed financial projections as it is not helpful in making investment decisions.

  • Investors may ask for a cap table, which is pertinent information, but due diligence on founder agreements may not have a significant impact on investment decisions.
  • Early stage investors should not ask for detailed financial projections as it is not helpful in making investment decisions.

Q&A

• What is the most important aspect of being a great angel investor?

  Being a good investor and acting appropriately when things happen.

• Why is having a good reputation important for angel investors?

  Having a good reputation is more important in startups as it allows access to good opportunities.

• How can investors demonstrate their value to founders?

  Investors can demonstrate their value by sourcing deals, meeting and negotiating with founders, closing deals, and maintaining ongoing relationships with companies.

• How should investors approach meetings with founders?

  Investors should respect the founder's time, keep the meeting short, and offer to pay for coffee or a meal.

• What should investors avoid when investing in startups?

  Investors should avoid making promises they can't keep and should build a good ongoing relationship with companies.