Airbnb, My $1 Billion Lesson

Airbnb, My $1 Billion Lesson

  I discovered Airbnb on August 12, 2008 and six weeks later gave them a term sheet for their entire seed round. But in the (literal) final hour, it fell apart. It’s an unusual story and one of several key experiences that shaped my approach to investing in startups. Over the last seven years, I’ve discovered and invested very early in a handful of highly valuable companies (Wish, Lyft, Zenpayroll, Postmates, AngelList, Plated, Styleseat, Klout, etc.) as well as plenty of disasters. But Airbnb taught me some of the most distinct lessons as an investor. Brian Chesky recently wrote about his 7 Rejections — feedback from a small set of the many investors who turned him down. This is my story as the one guy who didn’t. I was one of the few investors who actively pursued this deal from August through October 2008, and the only among them to agree on a term sheet. Every deal, every interaction with a founder teaches you something and I’ve consistently revisited my performance, my judgements, my biases, my filters and my approach to investing. Like most of you I’m highly critical of myself — this may not be self-evident, but I constantly question myself and engage in my own personal creative destruction. I question my beliefs and my tactics; I tear myself down and try to figure out what I’m missing, what I’m doing poorly, where I’m letting people down. And then I build myself back up again. On a tactical level, I repeat this creative destruction almost weekly as I analyze an individual deal; on an operational level I do it every few months...
The One-Two Punch: What We Invest In

The One-Two Punch: What We Invest In

  Our task at Arena is to back the most exceptional entrepreneurs and support their companies through the earliest stages. For us to most effectively do that though, there’s a lot of work that goes into filtering which investments we want to make and can add value to. A small number are perfect fits, but many others – while potentially promising – just aren’t the right match. Whenever I take my first look at startups, I use a “one-two punch” to quickly weed out most of them so I can focus on the right ones. The first punch is my set of “No Go” rules to quickly and ruthlessly kill deals that will waste both my time and the entrepreneur’s because they are objectively not fit for our strategy. The second punch is to filter the remaining ones through the framework of what we aim to invest in more philosophically – it takes more thought but lets us eliminate another 50% to 75%. Those that survive become official “Opportunities” in our pipeline that we sink our teeth into to reach a final investment decision (see “5 Questions I Ask Before Investing”). Mark Suster wrote a good post last week encouraging people to focus their time at the bottom of the funnel. To do so, you need to build your own rules and processes that filter the top efficiently. I’m shocked by the number of investors who don’t have No Go rules and end up wasting a lot of time pursuing false leads. Basic Rules So to lay them out publicly, these are the basic rules of our investment strategy at Arena Ventures. Deals...
5 Questions I Ask Before Investing

5 Questions I Ask Before Investing

Once you dive into investing you can quickly become buried in a tornado of potential deals – the “Dealnado,” as I call it. The Dealnado is a swirling, twisting mass of co-investors, scammers, screaming founders, substandard deals, shiny objects and little baby unicorns buried somewhere inside the chaos. To sort through this mess you need a methodology to filter the gold from the dirt. This is my framework for picking the best startups, crafted from 7 years of angel investing (and a decade before that of operational experience and research into people, business and conflict). It’s comprised of 5 simple but critical questions.   #1) Would I start a company with them? This question forces me to think about the quality of the people as well as the founder dynamics. When I sit across from a team of founders I ask myself “Would I join them?”, “Am I inspired by them?”, “Are these the brilliant, crafty leaders I can follow to glory?”. In this context, I’m not thinking like an investor, or a leader, but rather like a prospective early employee. I try to understand their character, their values, their capabilities, and their passions. A common mistake we make as investors – particularly investors who’ve previously built companies – is asking “Could I lead this team?” or “Could I be a cofounder?” That’s the wrong approach. As investors we can’t actually lead these teams and we can’t make up for major deficiencies– it’s their business and if captains are weak the whole ship is going to sink. When I met Melody McCloskey and Dan Levine (founders of Styleseat) in...
The 4 Ways Investors Find Great Startups

The 4 Ways Investors Find Great Startups

Investing in seed stage startups can be exhilarating and highly lucrative, but it can also be incredibly risky and time consuming. Identifying the most promising new companies requires a lot of cutting through the weeds – I interact in one way or another with well over 2,000 entrepreneurs a year and take meetings with over 200 of them, all in the process of finding just the 15 I’ll invest in. When I first began investing, I wasted a lot of time. Tracking down the most promising entrepreneurs was a crapshoot and I didn’t know where to start. But as I developed as an angel investor over the last 8 years however, and now in running Arena Ventures, I’ve recognized the pattern of where my investments come from…where I get the highest ROI on my time. There are 4 activities you can do as an investor to get to the good deals most quickly: hunting, trapping, farming, and trading. #1) Hunting Hunting is outbound work – hustling at events and parties, scouting for products online, reading and reaching out to people. You go anywhere you can to find great people. You don’t have a specific target in mind, you’re simply looking for unique, brilliant founders. When you first start investing this will probably be the majority of your time until you have a reputation, network and better idea of what you want to invest in. A good example of hunting is Klout: I found the earliest version of Klout in 2009 while scanning Twitter posts and then tracked them down via friends in Boulder who knew Joe Fernandez. I pursued Joe...