A few years ago, I had the most valuable orange juice of my life. It cost me $1.50. It was valuable because I drank it while I spoke with Bob Bozeman. I've been in the start-up, angel, vc world for about 5 years now.
I met with Bob a few years ago and learned a bit about how he and a 3 others started The Angel Investors, LP. The information that's available on the site stuns me every time I look at it. They were first investors in a few well known world changers (most notably Google) and a number of lesser known investor pleasers.
I am still a little confused as to why their story isn't better known. But since it's not, the interview focused, relatively, more on his business philosophies. What's great about Bob s that those philosophies are directly related to a way of life that I vibe with (the best way I can describe it is fearless humility).
I love entrepreneurs and have a rule that I work/interact with people I like. I like Bob.
Bob Bozeman enters The No Blah-g Zone.
Why was The Angel Investors (“TAI”), LP so successful?
A bit of history first, when they formed the funds, they looked to invest in a wide variety of internet oriented start-up’s. They wanted coverage over a wide spectrum of opportunities because they believed that was the best for the LP’s.
But there were plenty of other groups that had the same general plan, wide coverage on the internet which seemed then (and still now) a great platform to create value unseen even in the eyes and minds of the best abstract entrepreneurial forces of the day. And, frankly, some of these groups delivered attractive IRR’s to their LP’s.
The difference with the Angel Investors was they delivered venture level IRR because they not only hit with Hank Aaron power (Google, Paypal) but also with Tony Gwynn-like consistency (check out www.svangel.com).
TAI was legally organized as a Mutual Fund or quasi-VC, however they were first money in on deals. What that meant, interestingly, is that they acted as angels, but were accountable to LP’s. Which meant (to Venture-ize Mr. Buffett): Rule #1 was deliver venture level IRR and Rule #2 was don’t forget rule #1.
Bob’s freely admits he is a Buffett believer, but how could he apply Mr. Buffett’s wisdom that included:
Wide diversification is only required when investors do not understand what they are doing.
Maybe that applied to the numerous other venture investors who were placing numerous bets, delivering IRR from one or two big IPO winners. But it didn’t apply to the Angel Investors who delivered competitive or even superior IRR from a few big IPO winners AND numerous other winners that many other first money in investors missed.
How could Bob apply Mr. Buffett’s wisdom that included:
Our favorite holding period is forever
Easy, both of these statements make sense for Berkshire Hathaway. Bob made them made Mr. Buffett’s approach make sense in venture investing.
At Angel Investors, LP, as first money investors focused on a wide variety of internet related start-ups, it worked like this:
favored judgment to rules: First and foremost Bob told me that the
world is always changing (interesting, but not particularly
insighful!!!). He said, because it’s always changing, as soon as a rule
is codified, it is by definition out of date (to me, that’s
insightful). In my experience, the start-up world is like change on
steroids (to me that’s humorous and insightful….but that’s me).
In the start-up world, judgment is CRITICAL, because often even the strongest of outdated rules aren’t relevant because the entity itself is fundamentally about re-setting the rules. Let’s face it however, rules are nice because they can make the decision faster and easier, but not necessarily better.
- They had a small group who
made decisions: They had a small group of individuals who made the
investment decision. Often groups of first money investors (often 8+
investors) miss the boat while they try to herd cats to an ever
shifting finish line. TAI’s team of four made the decision
(more or less). They believed that with a smaller group there was “less
opportunity to make the wrong decision”….priceless.
Typically, successfully raising first money in is an exercise as much in consensus building as anything else. That’s tough when 8+ individuals are taking out their own checkbook to write the investment check. Also, when they are writing personal checks, emotions more frequently come into play.
Emotions often serve to delay recognition of value. During that time, it just gave TAI (to loosely quote Mr. Buffett) more time to buy more of a good thing at a lower price.
TAI had 4, working at the behest of the LP’s and a comparatively swifter decision process.
used sensible evaluation filters: In venture capital at all stages,
investment groups have criteria that they use to choose deals to look
Angel groups, particularly these days, are placing a premium on CEO’s who’ve “done it before”. That leaves a lot of start-ups in the cold.
Or a VC will focus on finding start-ups that as Bob said will “change the world”, which usually refers to some type of revenue projection that starts with a “b” and ends with an “illions”. There just aren’t that many world changers.
Filters like these and others limit the number of deals you might look at. The most commonly used filter for TAI….judgment.
Bob said they looked for the “raw diamonds”. Raw diamonds apparently aren’t very beautiful. (I’ll take Bob’s word on that, after all his group invested in Google, I just search with Google.) Ah, but Bob added, beauty is in the eye of the beholder. They worried less about financing details and even, to a certain extent, financial projections. Let’s face it, the only thing we know about any financial projections is that every number is wrong.
They were looking for innovators with great products (not too novel). However, Bob added that they gravitated towards the more abstract thinkers. These abstract thinkers create something that returns value that he or she couldn’t even imagine.
Now this certainly doesn’t lend itself to a filtering model that has deals trickling in, they evaluated a lot of deals. But with the swift decision making process noted above they could handle it.
- They sourced great Board Members: You may
be thinking…Tim get serious, abstract thinkers as attractive management
teams? Come on, a quality management team is critical for successful
venture investing. I agree, a quality TEAM is critical, but that
doesn’t mean just the management team.
Bob noted that a common weakness in start-ups is their Board of Directors.
I frequently encounter start-ups that:
- Have a Board filled with recognizable names of people that rarely meet and don’t help.
- Have a Board filled with names of people with skill sets and/or contacts already on the management team (birds of feather I guess) that rarely meet and don’t help.
- Don’t have a board at all.
Bob told me that they spent a great deal of time sourcing board members for their portfolio companies. They invested in a wide variety of internet oriented companies and due to shear numbers Bob and his team did not sit on the Boards.
They used their network to source and place Board Members who committed time and energy to oversight. So, for example, it wasn’t critical that the CEO and team had “previous” experience.
Bob noted that at that time, CEO’s commonly measured their success by whether or not they had taken a company public (a product somewhat, of the bubble). But previous experience in that light wasn’t critical (it’s nice but not critical).It was critical that they had relevant experience. Strong Board Members turned good management teams of abstract thinkers into great teams.
5. They partnered with great follow-on investors: Bob told me that they made sure that they had a reliable network of strong, follow-on VC Investors. Often in venture investing, VC’s and first money investors are at odds.
Angels are wary of being crammed down. Cramming down means more or less, the start-up is out of money and the VC has the money. If the start-up wants the money (and it needs it to survive) they basically have to accept whatever terms they’re given. Net result, the VC’s cram a deal down the company’s throat where they take a huge hunk of equity, leaving a few leftovers for the early investors.
Bob said that they identified VC’s that had a strong track record of success. That track record didn’t necessarily focus on IPO’s. Rather, it focused on their ability to monetize companies (which includes IPO’s and acquisitions).
In summary, Bob and team:
- Applied sensible filters for a wide variety of internet oriented start-ups as first money investor.
- Had a small investment decision making group that relied heavily on judgment not rules
When they invested, Bob and team:
- Sourced Board members to fill in the gaps of the team and provide active oversight of the company
- Identified and partnered with strong follow on VC investors
The website has information on a portion of the portfolios. Bob told me, frankly, that the site is not a complete list of the deals. And that has been a source of some friction. VC’s challenge the model based on the published results. Of course these same VC’s virtually never publish their results….period.
In my experience in the start-up investing world the track records is at a minimum competitive. In my opinion I think the track record is unprecedented.
I think it’s unprecedented simply because Bob and his team delivered IRR to the LP’s with IPO’s (which by the time Google went public, for example, the bubble had long since burst) AND the acquisitions.
I’m not suggesting that Bob’s way was “the” way (neither is he by the way). I’m suggesting it is “a” way, that happened to have been different, that happened to also have been VERY successful.
Oh, and please also note on the website that THEY were acquired Credit Suisse First Boston.
What successful start-up(s) that you passed on do you still think about?
“mySimon was one of the first deals I looked at and it closed before I acted.” Bob referred to a common first deal promise angels make to themselves: their first deal would be a success. It was, but he wasn’t in it.
TAI also passed on salesforce.com, interestingly because of valuation. At the time, TAI had committed to its LP’s to invest in lower valuation deals. Which, for me, is an interesting example of how looking at one element like that can be somewhat distracting.
Bob told me how he sometimes thinks about valuation buckets (for example, $1MM, $3MM and $5MM, etc.) and then just does the math to determine what it needs to be sold at to provide the desired multiple for the LP’s. Based on what start-ups have accomplished they may move from up valuation buckets. So, for example:
- $1MM: Company A has a completed product
- $2MM: Company A has one paying customer
- $5MM: Company A has five paying customers
The calculations obviously are rough. But the approach clearly rewards milestones with value. It gets tough when the entrepreneur thinks the buckets actually should be $10MM, $20MM and $50MM.
Bob also brought up a point that resonates with me. The best valuation is when everyone is happy. If anyone is unhappy with valuation, it will affect the value of the effort in some negative way over time.
What unsuccessful start-up that you invested in are you most grateful for?
He answered the question by first defining unsuccessful: the deal hurt the LP’s (is that focus or what?). The start-up was The Feed Room which was a broadband news network and a top video streamer. He’s grateful for it because it was where he met Jon Klein who in 2004 was named President of CNN/U.S.
Bob told me that even though the investment didn’t work out, the relationship did. He likes Jon first and foremost as a person but also as a professional.
This is one of the reasons that I wanted to share stories of my network. That’s a lesson worth learning. I know there are tons of successful people out there, but why work with jerks? When I’ve failed in endeavors with others, it does bring out there truest of colors. And relationships that endure failure can be some of the most rewarding.
What aspect of the start-up investment world would you like to change?
He told me that he would like to see empathy used more often as a means to gain insight. He understands that people who are best at it exercise a level of attention that doesn’t scale very well. But if you can start with empathy and understanding, you can thrive in this environment which is not simple and that’s what makes it exciting.
Sharing your expertise is what’s great about business. And for Bob it’s most exciting in business when you “bring everything you learn to bear”.
Why do investors continue to make the same mistakes?
My friend Mark Calvey at the San Francisco Business Times shared with me info from the WSJ on more people (Silicon Valley and elsewhere) are becoming angel investors. In my experience over the last several years, I’ve seen investors of all times making the same mistakes in their decisions.
Bob believes that part of that has to do with a combination of ego and coverage. The public messages often sent out by writers (….am I one of them???) ends up focusing on profiles, which touches the ego, a very powerful force. Most messages that are sent out thinking of the public eye rather than considering the public need if you will.
Interestingly, I think this may have, in some way, manifested itself with Bob’s mySimon experience. If you look at the way much of Silicon Valley processes deals, you’ll find that they are still making mistakes like this over and over. In my experience, ego often does play a big role in venture investing at all stages. When it does, it doesn’t help (assuming your goal is to make money on the investment).
I think this is another reason why TAI was so successful, comparatively. I told Bob that I think he could do TAI again and it would work. He believes that if it were to be done it would probably be more effective at a later stage in the process. I believe that there are still plenty of the same mistake conditions in early stage investing today that he told me about in TAI’s days.
If you could choose any 3 execs to start a company try to defeat Microsoft, who would it be?
I should say that Bob and I have nothing against Microsoft. I think Bill Gates loves what he does. Bob has nothing against Microsoft either. I only chose Microsoft because they are so huge and established.
I loved how after clearing that up, Bob just got right into how he would do it, he didn’t even bring up that it couldn’t be done.
He said that he would actually not start one business with 3 executives, but rather 3 separate companies to attack 3 fronts. He thinks that a start-up trying to topple big companies on its own is more difficult than it needs to be. He liked the concept of 3 separate companies because each one could secure model acceptance on what they are building.
For example, he would call on Brad Silverberg who worked for Microsoft for most of the 1990’s and created the original area in Microsoft that developed Windows. He would get Brand and a couple of others and fold them in eventually as they succeeded in each of their areas.
Anything is possible (multiple choice):
- I disagree with that statement
- I think that is true
- I believe that is true
- I know that is true
As he thought about this, Bob first identified when the statement fails. For example, everyone dies; therefore not dying is not possible. Beyond absolutes like that, anything is possible.
Interestingly, he noted that when we try to think of what could be possible in the context of what is possible right now, we are narrowing our viewpoint. At the same time, goals drive life. So, for example, in the days before a compiler (which essentially is a computer language translator to help old code already written talk to new code being utilized) things were known not to be possible.
When the compiler was invented, the things that were known not to be possible were addressed AND things never considered were brought into being. So, a compiler, more or less, helped companies to provide data over the internet for real estate. You can find data on the value of land, last selling price, etc. (written in old code) over the internet by looking at maps on the internet (written in new code). It’s called “mashing-up” the data (which sounds more like a Sex Pistols concert than software engineering).
Bottom line, the inventor of the compiler could never have foreseen the application of the tool but when the tool was provided someone saw it was possible. He likes the idea of programmers putting out hunks of code to be used by others. It at least broadens the possibilities.
Where and when did you learn to be so real?
Bob is humble and as approachable as they come. And, as noted before, humility is not always an assumed character trait in Silicon Valley. Even though he’s humble, when I talk to/email him his indomitable spirit effervesces.
“I was born in El Paso, Texas and am proud to be a Texan.” He feels that being a Texan he is linked to the American psyche by the American spirit. His Dad was one of the first people to introduce computers into the department stores in the 1950’s. Before then, the computer business didn’t really even exist. As such, the computer business was under-financed, but his Dad still succeeded in the endeavor.
He learned lessons from his entrepreneurial father on what running a business meant in creative ways as well. When Bob was a child, when he did the dishes, his dad would offer him 25 cents (like most other kids). However, unlike other kids, his dad told him that he would give him the money for the work he did at the end of each week when Bob presented him with a bill.
Bob studied computer science like his dad. But his dad also realized the value of knowing about how a business operates and wanted to teach him about those other aspects. It obviously worked.
What advice would you give to my 5 year old daughter?
Bob would tell Zoe that her life could be looked at in 3 acts, if you will:
- Preparing for her life: Learning about things and trying to find that which interests her and deciding those things on her own terms.
in her life: Identify goals explicitly and explain them. He emphasized
that she should break it out into steps. For example, deciding she
wants to be president of a company one day it seems too “big”.
But, if you break it down, you can say well lot’s of vice presidents become presidents. How do I become a vice president.
Well, lot’s of directors and managers become vice presidents. How do I become a director or manager? And so on, until you get to a point where you can see a definitive step today that will get you where you want to go.
And when you go after it, he says you should work hard at it. Knowing that today is mapped to the tomorrow you want, the hard work has broader meaning.
- Relaxing in your life: Think about what you might want to do after you achieve. You can enjoy the fruits of your success and realize that you can relax. He said often times people coming to this phase haven’t thought this through and have difficulty switching out of the achieve gear. I’ve found if they haven’t thought about it they end up doing what everyone else is doing, not what they really want to do.
In Bob’s case, he’s clearly in Act 3. A few of his passions right now: cooking and learning to play the banjo, and he loves it! For me, Bob’s story and endeavors are a model of how Silicon Valley venture investing can and should work.
I’m blessed to have someone like Bob in my life and am thrilled to have shared him with you.