May 14, 2020

Reaching out to angel investors having a tiny network: recommendations by Chris Lu, angel investor with multiple investments across the US and Canada.

Reaching out to angel investors having a tiny network: recommendations by Chris Lu, angel investor with multiple investments across the US and Canada.

In this episode Chris Lu, angel investor and investor at Employee Stock Option Fund gives a lot of recommendations for early stage founders - how can they reach out to angel investors if they don't have a good network, what books on fundraising should they read prior to raising funding and what he as an angel investor likes to see in the startup.

In this episode Chris Lu, angel investor and investor at Employee Stock Option Fund gives a lot of recommendations for early stage founders - how can they reach out to angel investors if they don't have a good network, what books on fundraising should they read prior to raising funding and what he as an angel investor likes to see in the startup. 

Book recommendation by Chris: building a business culture - https://www.amazon.com/What-You-Do-Who-Are-ebook/dp/B07NVN4QCM

Invest in Konstantin Dubovitskiy through an IPO: https://humanipo.app/id/konstantin.dubovitskiy

Below the description you can find the transcript of the episode and actually search it for things that you want to learn! 

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Transcript

This is Fundraising Radio and today as a guest speaker we have Chris Lu, investor at Employee Stock Option Fund, and angel investor. And in this episode we'll talk about what an Employee Stock Option Fund is, what do they invest in, how do they invest? Because their investment thesis is just unique and their approach to investing is just unique. And we'll also talk about Chris' personal preference into angel investing and he will give some recommendations on reaching out to other angel investors.

So Chris, let's kick off by you giving us some background on yourself and on the employee stock option fund. Thank you Konstantin. Thanks for having me on.
Yeah I joined the employee stock option fund in 2015 so I've been there for almost five years now.
on the side I started angel investing about two to three years ago.

The employee stock option fund was started by a farmer metric capitalist named Scott shoe and he, used to do early stage investing and he saw a lot of people leaving startups at pitches and letting their options just expire and he knew the companies are doing well.

on a one off basis, he would help fund the exercise and then split the future upside. The ESO fund, as we call it, has that exact same model today.
we effectively help employees exercise, cover taxes, and then split any future upside. However in my time with the ESL fan, I've interacted with, hundreds of people.

out of those hundreds of people, a good number of them actually became founders themselves.

They may have been an early employee, Stripe, Airbnb or one of those really hot companies and then they decided to start their own company down the line.

that's how I got into angel investing at the same exact time.

over time I've actually recognized a couple patterns and done a lot of research into exactly how, fundraising works and because you're so fun looks at later stage.

Yeah.

angel investing looks at earlier stage.

I also see a difference between the two and I'm happy to talk about it more.

Sure.

Just clarifying for some of my listeners that stock options, some people confuse them with just, shares that you just get after you work at the company.

Usually employees are compensated with stock options, which means that you can buy shares of the company, usually pretty big discount if you are an early employee.

I hope that how ACL fund works.
here I'll actually like to jump straight into the discussion of fundraising, from Angelo investors.

the key factor here is often getting a warm introduction and main founders just don't have, many paths to investors.

what's your recommendation to those founders who don't have a direct path to angel investors?

Yeah, that's a great question.
I see fundraising very much like a sales funnel.

you don't know the customers that you're going to sell into, how do you sell to those customers? And I think what works best is finding your ideal customers first.

for example, what does that translate to for startup funding? If you are a FinTech firm, you probably should not be pitching it to a direct to consumer, e-commerce venture fund, just because it's not even their market, it's not their expertise.

they will look at it and they'll just ignore you because it's clear that you don't know anything about them.

you're selling yourself venture funding, especially seed and angel money, you're very much selling yourself, your idea, the team and your vision.

you want to find the people who would actually believe in your vision and your team.

I've seen a lot of deals work, after some discussions and after the VCs and angels understand, your mindset and they're really excited about the space and they think that you have some unique insight.

If you don't have those, you, it's really hard to sell yourself as a differentiated product, which you can still do.

back to your point about not having a warm intro, I think once your customer, you can customize a cold email or something that really hits a tone with them.

I get a lot of inbounds and I could tell immediately if an email is a mass email where they may even spell my name wrong or if it's a very directed, they looked at what I invest in, they, maybe listened to or read some of my blog posts where they really understand what's going on.

for example, let me give you a quick one.

There's a friend of mine, his name's Jeff Chang.

He's a, pretty good angel, from Pinterest.

he was an early Pinterest growth engineer and he basically started a blog post and he talks about the one metric he cares about the most to determine product market fit.

he has a full blog post about that.

If you're trying to pitch him and you're trying to show him that, Hey, my metrics look really good, you should send him a direct email, first thing in the email, the chart that he wants and the metric that he wants.

Cause as soon as he looks at it, that will pique his interest.
And that's how you start the conversation.
Whoa, this company looks like it has some serious traction.
Otherwise if you send them an email talking about your vision and your team and how, it just doesn't fit here. Invest is very much based on what he knows and he knows growth very well.

if you're not growing, it's going to be really hard to convince him, that you're a good fit with him with a cold email other than cold emails and very, direct messaging I would say.

You have to spend the time networking.
Some VCs and some angels see their network as the first hurdle.

If you can't get a warm intro to them, why should they invest? So how do you go about that? Well, there's a bunch of ways these days.

There's Twitter and the Twitter community extremely active and very vocal. You can build a brand for yourself there.
that's one way a lot of people have been able to find race.
other things are sub stacks.

some people are writing blog posts where they share their thoughts and they get followed because it's pretty unique and this is some insight and then suddenly investors are quite interested as well.

Ultimately a lot of businesses exercise of creativity.

one way that this creativity is expressed is in how you deal with situations like this right now.

It may be fundraising in the future, it may be sales and the future you don't, it might be hiring, you don't know.

every single process is an exercise in creativity and it's a chance for you to really show that off.

Right, right.

I think you mentioned, Twitter.

Twitter is really a great source of for networking.

I've been recommended to go on Twitter and be more active on Twitter so many times by so many different people that I can count.

I still don't do this because I just, I just don't like Twitter.
I'm like, nah, I'll not do this, but I still would recommend others to try Twitter out.
if you don't have this really strong biases idea towards Twitter, then you should definitely try it out. There are smart people out, there are some smart thoughts out there, so definitely try it out.
Great advice, Chris.

other than those methods of, increasing your network and gain warm intros to investors are also different tools like, signal dot NFX do anything else like signal dot NFX where you can actually get connection to the investor through this?

Yeah, there's a lot of different groups out there that are trying to solve this issue.
I am a big believer that the universe of fundable startups is much bigger than what is in Silicon Valley. the main issue is you have to find the right angels or right investors for you.
So each business is different.

I would suggest you really understand who out there is actually investing in your kind of company.

for example, some angels, they only invest in Y Combinator companies for example.

if you're not a YC company, it may not be worth your time to even try to reach out and pitch to them.

Other people may only invest in their city.

so, if you're a different city, it's not worth it.

Ultimately there is a large universe of potential, angels and investors.

You just need to find few that really believe in your vision and your market and can really help you out and get you to the next level.

recently there has been a couple of Slack groups that have been doing around, for very specific, angel investing. some of them may have a focus on a specific topic.

Some of them may have focused on specific geographies and you just got to do your research to see which one works best for you.

right, right.

On a personal note, I would like to mention a software called investor intelligence dot.

IO or.ai.

I'm not quite sure which hand it has, but just Google investor intelligence and it probably is going to show up.

it's a pre useful tool.

just to research, investors and also of course, Crunchbase.

Crunchbase is wonderful, one of the best out there.

if you have never used Crunchbase, you should definitely take a look at this.

here I went to ask you a follow up question when you just said, and you said that you don't believe that's all the startups.

Basically we are based in San Francisco, which I definitely believe as a person who believes in Los Angeles. you personally, you leave nearby San Francisco.
So do you,
do you prefer investing nearby San Francisco or do you invest throughout the whole us?

That's a good question.
earlier stage investors tend to invest everywhere.
the later you go and the more hands on the investors are, the closer they typically invest. otherwise they would feel like they need to travel to you in order to help you out.

For me personally, I am geography, but I don't really care about geography.

I can say I have not made any investments outside of the U S and Canada, but anywhere in the U S and Canada is fine for me.

when you're investing outside of the U S there's a lot of other considerations, I don't know international law as well.

you know, securities laws, vary from country.

I'm just very familiar with the U S system, which is why I only invest in the U S however I have investments in New York and Houston.

I think even Austin and California there, I have my investments are all over the place in the U S geography wise. But do you,

are you a generalist investor or are you a, I keep forgetting what's the term or are you a market specific field specific investors, something like that? Are you field specific?

I am more of a generalist.

however, I don't invest in things that I don't know very well.

I'm not very good at biotech, for example.

the only time I may invest in some biotech company would be if I'm really good friends with the founder and I know them and I trust their judgment and then it's just me trying to support them.

Otherwise my main focus would be around SAS, both consumer and B to D, SAS.

I really try to invest in people, where I have worked with them or I see their thinking or have, I follow them for a while.

I think that they really have some unique insight into what they're trying to solve and they believe something deeply that everyone else doesn't quite believe yet.

Excellent.
Got it.
Got it.
That's that's really interesting.
I love more generalist investor because I am a kind of one myself. So let's talk about what, uh,

how much time should you spend per,

that's your, so, each speaker of mine who was giving advice on reaching out to investors, nearly all of them said that you just, you have to do homework on ancient Vester read their blog, paws, see what they like, see what they don't like.

and it takes a lot of time.

what'd you think is the normal amount that you should spend per investment? That's a great question.
I'm a big believer in like the 80, 20 rule and fundraising.
It may even be, 10 90 or something like that, 90 10.

the reason is you only need to get a few people to say yes.

for those people to say yes, you should spend a lot more time on the people who have a high probability of saying yes.

I believe Brad Feld has written about this quite a bit and he has this great book on fundraising, on startups in general, actually.

he focuses on, there's three answers a VC will give you or angel will give you.

it's a yes, it's a no and then it's a drawn out.

No the most dangerous of these is the drawn out no.

you had to become very good at recognizing that the investors who are really excited if won in under deal, they will move quickly.

They will move mountains to really get this thing done.
They'll let me email you on the weekends.
They will, you know, constantly follow up.
They'll keep you updated on their process and how quickly they're moving and how they can help. the, very good VCs who give a quick note, they are amazing as well.

They may just say, Hey, this isn't really my space.

Or Hey, we're invested in a competitor here.

Or Hey, this is what we don't really see eye to eye on.

they'll give you a quick no, and that is great as a founder just because you're not going to waste more time.

The really dangerous one is all drawn out.

No.

they may be like, Oh this is kind of interesting.

Hey can you send over some financial models? Can you send over a, your pitch deck again and can you change this or can you answer these questions?

ultimately a lot of founders end up spending a lot of time and it's kind of wasted because eventually the answer is going to be no.

I don't have exact really good advice on how do you identify between a yes and a drawn out no.

what I can say is if they're not extremely excited and if not moving quickly, you probably shouldn't spend too much time on them.

You could always turn that drawn out.

No potentially into a yes.

it's only after you have a lot of traction and fundraising, your first investor should be very excited.

this is a familiar scenario where you may have talked to an investor and then they may have been like, this is kind of interesting and they're a, maybe don't spend too much time on them.

You go find another investor.

This investor is really excited.

They're like, Oh, I want to take the entire round.

you're like, what, I'll give you like 70% of the round and then I want 30% for other strategic angels or other investors.

you go back to that first investor and say, Hey, we're already at like, 70% we only have left, are you in? And at that point, the pressure is on them.

They can't do a drawn out no anymore.

If they want it, they go on and now if they don't want it, they're going to miss the deal.

a lot more pressure is on the investor and you as a founder in a much better position.

I would say spend almost all your time at the very early stages of fundraising.

I'm getting those really excited investors onboard.

Don't fall for the VC or angel trick of like, Oh, this is kind of interesting.

What do you think about this? What do you think about that? And it feels more like they're on the fence.

If they're really excited and they really want to meet you and they'll try to make multiple meetings, they will get to their investment criteria yet.

it's also really good to ask, Hey, what does it take to make a decision for angels? Usually it's just them making a decision.

They may say, I sleep on it for one day, or I write an investment memo or something along those lines. you use that criteria to judge how well am I compared to what they would invest in.
if it seems like they're really excited, they're moving quickly, spend all your time closing those people. Okay.

That's great advice.
just to clarify, you mentioned in the beginning of your answer, the 90 10 rule that you're using. What what is that? Oh yeah.

80 20 says that, you should spend 80% of your time on the 20% that matters.

Right.

And, it's just like a, it's called Pareto's law and it's a rough, number set, but they, it usually comes up quite a bit.

in sales, you will end up wasting like 80% on like 12 your time on like 20% of your customers or potential customers and you just have to cut those out.

in this case, you should really aim to spend the majority of your time on the investors who are interested and willing to close and it may be very small.

you just spend 90% of your time on the 10% of VCs or angels who are extremely excited. Absolutely.
That's that's a good point.
shear we're moving on to how you personally invest.

how do you source your UK's where do you find those investment opportunities? That's a great question.

early beyond, as a really new angel, you have to invest in your own network, just because ultimately you don't have much of an advantage.

I personally knew I did not have much of an advantage early on, so I invested in friends effectively.
the, I had a couple childhood friends who started companies and those were literally my first investments. After that, I jumped into more of a pre-vetted community.
I looked at a lot of Y Combinator startups for example, and we made a few investments out of that.

beyond that, you start investing, you start getting introed to friend of friends or at one point I was making a few crypto investments and I had one crypto investment and they introduced me to two of their best customers who were raising and you really understand like what is going on and you basically can see the entire vision of these, groups, I guess playing out.

it's like, Oh, I want in there.

I invested in, a couple of their top customers as well.

these days I am more, open to investing in a less traditional like, friends and network deals.

I think I have a, but there is a caveat.

It has to be in a space that I really feel passionate about or that I think I know a lot about.

currently, I've been thinking a lot about remote work, about how to organize companies or any type of organization and how remote work and these longterm, organizations kind of work together.

What about it is extremely advantageous and then what tooling needs to exist in order for this to all work? So, if it's a cold email about, something that I don't really know very well, like let's call it a direct to consumer, makeup, I wouldn't be the right investor.

I would not make that investment unless it was a close friend of mine who I really trust and who I really believe in is running by company.

Otherwise I'm looking for, someone who has a lot of unique insight into the space that either thinking about if they can even surprise me with their insight.

I've done a lot of thinking that's a good sign.

If they could push my thinking beyond where it is, that really excites me.

if I agree with their vision, I'm probably so, yeah, it does change quite a bit.

right now I'm really thinking about the future of work.

That's really interesting that the topic is really interesting, especially now when no one knows how many people will actually return to the offices after the pandemic is over.

I think that's actually, you chose an exciting field to look in. here we're moving on to the last question then we'll wrap it up.

the last question that I started asking reasonably in my speakers is something like culture actions to our listeners right now.

what's one thing do you think that was listeners should do once this episode is over? So for example, maybe they should, I know a full couple investors on, Twitter and just, start comments in their fields.

I mean their feeds were I know first cream and a Twitter account at all or was that one thing that you want them to do right now? that's a great question.

all those are great, but I would like all the founders for our listeners to really think longer term.

I'd read this book recently, it's called what you do is who you are by Ben Horowitz and in it really explains that one line, what you do is who you are.

if you're going to do a startup, these journeys are long. It's eight to 10 years.
It becomes a,
you pour your blood, sweat, tears into it.

And I want all.

the founders listening to really look internally into themselves and really feel like this is what they want to do because eventually what you do is who you become.

the journey of a startup very much is a journey of self discovery, of self-realization in many ways. where this organization that you're building is almost an extension of yourself.

really spend the time, it doesn't have to be very long, but just really spend the time to make sure you have the conviction to do what you're doing and if it doesn't fit, it's okay.

There are going to be things out there, other things out there. It's always easy to move on.

I would love to see more founders who are really excited about what they do and each extremely excited, longterm excited founder inspires multiple other founders.

it's not an easy ask.

It's not something that it's like, a call to action that's really easy to do.

But I think that's really important.

Don't get caught up in the rush to become a startup founder.

Don't get caught up in the rush to try to do anything and you do the first thing that you can think of.

Really spend the time understanding who you are and what you really want to bring into the world.

Cause that will make you more successful longterm and it will make you happier and it'll all just work a lot easier.

When everything is aligned, everything becomes a lot easier.

The excitement is tangible, all, investors get more excited, your customers become excited and you feel really good about it.

All long answer, but hopefully everyone can do that more. Yeah, definitely.
My advice was much shorter and easier to accomplish. Important too.

Very important too.
Yeah.
Yeah.
I'm a more of a believer in small steps.
I'm trying not to think like extra longterm book.

You mentioned something really important, which means that you really have to understand that third life has really tough and it's fair lawn for some of my previous speaker that showy just mentioned, the firm just said a phrase like, that when you sign a contract, when you actually sell some shares to an investor, it's like you're concluding a marriage because average marriage is shorter than the relationship between a startup founder and the rest are, and I think this is insane.

Completely insane, and definitely proves your point as you just, you have to be extremely committed to that relationship.

So um,
yeah, it's, it's more than a marriage.
I want to put in one point it's a marriage, but every time you accept money from an investor, it's also a promise. the promise is that you're going to help grow the of this.

if you break that promise, like you can break it but it doesn't look good.
so, what you have to do as a founder is to really communicate with your investors, see it for the longterm.

If they invested in this company and they're excited and it didn't work out, it's okay if you communicate a Wellville, invest in your next one potentially, it's a longterm game.

A lot of these really successful founders, they've failed two, three, four times before they hit the really big one.

So just keep that in mind.

Absolutely.

we will wrap it up here, but as a reminder, crease mentioned a couple of books, which I already forgot, but I will make sure that includes the links to those books in the description of the episode.

if he wants to take a look at them to check those scripts.
And if this episode.
So we'll wrap it up here.
Thanks a lot Chris for coming and for sure your joint besting field. I think it was a great episode.

Really thoughtful advice and thanks a lot of VC out there. Thanks council team.
Thanks for having me.
I'm really excited to see how your podcast grows.

It's it's great stuff.
It's great content.
Thank you.