Managing Partner at Emerging Ventures
David Mandel - Angel Investor | Venture Capitalist

"Technical products need technical founders."

- David Mandel

David outlines what he looks for in a start-up

Talk Takeaways

David Mandel, Board Member of Pasadena Angels and Managing Partner of Emerging Ventures Fund, talks to (JP) Jeffery Potvin on early stage investing, emerging tech, fund economics, and his investment process.

About

Prior to his current career in venture capital, Mr. Mandel built, operated and exited 4 different successful businesses in the Insurance and Finance industries over a 28-year period.

Much of the success of these businesses is attributed to his logical systems thinking, aided by his technical training and advanced Mathematics and Computer Science education, which he used to create and evolve unique perspective and, and models for underwriting, pricing, risk selection, etc., while always taking a fresh outsider’s approach to each venture.

While Mr. Mandel has been a life-long investor, starting in 2014 he took a strong interest in the technology start-up ecosystem, and is now applying his thinking to this endeavor.

Mr. Mandel is a very active angel investor. To date, he has invested in over 500 early-stage technology start-ups. He is an active member of several prominent angels groups, a frequent judge and panelist at start-up pitch events, and is considered a thought leader.

In addition to remaining very active as an Angel Investor for his own portfolio, Mr. Mandel in his role as Managing Partner of Emerging Ventures, is curating a select group of emerging tech startups allowing others to passively invest along-side him in a diversified basket exciting tech startups. Check out https://emerging.vc for more details on the fund.

The full #OPNAskAnAngel talk

Jeffery:
We’ll just jump right into it if you’re good with that. Go ahead. Awesome. Well, David, Welcome. We’re excited to chat with you today. Welcome to OPN Ask an Angel and today. Well, and what we always do is we love chatting with early-stage investors. We want to find out more about what you’re all about and the things that you look into so that we can help our community and the rest of the world one find you, and two learn a bit more about what investors are looking for.

David:
Awesome.

Jeffery:
So to start off, the fastest easiest way for us to jump right into this is if you could give us a little bit of a background on yourself, kind of where you’ve come from, where you’re at today, what you’re looking for in the future. And then one thing about you that nobody would know. That’s kind of to wrap that all up.

David:
Oh, boy. Um, okay. Well the short history is I, I’m in the southern California area. I’ve been here since 1985. I’m in the San Fernando Valley, which is the famous suburb of Los Angeles. Uh, and particularly now live in the city of Calabasas, which is just over the hill from Malibu. That’s basically in the Malibu hills.I had a career that was mostly in finance and insurance. I have built and exited four separate mid size companies around that space from an insurance retail distribution network to a premium finance company, which I sold to a credit union to a auto finance company, which I started and built for 18 years and then sold to a east coast competitor who wanted to expand out west. And the largest of them was an insurance company. Insurance underwire that uh, underwrote nonstandard auto insurance in California, outlined tonight insurance company which has sold the camper In 2014. Since then, and since before then I went back to my technology roots. I’m a computer science major and a double major in math and ComSci by original training and uh did a lot with software in general, always follow technology. And it seemed like, you know, we’re at an amazing inflection point with AI and IOT and the convergence of all and 5G. And the convergence of all these things coming in. And it’s gonna be a really exciting time for innovation and technology. So I started following the whole start up scene and Silicon Valley, going to conferences attending,starting to invest through funds and syndicates and talking to a lot of people who are investing in Silicon Valley. And started following along, eventually started to get my own deal flow. And that turned into wanting to do it more down in L. A. And joined a bunch of angel groups down here. So I’m a very active member in Tech Coast Angels, the Los Angeles chapter and in Pasadena Angels and Pasadena Angels. Now I’m also a board member. So I’m helping out a little bit with the leadership and I’m also on the selection committee. So I’m sure we’ll talk about this more later. But when I’m looking, um, I’ve also along the way, started a fund back at the end of 2019, I started a fund called Emerging Ventures and I have about 30 LPS and the fund who get to co invest with me because you know, being an angel groups, I was starting to refer a lot of friends and associates to the groups and realized that angel investing to me seems like fun, but it’s actually a lot of work and not everyone wants to do that mind put into work. And uh, the worst thing you can do, I believe for a casual civilians is refer them to be an angel on one or two deals that does a disservice. It’s well documented that individual deals are highly risky. But an asset class of diversified basket does not need to be a diversified basket of angel investments, of early stage startup investments, can actually have a very steady, predictable return. I just need a large enough sample size is the same thing. Like the law of large numbers and insurance, it’s no different than insurance. One car is a gamble. One risk is a gamble. A basket that’s large enough is not a gamble, it’s business, it’s predictable. It’s analytics. That’s why the fund economics make more sense than one up deals. If someone’s a hobbyist, if someone is gonna just dabble in angel investing, they’re better off going into a fund and letting a professional make the selection so they’re not hit with the adverse selection, but also to get the diversification, let someone else choose a basket. And that’s where I felt I can help my friends best co invest with me by investing out of a fund structure. And the idea of microphones became very popular. Silicon Valley is littered with them. Every founder who has their first exit, starts the second startup, but also start saying to investing and often makes the microphone now because it’s the thing to do and allows others to come tag along who aren’t insiders. So I’m kind of jumping on that bandwagon and uh, I’m at the tail end of emerging ventures fund one. We made 19 Investments from the Fund of 25 slots, so I have six slots left and then I’m gonna start raising fun to, uh, so we can continue that, but it’s been great to be over the right, slightly larger checks this way because I’m pulling the money of 30 lPS instead of just my own money so I can write bigger checks, help the founders better that way, get better credibility from founders and other investors in the rounds. So it’s been a win win for everybody, I think, by using the fund structure, I’m very happy with that. Back to your first question. One thing that no one knows about me, um, well, the only part that’s relevant somewhat to my career in one way or another is, uh, I was a weird nerd in high school. Um, I wasn’t fitting in, and in my junior year of high school, there was a program where one can take ah at the local university uh classes it’s meant to get a taste of college, so allow you to take actual classes and they’ll give you a code for the first time freshman to go take up to three classes in the afternoon while you’re in high school. And you got dual credit. It was a special program, you got credit for those classes, you got the actual university credit, but you got to use them also towards your high school credit. And uh so I did that and at the end of the first semester they’re doing that college counselor at the high school uh pulled me in one day and said you don’t belong here, you’re doing well at the university. I talked to the counselor there uh go take this test on saturday. It was like a Thursday, she’s like on Saturday to this address, take this test and don’t show up here anymore. And that was a high school proficiency exam. So my joke all the time internally for the longest time is that I’m a high school dropout. But you know, so that’s kind of the little backstory, which I haven’t even thought about so many years because that was back in 1986. So it’s been a while.

Jeffery:
it’s a great story. Uh We have similar backgrounds, but I’m a big fan of this schooling where you were able to jump into university. My God, I would’ve skipped half of my high school, now if I would have done this. That’s —

David:
So I never had a senior year of high school, so I missed all that drama. No senior prom or any of that stuff.

Jeffery:
That’s awesome. I flipped schools all over because I played hockey and I saw I was in different schools, but I was done school in grade– But you know, grade 11 or 12 I graduated because I graduated sooner and then the rest of it was just a waste of time because I was doing it just because I was playing hockey waiting for my scholarship to go to university and then I just university anyway. So I thought the fact that you were able to start into that

David:
Well in hindsight and I didn’t have anyone on the other side and that’s where having a good family network helps. I can see that I didn’t have anyone to mentor me to say what I’m missing because if you go through the senior year and you get to go through the whole college application process, you can go to an Ivy League or try to at least go to that process. I skipped all that. I was at the local university was Cal State University Northridge which is just a local state school and which is fine but you know um that’s what I wound up doing and you know I was there and I just stayed there and I finished it. I never had to really do the whole process. And I never got to see if I could have you know maybe gone to you know caltech or an M. I. T. Or Harvard or you know and —

Jeffery:
Well I’m gonna say you did okay. You did all right for yourself.

David:
It worked out that people would say well you know what school did you go? 2.5 hours wow. My state local I went to North Ridge and that’s what

Jeffery:
And I sold four companies, I’m gonna guess you did okay. So there’s looking back and saying would have caltech or this other people would have been good for you. I think you did pretty good.

David:
Right, the second academic story on that. And then we can always, I’m also a PhD drop out because when I was done with the Sun I got admitted to USC for a doctorate program at Math. And um the short version of the story is I decided to go into business and put that on hold for two years and see what happens. Because it just didn’t seem like a good time to be an academic and a lot. So I said yeah I’m gonna I’m ahead by two years.I’ll start a business, give it two years. See what happens if the business doesn’t work out. I can go back to school. And obviously I never went back to school.

Jeffery:
That’s good. I’m a huge fan of school and I’ve done lots of it. And I look at it as one day when I’m kind of past the if that ever happens, because I’m a huge fan and obviously love investing, but in early stage companies. But I also look at it as the one day I do want to have a PhD and I wanted to get that, not just to have the letters. Well, because I just had this fascination with learning and I think it’s kind of that next step.

David:
I agree with you on the learning. I do a lot of online stuff. I know I would not have the stamina to do an actual rigorous program. It’s a lot of work. I looked at it when as far as talking to admission counselors at different universities, about their remote programs and online programs for doctorates. And it’s basically three years of hard work. It’s a lot of hard work. I’m not, you know, I don’t think I would have the energy to really see it through at this point.

Jeffery:
Maybe we can get you an honorary degree in entrepreneurship.

David:
That would be awesome.

Jeffery:
There you go, awesome. Well, that sounds all amazing and very exciting to learn more about that. And one of the things that really kind of piqued my interest is that in the bios and everything that I’ve been learning about you is of course you have these four exits. And you’ve worked with and in the early stage space growing businesses into mid size. How much of what you’re doing today has come from what you went through over the last 20 30 years. I come much learning did you take from working with investors and everything else? Did you raise money back here, uh, in your other companies, grow them grassroots and then decide, you know what, here’s the learning I want to take from this and I can better help these earlier stage companies today with my learning.

David:
The general business side is definitely valuable. I think it’s quite well accepted in the early stage venture industry that the best VCS often come from former operators. That it’s harder, it’s easier to turn an operator into a V. C. They turn, and a career long investment banker, banker kind of guy, uh, you know what you’re going through. Um, you know, if you’re going through Goldman Sachs and you’re an analyst or, you know, something like that and you want to go into venture, that’s a harder transition. And I think the reason is when you started and ran businesses where you’re, you’re really worth starting out, this chief janitor, you’re doing everything, you’re, it you have to build everything from the ground up, uh not coming from the enterprise world, but coming from a true small business background of any kind uh then iis natural when you look at a fellow entrepreneur starting it first, you know exactly what they’re going through, but you can also see if they have what it takes. It’s easier, I think, to underwrite the people to see if they’re thinking about it correctly or not because you just know what feels right and wrong instantly and I can dismiss a lot of people who I think you know who I just said no, this guy is not gonna make it, he doesn’t have what it takes because I can just feel it that I’ve done that and they’re not they’re not going to cut it, they don’t have the rigger takes on the other side, something a little more specific and technical is, as it happens to me, my background is all in underwriting. I was sending up underwriting models and thinking about deal selection. I ran an auto finance company for 18 years and we would look at besides setting up all the models for um we would look at back then 3000 approximately say auto loan applications per month, 3000 deals a month and fund about 2 50 to 300. So we have that 8 to 10% conversion rate. We have to be very efficient in that you can’t take forever to do. There would be an auto deal. But so it was really constantly thinking about how to do that efficiently and yet be good at it. And I spent 18 years with that in my head working on that constantly in the back of my mind, making that process better. On the other side. I ran another insurance company that was also an underwriter where we had to automate the underwriting insurance of, we were actually at our peak issuing over 30,000 new policies per month. We’re writing a lot of business. The book of business was almost a half a billion when we sold the company to Kemper there is over $400 million dollars of premium. And there are small policies. So underwriting is just second nature to me. It’s literally my whole life has been about underwriting models and funding a start up and the deal flow process and all that is absolutely no different than auto loans. That’s, you know, it’s just a tweak of it. You know, it’s just always are changeable. It’s a slightly different product. You know, it’s like someone going from selling cars to selling luxury bags or whatever. You know, it’s uh, the product might be different. The interaction is the same. The concept is the same. The mindset I guess is what’s really the same of looking at, but so you’re looking at a start-up business and your underwriting their chance to make it and see if they have what it takes. But the idea of the underwriter mindset has been so part of who I am. It’s literally a core part of being now for my whole life, my whole professional life, I’m a career underwriter. So, and always taking risks with my own money. It was my money and the auto finance company was my money and the insurance company, it was $400 million dollars a premium on me win or lose Our is responsible for the loss ratio 100 we had reinsurance, but that was, in a sense, a form of leverage. So it was all on me. So having being responsible for your own portfolio and making underwriting decisions for it. It really doesn’t matter if it’s auto insurance, auto loans or startups. The only thing that starts is a lot more fun. I’d much rather be talking to genius entrepreneurs who are inventing the future and having them explain to me how to invent the future than to finance manager to use car lot. Trying to convince me why I should find a particular use Car loan. It’s just a much more fun conversation and there’s a lot more room. There’s a lot more money on the auto loan, your revenue, what you’re going to make, your upside is fixed.

Jeffery:
And on the same side though with even whether being fixed, uh, it’s a guarantee, probably higher guarantee in your outcome over uh you know, 3 to 5 year process. But I think at the same time you can mitigate risk a little bit differently. And also you’re building a SAAS models, you’re kind of like the earlier SAAS model versions before SAS models became big because you really were working to get people, you’re paying monthly premiums, yearly dividends. Like there’s a lot of stuff that goes into building this book of business, which is even more just start ups, because startups work the same way you’re asking the same questions you’re trying to get, I don’t if there’s going to be monthly MRR, what’s there ARR, how are they gonna build cash flow, all those things that they’re necessities. And you learn really really

David:
Looking at the excel models and trying to model out projections and all that, that second nature as well. And so I say all that relates, all that transfers very naturally. So it actually wasn’t a big transition at all. It’s a very, it’s a very natural transition to this world. And it’s just a lot more fun and a lot more room for error. There’s a lot, it’s actually a lot less stressful. On auto loan, you can have maybe one out of 20 go bad. You need 20 good ones to make up for one bad one. So you have to be really, really careful not to fund the bad one where it’s almost turned on its head with startups, you need, it’s not that you need one good one for 20 bad ones, but you can actually assume that half your deals will fail and you can still turn out okay. Which is just an amazingly way. It’s an amazing breath to say, wow, it’s okay to make a mistake here. I, you know, on on all the wondering, I was always under constraint that I can have at most one bad one for every 20 I fund. So you really cannot make mistakes.

Jeffery:
It’s interesting you say it that way, like when, uh, when I started on the venture side in early stage, working over the last 20 years with early stage companies and then started investing and building a fund, what I annoyed me was that everybody will always say only one in 10 will win. Everybody else will fail. And I thought, You know, why do you keep saying this? You’re always putting the negative in this picture. And I think the problem with that is that we all start to think that and maybe that’s just a tactic to reduce costs and fees for everybody so they can get into a better value. But the problem was saying, 1 in 10, I’m thinking who in their right mind would want to come into this space with the fail rate so high?

David:
No, that’s and it should not be. With reason, I mean, half of them and by failing, I mean, if we define fail, not, it’s going out of business, but you define fail from a VC perspective as not having a positive exit, Uh, fail. I mean, they can stay a zombie for 10 years, that’s still a fail. Uh, you know, uh, fail is not having a positive exit for the investors at some point. So where you’re not getting, more than a one X back uh, into the fund during the life of the fund, then we would say that, I think Typical, it’s 50%. And with good deal selection, if you’re, if you’re being aggressive and looking for unicorns, it might be higher. If you’re saying, okay, I only want unicorn potentials, I’ll find them really early and I just need one to be 100 X. And I’m good. Uh My philosophy is a little different. So I’m looking to have probably less than a 30% failure rate. But I’m also selecting a lot of safer deals. I’m not funding companies too early. I’m waiting for some early traction. I want them to prove some product market fit and have some traction and by that you mitigate the risk. Uh, and also funding a lot of companies that were probably only have exits that are in the 3 to 10 X. That are not necessarily going to be 100 X. They’re not going to be unicorns. Some have potential to be, but most, I’m okay funding companies that can never be unicorns. I just know that’s going to have a good quick eggs that within three years I can have a five X. That’s also acceptable to mix into the portfolio to have because my main goal is to get my LPs a three x blended return on the portfolio. So if I intentionally mix in a few 5xers that are safe, they are very unlikely to fail, but not likely to be unicorns either. Uh they’re more boring kind of investments, but it’s more of the private equity mentality when they’re investing at a later stage. They’re looking for 3 to 5 X returns in 3 to 5 years on their, each of their investments. So I use a PE mentality on some of them to mix into this even though it’s an earlier stage, But it’s okay to take a company that’s ready has revenue in doing well. And I kind of see that the founder is not running a unicorn. I see, but I see it’s a salesforce find them for 50 million in three years if they continue on different if are their trajectory of their projections, your model it out and say, okay, I see you hitting 8-10 million and ARRe in three years and I can see someone like a salesforce buying you for about 50-60 million. I’m investing at a five million pre so that’s not bad. It’s like I’ll take that deal because their likelihood of failing is pretty low. There already almost break even on cash flow. So look, I’ve made a few deals. Yeah, I’ve made a few investments like that in the fun, which are not as exciting. They’re not you in the corner, but I’m not you in the corn hunting. But in that case, if you’re making those kind of deals, you should not have anywhere near A 9 out of 10 failure rate, you should have probably a 3 out of 10, 4 out of 10 failure rate.

Jeffery:
Agree. Well, the thing is too, is the, and what I like about the way you’ve structured this and just as an example, we’ve conducted now 50 interviews. You’re the second person that’s looked at the environment this way. So why I love that is because you’re actually trying to find returns for your investors versus trying to find a needle in a haystack that’s going to be that unicorn return. You’re looking at what businesses can I actually work with that can grow three times five times that value so that those investors will receive money back, they’ll get their payment out, they’ll feel good, they’ll reinvest in you and then you can take bigger shots as you start to grow and continue to build that fund. And that’s really what it’s about is, the more you can return to your investors, the more faith they’re going to have in you, and if you’ve got a 10 year return on your fund, people aren’t going to be really that excited, they’re going to forget that they even invested in the fund. But if you’ve got things that are turning over every 3 to 5 years, the excitement builds, that’s what’s exciting. It’s not about the fact that they, I don’t know, they got a new spaceship that can fly people from door to door and it’s two men helicopter — great! That might come out in 10 years, but that’s not what you’re looking for. You’re looking for those businesses that are turnkey, like you said, Salesforce can buy up. And that’s a great, great way to get behind your investors and get behind your startup. So I love that. It’s awesome. And everybody needs a different way to fit into a market, right? You can have the unicorn Chasers, you can have the stable ones that are going to give you returns or you can have the ones that fail. You’re obviously picture in a good spot.

David:
Right, ideally. I have a little bit of everything in there. So I’m not against looking for unicorns, but I’m not excluding safe, you know, Okay, triple it’s not always home runs, some doubles and triples are okay too.

Jeffery:
Yeah, no, that’s awesome. I love it. So taking this experience you’ve had working in this space and it’s obviously heavily over the last uh 20 years that you’ve been diving in working through your businesses and learning a lot, How much do you put that back into the startups? Do you get the same opportunity to work with them from a VC perspective or is it more cash in and I try my best, but you know what? Things are moving too fast. We do our best here. But how is that? Really nice audience?

David:
I’m a small check on their cap table. I’m not usually leading rounds, so I’m often not very involved to be honest with the startups after funding, But I try to help where I can, I make connections in my network, the potential prospects even connecting startups to each other. I’m now an investor in over 500 different startups. So, uh, you know, there’s a lot that comes to mind when I see something new. I connect to something else in the space and was like, hey, you should talk to so and so on. I make warm intros. I’ve done a lot of that. I’ve really connected a lot of founders to each other, uh, for potential partnerships are just ro chat. Also I’m an LP and some upstream funds and downstream funds. So I’ve made connections to help fun, help founders get introduced to, um, two firms who can lead their series A and of course, I’ve gotten a lot of deals from funds where their incubator and accelerator programs that I’m a LP in where I’ve gained the deal flow from them. So it works both ways that I’ve been making, I’ve been making and I take a lot of deals and share them with other investors, including the angel networks that I’m a member of. So I’ve taken deals who didn’t even, there’s a million and a half round open. I might be writing $150,000 check from the fund. So if there’s still another half a million open, I would say, hey, let me introduce you the best of these angels. I think this will work and I’m on the screening committee and we put them through the process if I think it’s compatible with that group. So I’m not bringing them a whole angel group who might fill up collectively with $25,000 checks each, the arrest of half a million or at least a part of it. Um, so I’ve done that too. I brought them investors. I bring deals deal flow to the angel groups that bring the angel groups to the founders who didn’t even know about those angel groups. And I refer founders to each other. I refer founders two series A. B. C. S. I try to be active in the network that way, uh, and never really looking for anything other than truly just trying to connect everything. Be helpful wherever I can and hopefully it’s reciprocated. I think I get a lot back in reciprocation. A lot of people wind up just referring me things that might be helpful saying, hey, you know, I talked to David and um, it’s great when, when people reach out to me and say, hey, so I’m so sad to talk to you. Uh, uh, that feels great when people remember you maybe because you refer them something recently and they remember you and now they refer you back something and it’s just, uh, just keep paying it forward.

Jeffery:
I love it. Yeah, we have so many similarities there. It’s crazy. But that’s a very impressive and I love the size of your network, but I love the size of the amount of companies you’ve invested in. That’s phenomenal. And is there in this process that you’ve been going through? Is there a real touch point that you find really benefits when you make an investment? Is it the founder, is it the type of business? What really hooks you into it? Because after 500 investments, you’ve got to find some secret sauce in there that you really get attracted to and maybe define what that is?

David:
Well, there’s a 500 I’m in and the tens of thousands that I’m not, I probably see 500 plus a month through pitch days and everything else. And yeah, it got to a point where the nose can be very quick. So my first filter for myself is, you know, the 95 of everything that’s not emerging tech. That’s a quick filter. A lot of what comes to, it’s like, yeah, okay, that’s just another business you might do well with, it might make money, but it’s not what I’m currently looking for. So that’s a quick filter out. Um, as far as the next step and yeah, look at that. It might not be for me sometimes now, I might still look at them and say, are they a really quality founder? And should I try to bring that into and try try to connect them to an angel group? Do they belong in Pasadena? Angels would help the group? Uh, so whether I like them personally, the business or not. So yes, I have to like the business, but then within the business, I have to think that that’s the founder that’s going to make it for that business. So there has to be founder market fit. Founder… It’s not just, you talked a lot about product market fit, but there’s also the concept of founder market fit and like, why is this person working on this business? And do they have passion about it? And do they have what it takes a to build A business and being an entrepreneur and B to run this particular business? So, one in general, are they a founder? I like, and to do, I like them for that business. Um, and all that goes on instantly. You know, some, uh, sometimes you’ll see someone pitch and you just, you know, you don’t think there is A class founder, depending on where you’re, where that filter already is. You may not come across in some places, there’s a lot of those other places, there’s none of those. I mean, if you’re the YC demo day, you’re not gonna have a lot of really bad founders. If you’re a local pitch day, you might see a lot of people who is like, okay, no, they have an interesting idea, but they need to bring a co founder that can run a business. This guy can’t run a business. Uh, you know, sometimes you’ll get a team, I mean, I’ll never, for example, invest in a technical product that doesn’t have a technical founder. If they’re going to outsource the technology and it’s a technology company, I won’t talk to them. That’s a deal killer. For me, for example, there’s a lot of things like that about the founders, it’s like, I don’t believe in, you know, someone with a sales background who is Biz Dev for their prior startup, saying they were going out there and starting a new business that’s a technical business, but they’re not technical, you know, they were an english major and they’re great at sales, but it’s like, okay, but the CTO is not bring on the CTO is a co founder, give them equity. If you’re, if I tell me who is the C T O, so I have this company in the Ukraine and they’re going to make the product for me. And it’s like, well, where’s the CTO, the project manager in charge of the team? There is a seating is outsourced CTO like fail. That’s it. It’s like, yeah, no, you get yourself a, he doesn’t even believe see the importance of the technology side of it, then it’s just for him, a product that he’s going to market and no, thank you. You know, that’s a deal killer instantly. So technical products need technical founders. Uh, and the converse is kind of true though, any business needs someone who can run a business. So sometimes the most technical founders aren’t, don’t seem like they can really run a business. They’ll be too much of a learning curve for them to learn how to run a business. And that’s through talking with them about business and you’re like, okay, you might be a great engineer, but you’re clueless about how business works. So get yourself an MBA co founder, go across this, go across the hall to the business school and find an MBA. You know get someone from your network was an M. B. A. From your school to be your co-founder, and then you might have a chance at running a business or I’m not investing in you. And Australia. I’ll tell that to them sometimes, like, you know, that’s a great idea, you’re a great engineer, but you don’t know how to run a business and you’re gonna fail if you don’t bring someone in who can you need a partner, go find yourself a and then someone MBA or MBA like as a co founder that can help you run the business or someone who’s run the business before, whatever it might be, even if it was a family business, but someone who knows business, it’s too much of a learning. Some engineers can do it, they can go and run businesses, no problem. But uh others can’t, so without spending some time with them, it’s hard to tell, you can’t tell on paper for sure. Nothing on paper is going to tell you that.

Jeffery:
But seeing all these things and going through pitches all the time and you’re able to get to know people really quickly and figure it out. It sounds like in a way you’re coaching and mentoring these early stage companies regardless of the position they come in at to really better understand who they are and what they’re trying to deliver. Giving them the facts of what you need in order to make an investment and then send them on their way and if they come back, then there’s a bigger opportunity for you. If they’re able to hit these keys.

David:
I’ve had many, many, hundreds of business founders who have spent a lot of time with, even though I know I’m not going to invest in them there too early. And I was coaching, I was coaching them about the available, um, incubator programs they should go to if there are really early and we’re a little clueless, it’s like, okay, you need an incubator, they’ll get you there and, or next step for the accelerator programs or trying to tell me what kind of co founders they need, what they should do, that they should incorporate what law firms they should go see to set up their documents correctly. Day one, so they are fundable in the future. Uh, if there, and I’ll see, making sure they know that they can convert to Delaware C sooner than later if they want to venture back about all those little things. But yeah, everything I see, I do take the time. Actually did that this morning with a company who was an L. L. C. And, uh, some other things with them there at the Massachusetts to have some great IP, I think then you clean up a lot of things before they venture back a ball and I spent another 45 minutes walking them through some of their options that they need to do before. So I love the tech. I love your IP, but you’ll need probably 4-6 months to clean this up before you venture backable. And I love to stay in touch during that process. And here’s some of the things you need to do. And then we spent about 45 minutes because they started asking me if they were coachable. They asked me a lot of questions and I just stayed on and had to walk there, happened to not have a back to back appointments. So I walked them through a whole bunch of things that I would do if I was them and tell him something’s not to do. And they’re about to go, they’re in the process of contracting some kind of fundraiser, some kind of broker dealer, I guess who’s going to different. We promised to try to raise $3 million dollars that mind you, these are at the pre-seed stage. They have, they don’t have client one yet. They have a pilot zero revenue. It’s like no you don’t go out there and hire someone to fundraise $3 million dollars for you. Figure your run rate, your burn rate for the next 12 to 18 months. You probably need to raise a half a million to 7 50 is a pre seed and do so on some kind of convertible debt now and next year you’ll go out there and raise that two three million and a much better evaluation and without the broker dealer. But here’s everything you do in between and I can help you but you need to do these things and then keep in touch with me and we’ll talk about every month and in 2,3, 4 months you’re probably ready and then we can do that precede round and you know it’s your, maybe I hear back from them maybe I don’t, these guys seem like they are going to follow up and but I talked to hundreds of those and you build a relationship and eventually maybe if I’m some of them and if not that uh I’m trying to tell them what they need to do so they can have a chance of succeeding at least from my opinion. And I hope they talked to some other people. No, they either do what I say or they don’t. Uh all I can do is try to tell them what I think and take my time to try to explain to them answer their questions.

Jeffery:
Well I think it’s a you’re doing a great job, it’s fantastic. And that helped. I would think any startup just being able to have half an hour, an hour with you to go through that and learn a little bit more about something, they probably don’t have any clue and they’re just learning as they go. I can’t see how that wouldn’t be valuable. Is there in this exploratory side of things and you’re working with these startups? Do you advise these startups that they should go and get mentorship or they should look for someone local in their accelerator programs that they can tie into or find a one off angel, they can spend some time helping them? Do you think that this is really valuable for them before they come back to, because it sounds like you’ve kind of road map them out with, there’s a lot of stuff you got to do, but go find someone your space that can really help you because in order for you to come back and really have us drive behind you, you need a lot more learning and six months of this. Is that really important to you?

David:
Well, it’s not one size fits all advice. So depending exactly who they are and what they’re doing and what they’re missing, I’ll give them different advice and for some, I really think if I was them, I would go apply to an incubator right now and the help they need, if it’s a clean tech kind of company, I was like, hey, go apply to LACEY or to wherever it might be or you know, Um, some other companies say, Okay, go to TechStars of 500 startups are reply all those kind of accelerator programs because you just need that extra boost and you need all the resources and you also don’t have a, you know, at the end of the day, you have this bonus of getting in front of a bunch of investors. So it depends who they are and what they’re doing. I don’t often go say, go find an angel. I don’t know how to tell them to do that. If it’s appropriate, I would introduce them to angel groups and walk us through the process and tell them what angels are looking for. And I spent a lot of time with different founders explaining to them the mindset of angel groups and how the process works with angel groups and when they might be ready, uh, and how it’s different from VCs and all that. And so it depends again on who they are, what stage they’re in, what industry they’re in, what they’re missing to see, you know, from getting to know them in the short period of time. I try to say, if I was them, what would I know? What would I do next? What would I need and therefore, what do they not know that I should tell them to fill in the gap that will help them get to where they need to be. So that their venture backable, that’s the end goal, that they’re, they’re each lost in different ways.

Jeffery:
David, you’re a good man, you’re helping the environment out and you’re helping a lot of startups figure their way out and get through the market. And I think that’s awesome. It’s been a big help kind of you guiding us to the types of things. Um, it’s unique. Most people don’t get into the how and where you help, but I think it’s pretty phenomenal that you’re able to dive into these, each of these companies individually and help guide them even with a little bit of time to figure out where they need to be and hopefully all of them find some minor success and come back to you and take investment as well.

David:
Thank you.

Jeffery:
So what I think we’re gonna kind of transition to now is we have our rapid fire questions. Some of the questions if you’ve added some insight into, but I think we’ll dive into those and then we got a couple other questions, they’re gonna hit some personal stuff and we’ll make it a lot of fun. So, first question, how did you get started investing in early stage companies?

David:
Uh Well, we answered that. So short answer, is after exiting my business is I wanted to be an investor instead of starting another business.

Jeffery:
Perfect. What’s your favorite part of investing?

David:
Meaning founders.

Jeffery:
All right. How many companies do you invest in per year?

David:
The fund is investing in about 20 a year. Me personally, I may invest in another 50 or so per year.

Jeffery:
That’s amazing. Alright. Any vertical as you like to focus on?

David:
Emerging technology, don’t — vertical agnostic but emerging technology. As long as they’re solving using technology to solve a real world problem, it doesn’t matter which slices the real world.

Jeffery:
Okay. Do you have any due diligence requirements that you look for before making a commitment?

David:
A long laundry list.

Jeffery:
Okay. So you do you spend time diving in? Right? It’s not just a constant under your diving deep into it?

David:
Well, everything else needs to check out too. And that’s how, By putting them, by going through due diligence is how you can make sure you’re not having 10 failures because you can weed out a lot of companies. That may sound great, but have some holes. I mean, they’re cap table may be screwed up. Their legalese maybe screwed up. They may not have the revenue they claim to have and so forth and so forth. Yeah. You might make sure everything is legit and that the documentation is all right there too. So yeah, the nitty gritty, you do need to take those few hours and do the due diligence and then have the back and forth on the legal and make sure that that’s done right. It does matter.

Jeffery:
Agreed. Timelines for investment from beginning to end of discussion to the end.

David:
anywhere from days to months, depending on, uh, where it isn’t around the quickest. It can be a closing round where there’s amazing data room for due diligence, a solid lead investor and they had everything done and it’s either follow in or not. So you can take really just hours and look through the data room and say, yey or nay. Uh, that’s the, and so that doesn’t have to take more than 2-3 days to do the whole process down to funding. And the longer ones, uh the typical is several weeks of back and forth and some due diligence asking for documents, having a few meetings to review the documents and ask more questions. Uh And then the longer ones are months we’re just dragging out and maybe you’re waiting for a leader waiting to get more uh co investors in or just drag documents out of them. If you’re early in the round and working with them, the longest ones obviously take years because it’s the ones where they were too early and you’re continuing to monitor until they find that we hit some milestones where you say, okay now let’s invest.

Jeffery:
Okay, all good points. You mentioned the one about being a big fan of the, of the leaders so that’s good or the ceo and you mentioned on the leading round side that you tend not to lead rounds, which is good. Is there any preferred terms that you like to invest on?

David:
Well I prefer preferred equity. Two notes at early stage notes are often the way to go. Safes are okay. You know, they became a standard, it’s I became used to be a preference for notes over safes because we can control the terms a little better but safes became a standard, simple way to do it. The new, the newer, not so new anymore. The last two years newer post money safe particularly I think works pretty well okay for very early stage early pre seed rounds that I think it’s uh maybe the best compromises that post monday YC. Safe.

Jeffery:
Okay. Do you do follow up investments in percentage?

David:
Not from the fund because it’s not set up to, it doesn’t have reserves. So then from the fund follow ons. We either go into the next fund or get pushed out. Also to the LPS we give our LPS the right to take those directly if they’re interested in it. And if I don’t get that interest I may say and don’t have a second fund ready. I would syndicate some. Haven’t had to do that yet. I normally just refer him out or and um on my own personal deals. It depends. It really just depends. I’m not ah it depends on the valuation and how comfortable are the direction the company took since the last time we funded them. So it depends on whether or not I’m still bullish on them at that valuation.

Jeffery:
Okay. Makes sense. And last question, do you take board seats?

David:
As a group we have, so I uh I’m not leading rounds, but a lot of times I’m in rounds where I’m quasi leading where there is no absolute lead and were kind of, I’m in the committee that’s negotiating terms and in that case the group collectively gets the right to either a board seat or board advisory seats, a board Observer seat. Sometimes advisory, sometimes observer. Uh, and if I it may or may not be me, it’s been me in a few circumstances. I don’t have any hard board seats. I have some board observer seats, personally. As a group. I’m in many, many deals that the group has a board seat and it’s not me. I choose, I don’t ask to be, I’d rather not be — a lot of responsibility. There was so many investments that’s a lot of responsibility, both just commitment wise and legally where I rather not have that on me. I might not rather not have to be an actual board director member of startups that are unpredictable. It’s bad enough being an investor.

Jeffery:
No, fair enough. Okay. So we’re gonna shift over to kind of more of a broader question or um, deep dive into maybe some of the past investments you’ve made. But one of the, one of the things that we like to find out where I love to learn about is you in all of these investments you’ve made our companies, you’ve worked with. There’s always that heartfelt story where a startup is gone through the struggles of, um, either really tough times and then just turned into a hockey stick growth or it was a totally opposite hockey stick growth and then the whole thing crashed. We’re just looking for kind of that heartfelt story were just, it was turn around or whatever you might think whatever pops in your mind of something that just blew you away on what it takes to be an entrepreneur. And I just love to hear that type of story. If you have one that comes to mind.

David:
I can give actual company name on this one, so I’ll use this one because they just got a press release on it. There’s a company called Go Site, it’s from SAN Diego and it’s one of those that I thought would would be like a triple I thought, okay, evaluations good. This guy is running a good solid business, but it’s really more of a call. So he makes up, he makes software to automate ally the processes for brick and mortar, uh, companies. So everyone else is trying to help plumbers or this or that. The service guys, no one was doing it for the brick and mortar guys, like the physical hair salon or the physical uh whatever it is, you know, there’s a lot of verticals, there’s software for dentists, but there’s no software for generic brick and mortar that turnkey everything. So he was doing that. And by the time we invested, he actually had some pretty solid revenue. He had a cold center with like 25 people in San Diego and really just became a sales business. So it was like, Okay, it’s a typical business. It’s not really that innovative and I didn’t put it into fund. I did it personally because it wasn’t emerging tech, but it was a cool business, just a business. I was like, okay, someone’s gonna, but he’s gonna sell to some kind of bigger aggregator, someone’s gonna buy him out and it’s gonna 3 to 5X. My evaluation and in a very short time, like 2 to 3 years. I don’t think he’s gonna even make it to another fundraising. I thought he’ll get bought out. Well he somehow transformed himself into this amazing hockey stick of a startup, started hiring like crazy and raising funds from top tier Silicon Valley venture capital to fuel it. They caught on to him and they feel them and he did a series A, then a series B like three months after the series. A and you know the last round was I think it was the B that pre money was like 75 million and post was it’s right near $100 million. So it became $100 million business. When we invested, I think, it was a $6 million dollar business. So uh that was a surprise hockey stick because it’s one that I thought was not going to be, that’s that’s safe kind of three X kinda exit in two years and instead it turned out to be a hockey stick. Silicon Valley darling kind of business. That’s interesting. Covid helped a little bit, helped fuel some of the transition. I thought he was going to fail during Covid because brick and mortar stores were struggling and everything, you know. But somehow that helped fuel their need for more of his software. So it worked out beautifully. Amazing. The founder made an amazing transformation personally I think from running a slow growth. So basically it took like five or six years to get to just a couple of million and annual revenue and suddenly he has hockey stick that thing in 18 months. The biggest upside surprise! Downside surprise. There was a had one Covid casualty. There was a company that I did in my fund, ironically it was a series C, not seed but C like after B A B. C. Uh and it was going to be one of those that again, it was an enterprise, a company doing text enterprise, I won’t say a lot more about the specifics, but that’s to keep a little confidentiality there, they had government customers, there’s a very mature company. They brought a new ceo from outside who knew how to run enterprise companies with the idea of basically having an exit negotiating them in a deal at some point on that. So that was going to be another very safe one. That should be maybe a 2-3 x. But very quickly because they’re actually about to go to market. This is kind of bridge round to get them there. Uh there was an actual priced round as ACBC and there was a lead VC and everything they raised in this round, they raised $10 million. I was only 100,000 of the 10 million Aside one of the round. It seemed like just, you know, stabilize the portfolio, add this one stable company and there it turns out that that’s the one that like within eight months went bankrupt. Uh, they, they’re burned was really high and as soon as Covid hits there, they were burning a quarter million a month plus. And as soon as Covid hit their sales pipeline went to zero. And so they panicked, tried to do some quick and, and they at a discount price and They got screwed on the deal. The deal got cut in half. Last minute we got 24 cents on the dollar back from our price drowned everybody else got nothing. So language does matter. But we had the liquidation preference, the most recent liquidation preferences. So we got 24 cents on the dollar back. But that was the most surprising loss or want to go bad really fast once there was the most mature company in the portfolio. And yet it went bad the fastest. Well, sometimes you were saying, you know, the bigger they are, the harder they fall,

Jeffery:
Yep, yep. For sure. And that just could be planning and not uh not pivoting or structuring yourself quick enough and fast enough. We’re taking the insights from investors or team to make those changes. So yeah, that’s a tough one. Very tough. Well, I appreciate that. Thank you very much for sharing that. The war stories are always good and helpful and make people think. Um and then we’re gonna shift just quickly into a more personal side before we kind of finish up and start off by um what’s your favorite sports team?

David:
Oh, uh well, my favorite athletes. I’ll answer that one because it’s an individual sport. I’m a big tennis fan and my favorite, my favorite athlete is rafael Nadal. I’m a lefty and I love that he’s a fighter and I love that he’s playing lefty even though he’s a righty but absolute favorite athlete is. Nadal. Federer would be my second favorite.

Jeffery:
Yeah, those guys are both great. They’re very mature in this space and they certainly know how to deliver excitement on the court and off. Alright, favorite movie. And what character would you play in the movie?

David:
Oh boy. Do I have a favorite movie? Um I actually, there was a movie that I watched several times with my kids when it came out. I thought it was really cool. It was Moana.

Jeffery:
Okay.

David:
It’s a Disney movie. It’s animated, and I have kids that are now 7 and 9. So, Moana. I love the grandma, shall we? All right. You know, if I can, I don’t know if I can be her. But that character really resonated. We love, we all want to paramount.

Jeffery:
It’s your choice. Your movie. It’s your character could be anybody. Like, I think that’s the one with the Rock in it. Right?

David:
Yeah. Great movie. I don’t want to be Maui, but I would love a lot more, I resonate with the grandma.

Jeffery:
Yeah, She was very insightful and guiding and everything. So, yeah. Great, great character. Yes. I’m gonna have to go watch that movie now because I can’t remember all of the specifics on it when it came out. But remember (Inaudible)

David:
If you have younger Children of any kind or grandchildren, that’s a, it’s a fun movie. It’s actually, it’s like a many Disney stories as a good moral to it behind the scenes to, which might be too deep for them depending on their age, but it’s fun for any age

Jeffery:
For sure. Well, it also helps me learn a lot more about yourself and knowing the character that you pitch in there, I will now be able to better put it in context where I learned more about you. So I think that’s great. Um, and I appreciate all the insights and thank you very much again, David today for giving us a nice broad view of how and what you look for from investing. I love the fact right away that you’ve invested and been in this space a shorter amount of time, but you’ve taken the reins and gone full force invested in a lot of companies have a lot of experience and a lot of knowledge and very excited that we got to connect and learn about that. And the way we kind of like to end of our podcast is I like to give you the last word, so if there’s anything that you want to share to investors or to the startup community, I turn it over to you to share that. And again, thank you very much for all your time today and hopefully we can get you at our event on February 4.

David:
Yeah, thank you. This has been great and I’m happy to do this. Obviously you can check out emerging ventures emerging that VCS, the website. There’s a little more background there. I can be found on linkedin or any, you know, or, or through emerging ventures if anyone wants to reach out for me, whether their founders wanting some advice or looking to pitch or wherever it might be open. Always open to collaborate with other investors as well, U.S. or Canada open to connecting. So yeah, no harm, no harm in reaching out and, you know, not everything is always a fit, but anyone is welcome to reach out to me and say hi and build a network.

Jeffery:
That was awesome. And I’m gonna say it was brilliant. Uh, we don’t, every day you don’t get to talk to someone that’s invested in 500 companies. He’s totally surpassing, um, any goal or expectation I had. I was always looking to make sure I could get up to that 100, 200 companies, but 500 seems to be the new goal. That’s amazing, big fan. I just love all the things he’s done right. It’s it’s, uh, his whole background and how he works on that passion and making sure that the founders really are a good fit and that’s what he makes his choices on. Um, and they want that emerging tech. So we’re not looking for unicorns, but they find that middle ground where they’re going to get 3 to 5 years out of the start up and get a good return. And I like that. He’s looking for good returns for the investors and that’s what it’s about. So, David, thank you again for your time today and everybody else have a fantastic day, and thanks for joining us.

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