 Prepare for the extraction point. We've been briefed on all the important stories and events in the world of emerging information. Now it's time to extract the data and turn it into action. Live from the SiliconANGLE Studios in the heart of Silicon Valley, this is extraction point with John Furrier. Welcome to extraction point. Today I'm John Furrier, founder of SiliconANGLE.com and SiliconANGLE.tv. Today we're going to talk about angel investing startups, early-stage startups, venture capital, and all the dynamics going on in the current landscape of entrepreneurship in the technology business. And my guest today to extract the signal from the noise is Chris Yeh, an angel investor with PB Works and a variety of other things. Prominent angel investor you've been active for many years. Welcome to extraction point. We're going to talk about for folks out there really about the entrepreneurship and technology. And this is really for about for folks out there starting companies and or angel investors who are investing. And I have some personal friends who are angel investors with me in deals that we do that are a little bit older and are kind of scratching their head going, hey, this is not the Silicon Valley that I knew 25, 30 years ago. So first, Chris, talk about as an angel investor yourself. You've been around the block. You're not new to the business. What's going on today in the angel early-stage investment and what's different from say just 10, 15 years ago? Absolutely. What I'd say is going on is there are two separate things that are sort of coming together and causing a bit of a tempest at a teacup. The first thing is something that's been commented on before, which is the rise of super angels. Super angels are really just seed VC funds because at this point all the people who are self-identified as super angels are not investing their own money. They're investing institutional money and money from other people. So they're VCs. Some people are abandoning that name super angel and going with the new politically correct term micro VC. I've heard that as well. I have personally never been a fan of going with the name micro in general. I always thought Microsoft was probably one of the worst brand names of all time. But whether you call it a super angel, micro VC, somebody who writes checks very quickly, there is this rise of this new group of investors and there are different paradigms. Other people's money versus their money. Other people's money versus their money. The pools of money now we're talking about are in the 10 to 50 million dollar range and a number of them have adopted an investing style that they have proclaimed pretty loudly as being different, which is to make a lot of smaller investments, not the traditional VC model, not the slowly nurture a company but more the, hey, let me have a broad investment thesis and do a lot of investments. Versus 10 years ago, which was a little bit slower. Yeah. Talk about the dynamic 10 years ago. So I remember when I was raising angel money 10 years ago and I was an entrepreneur and things have really gotten a lot better for entrepreneurs because back then you didn't know who to go to to raise money. It was all word of mouth. And so you would talk with someone they'd say, hey, you should talk with this person or you can talk with somebody else. Nobody knew who the angel investors were. Nobody knew how to find them. And so it was all word of mouth. And as a result, the deals were relatively inefficient in the sense that as an entrepreneur, you weren't in a real market. You weren't getting the best price. You weren't seeing all your options. Nowadays, thanks to things like Angel List and thanks to the fact there's a lot more publicity about the space, entrepreneurs are a lot savvier about fundraising than I was. So there's two things that kind of were going on back then were not a lot of access to the angels. So there was a standard gatekeepers you'd have to go to to kind of go through the door if you will a gatekeeper and also slower. But today it's faster with Angel List and other things. But still there's kind of a gatekeeper mentality. I mean, would you say that the Angel List really is a gatekeeper? Because if you want to get investment, you got to go through a handful of individuals who are syndicating or colluding on Angel List. As the case may be. So Neval and Nivi and folks might come back and open to have a conversation about this. But to me, there is still a gatekeeper mentality controlled by the send button of Angel List. Is that true or am I off base on that? Well, what Angel List would say is that anybody can create a profile on Angel List. But obviously, the frenzy really occurs when Neval, Nivi and other influential people actually push a deal and send it out. But that's always been the case. Influential investors have always had the power to push deals and make them more prominent. What I think is also true and is frustrating to entrepreneurs, is you hear people all the time say things like, Oh, it's so easy to raise money. Oh my God, it's easy to raise money than ever. Well, let me tell you, for most entrepreneurs, it's not easy. It's not easy to get someone to give you money. Now, it may be more appropriate to say, it's easy to raise money if you fit this particular profile, you're doing consumer web application, you went to a top tier university, you're relatively young in your 20s, you know the right people. And most controversially, you're probably either Caucasian or Asian. Yeah, I wrote a tweet about Dave McClure wrote a really good post commenting on the Angel List. And I actually thought it was a great post and I commented that Dave, you're right on one of the three points. And he said, point one, Angel List is freaking awesome and revolutionary. I don't think that's correct. I think it's awesome. I don't think it's revolutionary. Point two was, I forget what point two was, wasn't even memorable. But point three was he's been with Quora and the web now, the democratization, the content, the information's out there. That's so disruptive. So he's one out of three, which in VC and investing, that's a good percentage. That's a very good percentage. I take that percentage any day of the week. By the way, I remember what number two was. Which one was number two was he was responding to people who characterized him as a spray and pray investor. And he was saying, listen, VCs don't have great returns over the past 10 years either. So, you know, maybe people are in glass houses shouldn't throw stones. Now, Dave was quick to point out in his follow up that there are certain VCs who have delivered outstanding returns over the past 10 years. So it's not really a blanket statement. But nonetheless, that was what he talked about. Point two, exactly. That was the percentage of spray and pray and justifying this portfolio and statistical approach allow white combinator. Well, for the folks out there watching, let me break it down for you about Dave McClure's point two. And I feel strongly about this. Dave is taking a specific strategy to look at the number of investments as a percentage. So it's very clear in his post, I want to lay out a percentage and lay out the dollars and one will hit its absolute game theory based statistically based theory of angel investing or micro VC or VC investing. So I have no problem with that at all. That's strictly a strategy. What does it mean for an entrepreneur? I'll tell you what it means. Ultimately, he will not follow on and care about most of them. Okay, that they will fall off the table. He'll argue with me and say, No, that's not the case. Because you really can't be one of two things in the angel world. And this isn't for VC. I mean, for entrepreneurs. And we can debate this if you want. Right. You either are building companies, or you're managing a statistical number. So I think what Dave's confused on or not confused on, or people are confused on is that he's statistically putting the numbers out there. And like a Ron Conway, like a white combinator, there's nothing wrong with that. That's more of a hedge fund like approach to managing the investments versus, Hey, I'm going to put money into a company and work with the team, build a durable business, building companies. And I don't want to spend the whole time talking about Dave, because we should probably just get him in and talk here. But you know, it's definitely the case. I think what Dave is trying to do is he's trying to have his cake and eat it too. And if he can manage that more power to him, because what he's done is he said, I'm going to assemble this team of mentors. He understands that he's not scalable enough to actually provide one on one help to the various startups he works with. And so he's tried to build a community. It's almost like crowdsourced mentoring with various people coming in. But in the end, you know, it's difficult. I've taken a different path. I make a relatively small number of investments. I work closely. You get involved with the companies, right? I get involved in and part of it is because that's just what I enjoy. I consider my angel investing relatively non economic. I spend more time on it than could be justified. Well, in terms of like the returns, you're talking more about the strategy, of course, you care about money, making money, right? Well, I care about making money. But even so, you know, you could argue my angel investing strategy is is economically irrational because I spend more time with my startups than would be justified by the amount I invest. But I do it because I enjoy it. But that's categorically what angel investing is about, right? Because the VCs are, as I say, institutional investors are supposed to be unemotional about the dollars and, you know, it's a portfolio. And that's where the difference really comes into play. I mean, when you're investing your own money, you're free to make these choices. If I took a hundred million dollars from limited partners, I would have a fiduciary responsibility to them to maximize the return. Now the interesting thing about angel lists, you know, it isn't revolutionary necessarily, but where it really makes a big change is the fact that it enables a whole different class of angel investors to get into the fray. So angel investing, you know, it takes two things. It takes time and it takes money. Historically, money was the limiting factor. People were like, oh, you have to have a lot of money to become an angel investor. Well, thanks to the boom and companies like Google, there are a lot of people hanging around with money these days. Fifty thousand, hundred thousand dollars is like lunch money for some of the folks out there who made some cash out there. Now they may not have the time and that's where angel lists comes in. But entrepreneurs are confused, though. I mean, entrepreneurs, this is what I'm finding, that entrepreneurs are generally confused. They see angel lists as, oh, I can raise money really fast and it's a, it's something we're saying false hope out there. And others were saying, okay, it's not really angel investing. It's just VC investing brought down to the levels of angels. So most VCs have never walked into the dynamics of VC, which you and I have been through. So let's talk about that. Is that true? Yes. And to what are those dynamics that the VC market traditionally used to be for Series A? Right. I mean, it could be pretty brutal. Left alone. You don't make your numbers. Your company's not hitting milestones. You get cut loose. I mean, why combinators have been seeing huge amount of churn at the entrepreneurial level? Well, let's talk about that. Is that good? It's neither good nor bad. What it is is a dynamic that's going to come into play because of the other forces. So the way VCs traditionally work, even though it is an industry that's polite on the surface and there's a lot of great people in VC and a lot of people I consider friends, it is a shark tank because you are competing for deals. And if you're going to compete for deals, you have to beat the other guy at the end of the day. It is a zero sum game. You can't just share out the deal with everyone involved. In angel investing, that wasn't always the case because people were investing smaller amounts of money. There wasn't a lot of competition for the deals. Nowadays. There was community involved too. Exactly. Nowadays, you see seed stage competition. You see companies who are getting funded out of Y Combinator with zero cap on their convertible note or for extremely high valuations on their equity rounds. And all of a sudden, if you're an investor, you've got to be elbowing like crazy just to get into the deals. What has that done for some of the traditional angels? Have they kind of stepped back? Are they looking to regroup up with some other people? Is there a strategy? Is you seeing anything out there? Well, I can tell you what I've done myself, which is to tell people I'm investing with less frequency than before because I do believe that fundamentally the price of a deal matters. It's just my opinion that if I can buy Berkshire Hathaway for $100,000 or I can buy Berkshire Hathaway for $50,000, I'm probably going to get a better long-term return if I buy Berkshire Hathaway for $50,000. Now, of course, the other side of the argument is, hey, if you buy into Google at an early stage, it doesn't matter what price you pay and they point to the success of Y Combinator. One thing I'll note about Y Combinator, and people don't understand and grasp the genius of Paul Graham at this sometimes, is that because of the terms of Y Combinator, Y Combinator is effectively buying into every startup at a roughly $250,000 pre-money because they're getting 6% of the common stock and they're contributing about $20,000. Now, if you allowed me to make those investments, I would make them all day long. I would absolutely make those investments because that is a phenomenal valuation in a lot of good entrepreneurs. So talk about the Y Combinator market. Does that scale up to this seed level competition? Can everyone do it? Can there be too many Y Combinators out there? I mean, that's the dilemma. Can there be three, two, one? Well, we already have a number of them. Techstars is out there. There are incubators seeming to spring up by the day. I think that people always have to think about the overall macro situation. And the fact is that if you're talking about startup companies that are all competing for consumer attention, there's only so much consumer attention to go around. You and I get up in the morning. We spend 16 hours a day working pretty much. And, you know, we can only focus on one thing at a time. And so there's only those 16 hours to spend. The fact that there are now 100 times as many ways to spend those 16 hours doesn't increase them. What is the politics of the early stage that you're seeing out there? I mean, obviously early stages, there's been a lot of big brand names out there. True Ventures, the first round capital, Ron Conway has been an angel. And now he's got this firm SV Angel. What's changed? Are they talking to each other? Is there are you seeing kind of these silent wars? Is it a silent war? Or is it just a tempest in a teapot, as you said? I think there's a lot to a large extent. It's a tempest in a teapot. It's just bringing VC dynamics earlier into the stage. And it's not any different than VC dynamics have ever been. People do compete for deals. That being said, you know, people are friends. They know each other. They've known each other for a long time. And all angels love to talk deals with other angels. I've never met an angel who's secretive and says, oh, I'm not going to tell you about what I'm working on. Because once they've decided to invest in a deal, they want to tell everybody. They want to tell everybody they want to get other people in. So that deal gets the appropriate financing. What have you learned over the past 10 years doing your investor as a startup entrepreneur, angel investor now living in the current situation? What's your advice to entrepreneurs out there trying to figure out the landscape of angel angel list, VCs, micro VCs, these VC dynamics? What would you warned someone to give them the advice? Absolutely. The number one advice I always give to entrepreneurs is to say, look, look, investors are like customers. They have needs, they have desires, they have motivations. Try to understand them. They're not some sort of black box. They're all human beings in the end. Even somebody who is a partner at Sequoia has motivations. They want to find good deals. They need to stay in the partnership. They need to make sure they get their appropriate piece of the carry and so on and so forth. So if you think about these guys as potential customers with needs and you figure out how to meet those needs, you're going to do better every single time. Basically be a business partner. Be a business partner. And I often warn people about investors and people will sort of willy nilly invest, take money from anyone. And I tell them, listen, you can fire employees. You can't fire investors. Once you bring that person into the fold, they're there permanently. What about the case where entrepreneurs have to get money, free money from these angels or not free money, good money, free terms? It's good because it's good for the entrepreneur. Like I said, they can't get rid of them, but what if the investor doesn't want to be business partners with the entrepreneur? Right. I mean, that's a fear and that's seen situations where you know, here's some here's 50K, here's 150K. And then the entrepreneur thinks I got a partner and they look around. They're standing by themselves. I still believe that the model has worked for a long time. The concept of a lead investor makes sense because you want somebody who is committed, who is on the hook and who will be there for you when times go bad. I've been through bad times a couple of times and each time it was important that there was a committed lead investor who could pony up another million dollars or whatever and keep things going even if the economic times made it difficult to raise outside cash. So the danger in syndicating away your seed round and not ever taking a lead investor is that if you distribute the responsibility, maybe it doesn't happen. And so that's the advice I give. I talk with a lot of entrepreneurs and sometimes they'll say, oh, we need to raise another round. They come to me and they ask me, I say, listen, I'm one of your smaller investors. You like to talk to me because I'm friendly and give you advice and I'm on your side. But go to your lead investor because they're the only one who have the moral authority to then beat up the other investor and say, you bastard, you got to pony up your pro rata for this inside round. Otherwise, your name is Mudd. Yeah. So first of all, we're going to explore a lot of these advice questions through our doctor startup. Yes. I'll show you what we want to start doing together. So Chris is an angel investor, experienced entrepreneur, been around the track, high integrity. Great to have you here. What's exciting you these days? What's the what's the big thing out there that besides the look for the love of the entrepreneurship, tech wise, out on the landscape, what's exciting you right now? I got to tell you something that has got me enormously excited in general is just the rise of sort of touch computing. And this is not a brand new phenomenon. It's been around for quite some time. But I look at things like the fact that I've got kids, young kids who know how to use an iPad, know how to use an iPod, know how to use an iPhone, don't know how to use a computer with a keyboard yet. The fact that this is so intuitive, the fact that it is almost zero penetration into the business market, which is of course an order of magnitude larger than the consumer market in terms of its value. And I say we're still in the very early stages. If you're a baseball fan, we're still in the first or second inning of this thing. So I think there's a lot of promise in the connect to Microsoft connect to gesture based minority report kind of stuff going on there. That's always it's always been the case that computers have been somewhat biased. They're biased towards people who are good at a certain type of input and output. Now it happens to be that you and I are good at that sort of input and output. So it's a good thing for us. But by taking computing and making it something that anyone could participate in and anyone can drive value out of all of a sudden you're unlocking a lot of people that didn't really have the opportunity to get involved in technology before. It's pretty exciting. The software market is kind of coming back and I was talking with Dr. Crave at Strata and he's an old school genius on the Cube and at the Strata conference. And he said, you know, we're going to look at computers more like cars where you think about computers today. They weren't if they were if we if a car was built like a computer, we'd be crashing all over the place. We're instead computer be more like cars. You don't think about driving. You go places. You're having conversations with people and it's just there. And so I think we're seeing a lot of this kind of evolution with video. The gesture based computer. Is there any trend around mobile that you're excited about in particular? I think with mobile, the thing that's really exciting is the fact that mobile is becoming a point of content generation, not just a point of content consumption. So it's always the case that the first thing is content consumption. Just look at the the internet itself. People would sit down with their modem and consume content from websites. I remember people were really there was like, wow, there's a website called suck and it's got funny articles. I'm going to go check it and read it or wow, they put something up called ESPN zone and they actually give you the games. You don't have to wait and turn on the TV and wait to get the actual score. Holy Toledo, that's amazing. But the real power comes not from just consuming information as a publishing platform for a collaboration platform, something that allows people to work together and start putting their own stuff out there. So I think that as the mobile increasingly becomes a point of creation, that's really exciting. And right now a lot of that creation is, hey, they're tweeting or they're checking in somewhere. That's just a very beginning. Final topic here with Chris Yeh, this angel investor here inside the cube on extraction point is let's talk about the bubble. See, everyone's talking about this bubble we're living in because and in particular we're talking about Facebook, Twitter, Zynga, these new brands, these new franchises. I wrote a blog post about it. Link to a few other external blog posts that I felt was relevant. And my opinion was, yes, very bubbly in the sense of valuations, Andy Kessler was inside the cube here at extraction point and he talked about there's no real rational valuation benchmark to kind of counter what these valuations are. So he's kind of dismissing it. So in general, there's bubbly behavior with a non-calibrated valuation mechanism meaning no one to no market to justify the price and a growing franchise base. So really Zynga, Facebook, these companies like Twitter, I mean, these are franchises that will be around. So justifying the number makes kind of sense. The numbers are massive. But yet in the IT space in the enterprise, which we cover on SiliconANGLE, people are buying. So this I don't see kind of drying up there. Right. What's your do you agree with that? Do you think you anything to add to that? So what I would say is having been through the probably the biggest tech bubble of all time, which you and I can remember very well back in the late 90s and the year 2000, at least the first part of here. It's a scar tissue to prove it right there. Oh boy, there's a lot of lost money along the way. The thing about this feeling right now is it's not as bad as then because back then, you know, e-commerce was a tiny fraction of where we are now. Marketing was a tiny fraction of where we are now. People were going public with revenues of under a million dollars a year. And it was just literally insane. And it's not quite as insane as that. And so in comparison to the great bubble, this is nothing. But that being said, great bubble, well said. I am old school. I believe that you can use a discounted cash flow analysis and figure out how much a company should be worth. I won't claim that I do that all the time as an early stage investor. That's not really what I focus on. But but at some level, you can go back at a napkin and say, OK, discounted cash flow, future value of money, NPVs, all this stuff. The numbers have to work. If you say Facebook is going to be worth a huge amount of money because it influences purchasing behavior, then you have to say, well, how much purchasing behaviors are going to influence? And if the number to justify your valuation says it must influence 95 percent of the purchases in the United States, then the answer is, gee, maybe we are bubbly. So there always should be a way to reduce the practice because all these things in the end, somebody's got to pay for it. Somebody's either got to buy something or it's got to influence what something buys. Andy Casper said, you know, just don't be holding the ball when the music stops. That's kind of his was his rationale. Absolutely. Have fun with it. It seems to be justified and they are hot. They have massive growth. Facebook in particular. People were questioning Google when they went public, how massive they were. But again, they were printing money. I would say as an entrepreneur, I mean, there's an enormous opportunity here, which is that money is not easy to get, but easier to get. There's a lot of excitement and promise. If you can raise money now and build a real business with a focus on an actual revenue model, once you have enough money to survive, once you have a business, a franchise of some kind, even if it's a smaller franchise, you're less vulnerable. You're not Twitter or Google. You don't have to be beholden to the broader economy. So you can find a way to succeed even in a down economy if you have actually built a business that people pay for money or you actually do influence purchase behavior. Let's stay on that for a second. Let's talk about the kinds of businesses that are good businesses, durable businesses. And there's different categories now. There's lifestyle businesses, which weren't very common back in the tech business, mostly like old school brick and mortar, you know, start a dry cleaner, start a pizza place, whatever. Now there are a lifestyle business, you know, Silicon Angles, one of them and, you know, you're involved in a few of yourself. You have lifestyle business that can generate cash and you have the venture business and or growing be the big, big next big thing like a quora, right? An overhyped platform. Now, what's their valuation? Have you heard 100 million? It the numbers I've heard value from 85 all the way up to half a billion. And I heard 300 million who knows what to believe. Anyway, that's outrageous. But but that being said, people talk about platform wars, obviously Facebook, you see the Facebook launches places just a few months ago and in essence kills four squared, my opinion. And you got people out there, you got these big gorillas like Facebook, Google, Twitter and Zynga, big market power. As an entrepreneur, what is the selection for market entry tools, platform? Do you have an opinion on that you want to share? My opinion is very simple. It all comes down to having users or customers who love your product. That's it. It all boils down to that. Now, of course, you know, the top down analysis that says this market is better than this market. That's always important. But, you know, people ask me, what's the number one thing you look for? I would say traction to see, well, what is traction? I say it's people who love what you do and especially if they're willing to part with money, because you can have you can say, I'm building a location based group buying discount shopping service that has a mobile component and really ties into the Facebook API. And maybe it sounds good on paper, but you got to show me 100 people who just love it and use it every day before I'll believe a thing. We're here at the extraction point inside our studio live in Palo Alto, California. I'm John Furrier. The extraction point in the home of big data, Cloudera Inc. We share space here. Chris, thanks for coming on. A final parting question we do with everyone here is your view five years out from now, five five years or so out. What's going to be different in our world? Just in general tech business could be society. Any insight you want to share with folks from your perspective could be anything. Sure. What I would say is this. I did a blog post recently where I said 10 years ago, I would have to pay $20 a month for a 28 eight modem internet connection. Today I can pay $20 a month and get a broadband connection in my pocket. The world changes a lot faster than any of us think people look at things like Google people look at things like Facebook and Twitter and say my God, they're so powerful, they're going to dominate everything. Guess what Microsoft was supposed to dominate the web. They didn't IBM was supposed to dominate personal computers. They didn't. The fact is new and amazing things are being dreamed up all the time. Don't worry about what the big guys are going to do. Build something amazing. I'm John Furrier head distraction point with Chris Ye talking about startups, entrepreneurship, financing advice for entrepreneurs. That's a wrap for today.