Looking Back: Startup Investing Year #1

I wrote my first check to a startup on April 11, 2017. Since then, I’ve invested in 16 startups via my personal money and a small fund I manage backed by Social Capital. I’m having blast!

TLDR: I bet on outsiders using capitalism to solve society’s most important problems. 

Here’s what the last year & change has looked like…

Investment Pace

  • 16 investments total
  • 11 personal investments
  • 6 fund investments
  • 7 advisor positions

Thoughts: In the future, I want to increase my investment pace to ~20 per year.

Founder Diversity

  • 7 immigrant CEOs
  • 5 female CEOs, including 2 all-female founding teams
  • 3 Hispanic CEOs
  • 2 South Asian CEOs (does this count as diversity? I’m not sure.)
  • 1 African-American CEO

Thoughts: I think there’s a lot of money to be made by investing in people overlooked by the typical old rich white guy VCs, especially when I can mentor & develop the founders to the point where they can pitch & raise from anyone. While I am doing much better than the typical startup investor on the diversity front, a lot of this has been luck and personal relationships. I don’t have a repeatable process for sourcing diverse talent just yet. More work to be done here.

Investment Ideas that Excite Me

Frontier Technologies with Obvious Applications

  • Artificial Intelligence
  • Industrial robotics
  • Energy storage
  • Brain-Computer Interface

Structurally Underserved Markets

  • Women
  • Ethnic Minorities
  • Unsexy non-tech industries

Consumer Products with a Cult-Like Following

  • Direct-to-Consumer brands
  • Emerging social networks
  • Vertical marketplaces

Highly-Regulated Industries 

  • Healthcare
  • Financial Services

Thoughts: This is a work-in-progress. I didn’t start off as a thesis-driven investor, but I’ve quickly become one. I’ve steadily sharpened my focus to the companies doing things that that matter to the future of humanity AND have the potential to make craploads of money. I expect this focus to continue into the future.

Investment Stages

  • Seed: 75%
  • Pre-Seed: 25%

Thoughts: I want to flip this ratio. Ideally, I’d be investing in roughly 60% pre-seed and 40% seed stage companies. Not only is the potential for return greater when you’re investing insanely early, but it’s also more fun and less competitive. There are a ton of seed funds out there, yet raising <$500k is still pretty hard! Besides, being the first check into a company is way more meaningful and personally gratifying to me than being the 20th. I can help more, which gives me a ton of personal satisfaction.

Investment Sectors

Consumer: 40%

  • Social App: 2
  • Healthcare & biotech: 2
  • Direct-to-Consumer CPG Brand: 1
  • Marketplaces: 1
  • Financial Services: 1

Business-to-Business: 60%

  • Hardware: 5
    • Commodity Sensor + Deep Learning applied to Medicine: 2
    • Industrial Robotics: 1
    • Brain-Computer Interface: 1
    • Energy Storage: 1
  • Marketplaces: 4

Thoughts: I like this mix. If anything, I’d like to invest in more consumer products. But overall, I’m pretty happy with how this has played out.

Investment Geography

  • San Francisco Bay Area: 6
  • New York: 4
  • London: 3
  • Canada: 1
  • Atlanta: 1
  • San Diego: 1

Thoughts: Wow, I didn’t realize that so many of my investments are outside of the Bay Area! In truth, the majority of these companies were in the Bay Area when I met them, then later moved somewhere else (often back to wherever they were from). My model is to build high-touch, high-trust relationships with founders, and it’s really hard to do this without spending time together in person. Skype is decent for traditional pitch meetings, but I don’t do traditional pitch meetings, so that’s an issue. I’m sure there’s lots of great companies not near me that I’m missing, but I’m not sure how I could invest successfully in such companies, especially as I move more of my focus into the earliest, riskiest, most people-dependent stage of company. If anyone has ideas on how to build high trust relationships with people remotely, I’d love to hear from you!

Next: Lessons learned.

Matt Mireles
Are you an outsider building a company that’s solving an important social problem and/or creating a better future for humanity? Pls email me. I know what it’s like to not have a network––I was driving an ambulance for a living when I started my first company––and I’m happy to receive your pitch cold & take you seriously. 

To the Dreamers: a Thank You

Excellent Sheep

The only people for me are the mad ones, the ones who are mad to live, mad to talk, mad to be saved, desirous of everything at the same time, the ones who never yawn or say a commonplace thing, but burn, burn, burn like fabulous yellow roman candles exploding like spiders across the stars and in the middle you see the blue centerlight pop and everybody goes “Awww!” ― Jack Kerouac, On the Road

One of my favorite things about being and working with entrepreneurs all day is how empowered, how self-directed they are. Entrepreneurs, the good ones at least, pursue their dreams and no one else’s. They are leaders.

The energy, the passion rubs off on you. I love it.

I recently befriended a senior executive at large, elite tech company. She was brilliant and talented, could jump through any hoop you threw at her, had a sterling resume. Her purpose, her goal in life? To win… and then retire.

To win… at what, I asked? At the game, she said. At the competition. Whatever it was.

She had such a big brain, but such a poorly developed internal guidance system.

She had no why.

I’m so spoiled from hanging out with all these entrepreneurs that I was shocked. I know people like this exist, but rarely do I include them in my life.

Yes, I live in a bubble. It’s a luxury I afford myself. A true luxury.

But man, what a waste! To be so talented, so prepared, so wealthy and strong and still… to have no fundamental system of values, no goal, no agenda for life other than to win a competition as defined by others.

It’s good to be reminded of this from time to time. It makes me look at my life––I have the freedom to hand-pick my peers!––and be grateful. Very, very grateful.

To all who strive, who struggle, who hurt and cry for their dreams: thank you. Thank you for inspiring me, for reminding me how to live. I appreciate you always, but especially today, especially right now.

Alone on Thanksgiving? Come to My House.

Do you not have Thanksgiving Plans? New in town? Are you wondering WTF you are going to do on Thursday? Feeling broke / lonely  ?

If so, you should come to my house and join my family for Thanksgiving. We’re making smoked Turkey and yams and stuffing and all sorts of other deliciousness. Our house is in downtown Menlo Park 5min from the Caltrain and a few blocks from Stanford University.

Truth is that no one gets anywhere in this world alone. When I was 20, it was the people who picked me up on my cycling/hitchhiking mis-adventure down the California coast and let me stay in their homes on Xmas. When I was 25, it was the New Yorkers who welcomed me into a new city and taught me how to stay safe in my job as a paramedic. When I was 29, it was the entrepreneurs & investors who introduced me to Silicon Valley and showed me how to go from Zero to 1.

And now, I feel compelled to return these favors however I can.

So…if you’re in San Francisco Bay Area and you need a place to call home for Thanksgiving, let me know. We saved you a seat at the table.

Thanksgiving

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Betting Against the American Dream (in San Francisco)

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My friend Matt Pasienski, a Physics PhD, just announced he’s moving to Mexico and leaving San Francisco behind. Here’s what he wrote:

The American Dream has moved to Mexico. If you work hard in Mexico you can buy a house, have a family, and live a good life. That’s not something I can see happening in San Francisco right now.

Guadalajara is going to be a major world-wide hub for technology within the next 5 years.

As an American, these words break my heart. My father, born in 1929 to a single mom living in a one-room adobe hut in the Southwest, lived the American dream and clawed his way out of poverty into a PhD and professorship at a community college in Los Angeles. This is not supposed to be the story of the United States.

As a Bay Area resident, these words ring true. In any other place, our household income would earn us a place in the upper middle class, but here in the epicenter of the technology revolution, we instead live month-to-month, renting a musty, unadorned house for $3,700/month (a steal in these parts!). Daycare for our son, provided by a local church, costs $1,600/month and only lasts until 3pm, which means if we’re both going to work, we have to hire a nanny for $20-25/hour to fill in for the missing hours (you think a nanny could live on $12/hour in these parts? haha). Total cost of childcare: ~$2,500/month.

For our small family, that’s $6,200/month (i.e. $74,400/year) of post-tax income dedicated to just housing and childcare––before food, before gas, before clothes or toys or coffee.

64% of Americans don’t even earn that much money on a pre-tax basis.

Yet this is where the jobs are. For now.

Then there was this interview with the Mayor of Palo Alto:

We have to do away with this notion that Silicon Valley must capture every job available to it… We’re looking to increase the rate of housing growth, but decrease the rate of job growth.

Yep, the official stance from the Mayor of Palo Alto is that his city wants less jobs.

Ergot, he wants these jobs to go elsewhere. Like Guadalajara.

Or perhaps Seattle.

Austin?

Los Angeles?

Boulder?

As a Bay Area resident, these words make me feel hopeless and powerless. How will we ever afford a home here? It feels so out of reach.

As an entrepreneur however, these words make me think there’s an opportunity to bet against the Bay Area, to profit from the NIMBY catastrophe that is Bay Area housing policy.

Here’s my idea. Let’s call it IMBY Corp:

1) Raise a $50M investment fund from SF techies who are frustrated by Bay Area housing policy.
Pitch it as a derivative of the broader tech economy, but with a lower risk profile than traditional venture capital or angel investing. After all, the strategy might not work, but unlike startup investing the result is unlikely to be a complete loss of capital.

2) Buy residential real restate in emerging tech hubs like Seattle, Austin, Guadalajara, etc.
Target purchase price: $600k per property. Focus on the hip, gentrifying neighborhoods that are already attracting tech talent. Think: San Francisco’s Mission district back in 2010.

3) Invest $30k per property in renovations & furniture.
Make the house nice enough and furnish the properties in order to…

4) Rent the properties out on AirBnB to generate cash flow.
Back of the envelope: Average rental price of $60/night. Revenue potential per property: $21,900 (reality will be less, see next point…)

5) Use a third-party service provider to handle guest checkins, cleaning etc. for the first two years.
Assume third-party service delivers 60% property utilization and takes 30% cut of gross revenues, leaving IMBY Corp. with $9,198 per year in net income before taxes. Assume that once the fund switches to first-party service in year 3, property utilization jumps to 70% and overhead drops by to 20% of gross revenues, leaving IMBY Corp with $10,512 per year in net income per property before taxes.

5) Sell the properties for a profit after 5 years at a 50% premium on the purchase price.
Starting with $50M, you’d be able to buy 76 houses (assuming ~$500k in initial overhead). If each house sells for an average of $900k after 5 years (entry price: $600k), adding in all the associated setup costs ($50k) and AirBnB profit (($9,198 x 2) + ($10,500 x 3)  = ~$50k) makes it a wash, the result is a net profit of $300,00 per house with a final total portfolio value of $68,400,000 for an Internal Rate of Return of 7.65% per year over five years, which is better than buying US Treasury bills, but nowhere close to being an LP in a Sequioa fund much less angel investing in the next Uber.

Am I missing something? Would you take this bet? This is an idea I’ve been toying around with over the last few weeks. Perhaps someone else wants to run with this and make it a business?

I’d love to hear from any real estate or finance folks with actual experience investing these types of assets. Are my ballpark assumptions in the ballpark? Please share your thoughts in the comments on tweet me @mattmireles.

You’re always gaining credibility… or losing credibility.

The Rakish Brigantine

“Should we fire the CEO?” That’s the question at the heart of every board meeting. It’s the only thing I can really do as a board member, really. Even if I never say those words, the question is always in the back of my mind.

-Anonymous Board Member & Entrepreneur

A founder called me today. His lead investor was in the news in a bad way:

Rothenberg Ventures, the four-year-old, San Francisco-based seed-stage venture firm, may be on the brink of implosion, say several sources close to the firm.

 

At Rothenberg, the Rise and Fall of a Virtual Gatsby  -Techcrunch

“I thought startups were the ones that failed,” he said. Through the phone, I could hear him shaking his head in disbelief.  “It never occurred to me that my VC would implode.”

[Disclosure: The founder in question gave me permission to write about this. ] 

The founder was young. No professional experience outside of a couple menial summer jobs. But the business was surprisingly solid and well thought out. The boy could sell and he had the numbers to prove it.

But he’d just started raising money again. And here was his lead investor, the only brand name on a cap table littered with unsophisticated friends, family and randoms, going through a very public meltdown at the worst possible time. The other investors had looked to Rothenberg for guidance on how to respond to the many unpleasant gyrations that come with being a minority investor in a fledgling technology startup helmed by an inexperienced CEO.

“Dude, this is not good.”

The founder had called me, laughing nervously as he joked about having shat his pants “multiple times” throughout the course of the day.

We talked it over.

Did Rothenberg have a board seat? No.

Was he relying on Rothenberg as an ongoing source of capital? No.

Could Rothenberg call the note? When did the note mature? He didn’t think so, but he was looking into it.

Could Rothenberg sell their stake to someone else? Looking into it.

Was anything about his operating plan going to change as a result of Rothenberg melting down? Not a thing.

“Honestly,” he explained, “it just looks bad. I’m not sure how to address it when we talk to investors.”

Address it head on, I advised. You can’t hide it or run from it, so just directly acknowledge the problem, explain how it affects you and what you’re going to do about it.

This is what leadership is all about.

As an entrepreneur, you’re always being judged––by investors, by your team, by your board. It sucks, but it’s what you signed up for, so embrace it.

You’re always either gaining credibility or losing credibility. Remember that.

The surest way to lose credibility is to go silent.

Silence is like darkness. People are afraid of the dark, the unknown. It invites their fears to run wild. It feeds the monsters in their head. And those monsters, that fear is not your friend.

Good CEOs control the narrative. Good CEOs fill the silence.

Bad shit happens. This is true in startups, business and life. You can’t control for it.

Instead, what you can do is:

Work fast and do whatever you can to make sure they hear the bad news from you –– this sets you up as in control of the situation and in the know. Nothing makes people freak out like reading, for the first time, bad news about themselves on the wide open internet.

Acknowledge that bad shit has happened –– this demonstrates that you’re firmly attached to reality and not clueless. As my anonymous board member friend explained to me once, a clueless CEO is fired CEO.

Explain how the bad shit affects your business, specifying that which you know for sure and that of which you are still uncertain  –– this demonstrates that you understand the gravity of the situation. It’s always better for you to define that which you fear than it is to leave it to someone else’s imagination (or worse their officemates)

Lay out your plan of action ––this is the essence of leadership, this is what everyone wants to hear. People want their leader to be a man (or woman) with a plan. Now, you and I both know that your plan might not work, but that doesn’t matter. Having a plan means that you’re in control, that they don’t need to worry, that you’re on top of it.

Ask for help –– this transforms the problem that you own into a problem that the group owns, which will at least soften the blow in event that you fail, and at best lead to new ideas and more actual help. If the problem is yours alone to bear, then it’s easy for other to sit back and entertain their primal desire to blame you.

Aside: On a tactical note, I find that SMS and iMessage are a better way to communicate with stakeholders than email. Message composition is faster because it’s less formal. Response time is faster because the channel is so noise-free. How many times have you had an email sitting in your inbox forever, just waiting for your response. But you don’t respond because your thoughts are too complex, you’re too nervous, etc. The same can happen with a text message, but it does so much more rarely.

If you don’t know it, the iMessage hack is pretty useful. Oftentimes, you don’t need a phone number to send an iMessage. Just past the person’s email into iMessage. If the text turns blue, it works and you can be sure it’s tied to the person’s account. If it stays green, maybe they’re on Android or it doesn’t work. It’s an easy hack and a great way to cut through the noise. Be warned though that not everyone will appreciate your invasion into their personal space, so be prepared to cajole and apologize away your way into the recipient’s comfort zone.

/end 

People always want to be led, especially in times of uncertainty and fear.

Communication is the bedrock skill of leadership. Do it right and you’re a hero. Do it wrong and you’re in a world of hurt.

“It’s times like this when you learn to be a CEO.” I said, signing off. “Inspire confidence. They will follow.”

PS If you know of any founders that need coaching or startups that need a hustler, send them my way. I recently left Dishcraft and am figuring out what’s next. Contact me: @MattMireles  or  me@mattmireles.com

Alone on Thanksgiving? Come to My House.

Do you not have Thanksgiving Plans? New in town? Are you wondering WTF you are going to do tonight? Feeling broke and maybe just a little lonely?

If so, you should come to my house and join my family for Thanksgiving. My girlfriend Stephanie is making Turkey Dinner. We have beer, wine and not much in the way of family around these parts. We live in downtown Menlo Park 5min from the Caltrain.

Feel free to bring a friend. We’ve done this a few times before and it’s always a lot of fun.

RSVP using the form below and if you’re bringing food, please indicate what kind & how much in the Google Sheet that this form redirects you to after you hit submit. Once I get your RSVP, I’ll send you my address and other details. Dinner starts ~5pm and will go until ~9pm

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People, like businesses, want predictable revenue.

Let me set the record straight for you deluded millionaires of the world: For most people most of the time, working in the “Gig Economy” is an act of desperation that you do only because the alternative is unemployment or an even worse job.

Working a gig is exactly like being a temp. It sure as fuck beats unemployment, but unless you’re a teenager or a bored housewife, temping is not desirable.

People –like businesses– want predictable, recurring revenue. 

In business, we call this “quality of revenue.” Investors pay a premium for companies with high quality revenue. Here’s how Bill Gurley of Benchmark Capital (led Uber’s Series A) described

Investors favor pricing models that provide a high level of predictability and consistency in the future. It is easy to see why revenue visibility would have a positive impact on a Discounted Cash Flow analysis. The more certain you can be of future cash flows, the higher premium you will put on a business, and as a result, you will see a higher price/revenue multiple.

-Bill Gurley, All Revenue is Not Created Equal: The Keys to the 10X Revenue Club

Working in the Gig Economy is the worker equivalent of an transactional eCommerce company reliant on SEO. Times may be good now, but you never know what tomorrow will bring. The flick of a programmer’s switch can leave you ruined .

And while the same can & does happen to full-time employees, with employment comes a financial safety-net called unemployment compensation.

A financial safety net… yeah, who would want that?

The Greece Situation

Here’s what I would do if I was running Greece right now…

  1. I would vote “no” vote in the recent Greek referendum.
  2. I would move to abandon the Euro and re-adopt the Drachma as the national currency.
  3. I would stay in the European Union.
  4. I would print money and use inflation to solve the government’s internal debt problems.
  5. I would use my country’s now-improved negotiating position via threat of complete default to get our external creditors to restructure our debt on terms favorable to Greece.

There is no “happy” outcome for Greece right now. The choice is between dysentery and amputation. To leave the Euro would be to suffer a crippling dysentery that would leave the country crippled over and in deep pain for months. To stay in the Euro would be to willfully amputate one of the country’s limbs, making Greece forever an economic cripple.

I choose dysentery, because it is the only path of hope, however grim.

Getting Unstuck

“The only difference between Elite Entrepreneurs and those just getting started is the amount of time we stay stuck.”
Dan Martell

Winning is all that matters. You only have to get to the top of the mountain once. How much time you spent falling down at the bottom beforehand doesn’t matter (other than the opportunity cost, I suppose.)

Q: How long did it take for Steve Jobs to get back on the horse after Apple fired him?

A: More than a few minutes. Also, who the fuck cares?!?

Being able to get yourself out of a rut is a good thing. But even the best of us end up there sometime.

Something to think about.

Letter to a Fired Founder

A friend of mine just got fired from his startup. As a founder, he was classy, loyal and relentless. He behaved like a champion. But despite all this, he got shitcanned nonetheless. So I wrote him a letter:

Hi,

I know you must be feeling pretty shitty right now. Probably a little bitter too. I know I would.

[!Name], I’ve seen you in action. You’re an inspiring leader. You’re a motherfucking relentless hustler. And you’ve got the heart of a lion.

If you go off and start a company some day, I’d be honored to work for you. Or co-found. Or invest. Or whatever.

In the coming weeks, I’d advise taking some time off, investing in your mental health and getting out of the valley. This is what I wish I had done.

Travel. Mentor. See the world outside of Northern California.

It’s not a marathon, it’s a fucking ironman.

And whenever or wherever you need me, I’ll be here for you. I am your friend.

Thanks for being part of my life and supporting me so much over the last few years. I hope that now I’ll have the chance to be there for you in your time of need, whatever that looks like.

Sincerely,

-Matt Mireles

Be there for your friends, the real ones. Tell them what you see in them. They deserve it.

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