Angel Investing: Esther Dyson

Esther Dyson shares her unique perspective as an angel investor, offering startup dos and dont’s on everything from building your board to building your company.

Full Transcript

I invest in things that wouldn’t happen without that company ideally. I don’t particularly want to invest in the 3rd or the 23rd video sharing startup. Doing Groupon in another country doesn’t excite me. Doing something new and interesting that’s useful does.

Q: How have you seen the market change since you started investing?

A: When I first began long long ago there was a startup market but it was very expensive to start up because most startups either built hardware or they used a whole lot of hardware and is very expensive so the good news was that you didn’t have a lot of competition as a startup but you had to go and have a good idea or connections and raise money to do almost anything you couldn’t buy a five thousand dollar server you had to buy a million dollars worth of computer equipment to do almost anything.

What you have now is is a completely different environment where everybody wants to be a CEO, wants to be an entrepreneur and a lot of people really shouldn’t be. They might be completely great heads of development, they might be wonderful salespeople, being a CEO is way overrated and not everybody can do it.

I was not the CEO of my company after the first couple years. I had a CEO who did all the work and I got to do all the fun stuff. I wrote the newsletter, I traveled around the world, I ran the conferences I got to talk to interesting people and Daphne, my CEO, stayed in the office, and managed the people and dealt with the real estate and paid the bills and all that so those of you who think being a CEO is glamorous it really isn’t. if your investors tell you that they want you to become chairman or chief strategist they may will be right, and you may actually be much happier doing that.

Q: Have you seen any consistent traits in the good CEOs you have worked with?

A: Smart and honest. The ones I like the best also have senses of humor and senses of humility. There are companies I won’t invest in even I think they’ll make money because I don’t like the people and that’s one nice thing about being an angel—it’s your own money you can spend it the way you want and you don’t need to apologize to anybody either if you make a bad investment or if you miss one.

Q: What do you see in bad CEOs?

A: They don’t listen, they don’t understand their own limitations. The very worst lie to themselves not just to you. Sometimes thing tell you what they think is the truth because they are self deluding and there are more of those than you think. One of my startups, they watch you play games and they attempt to analyze people’s characters put people in the suitable jobs and so we got to this thread about psychopaths, could we recognize psychopaths? and someone else found a study that said on average 1% of people are psychopaths but 4% of CEOs are. Some of these guys do actually become successful because if you get beyond a certain level, people around you will support you in all kinds of craziness or bad behavior but if you have a good board a psychopath doesn’t make it. So the worst ones, are self-deluding if someone tells them no, they don’t understand it and I’ve run into a few of those fortunately not invested with many them.

Q: In terms of your current investments, what’s exciting you in terms of healthcare?

A: All of them. I’m on the board of 23andMe, I’m on the board of HealthRally. I’m in HealthTap Health engage, Health Village which is now called Medico, Health Loop, Keas, Organized Wisdom and Omada is one I actually really like because it deals with this issue with of motivation and it in itself it attempts to train people and I think you know my goal in healthcare is not to replace all the people it’s to make the people more effective and number one, and number two stop people from getting sick in the first place

Q: In those investments that you’ve made, what excited you about those companies the first time you saw them?

A: Well it was different things in each case in but mostly I thought they would make a difference and have an impact and most of them are more focused on prevention than on care.

Q: And that’s a theme for you?

A: Yes. It’s more cost-effective, it’s earlier, it’s better to treat your car right then they have to take to the shop all the time.

Q: How has your investment thesis or your investment philosophy changed since you started investing?

A: Well, I don’t have much of a thesis. It’s always been kind of at the edge of what people are doing it hasn’t changed that much. The specifics have changed the markets -what people will buy, has changed, what people can make has changed The shift from Internet to health – How many of you have studied math? Okay, so you’ve probably had professor who is working on a proof and he writes a whole lot of equations on the board and he says “there that is the proof. The remainder is left as an exercise for the reader” And to me that’s the point where we’re at the internet, the readers can take over. But health we’re still at the beginning.

Q: So if someone is coming to you with an idea or an opportunity, what should they bring to that first meeting?

A: Well usually, unless I don’t have time, I want to know where they came from, why they’re interested, what got them started. I’m not claiming every VC you meet or every angel you meet will what to know this but I kind of like to know what drives this person, who’s the customer why are they going to buy it, what problem are you solving that other things don’t solve and then what’s your business model. Most people that you give your business model to date they won’t believe your numbers. You will never produce the numbers that you put on your chart. They’ll either be low or high but what we want to see is your understanding of the numbers, the sensitivity of those numbers to different things happening. It’s not how big is the thing but what is the structure of it, what will make it grow, what will not work, what depends on what kind of what’s the mechanism that’s going to turn this into a real business? And then because whatever your business is now it probably won’t be in five years, how will it change, will you be good at changing it will you understand how to turn it into something else when the market changes

Q: What is your filter for all of the opportunities that come your way?

A: Well it’s sort of random. It varies. If it’s an editorial kind of thing and you don’t spell right that’s usually pretty bad. If its engineering and you don’t spell right it may be forgivable. So the thing to understand as you go out and raise money – some people have a real process- but a lot of life is really random and what that means is be persistent. It may not be that they don’t like you. You just happened to send your plan in on a day when they had 14 other plans and they didn’t get to yours. You should not be obnoxious but you should be persistent. I often get emails that say did you see the email I sent you two weeks ago. And I probably did, but don’t make me go look for it, just send it again. Whenever you send a communication to anybody, make it easy. If you want them to call you give them your phone number. If you want them to come speak at your event give them your address. If you want them to invest say so upfront. The best emails are fairly short, they say up front what they want, they make it easy for you to say yes and they sort of lead you to the next step. I get a lot from outside the US and so you might think these are hilarious but I get a lot of them like “Dear Ms. Dyson—is it okay to send you a plan?” Just go ahead and send it, I can always not read it. Then there are others that send simply a file with no description of what’s in the file. My all-time favorite one was a guy from England. He said “Dear Esther, my aunt heard you on the tele and she said I should write to you.”

It’s always good to have a recommendation from somebody but ideally it’s somebody I know and even better it should come from that third person because if they really recommend you they should be willing to do it rather than have you say that they come recommended and so what that means is you need to write to your friend Bob and you need to make it really easy for Bob to recommend you so you don’t right to Bob , “Dear Bob, please recommend me to Esther” you write “Dear Bob I would very much like to talk to Astor about a possible investment I know she’ll be interested in my company because blah blah and then maybe one more paragraph and then all Bob has to do is hit reply and add my name to the CC and he’s done and I’m just amazed at how people don’t do that.

Because whenever you want someone to do you a favor or respond, just make it so easy for them that they can handle your email the first time that they see it. So the emails I respond to fastest are the ones where I say ,“Thank you so much but this really isn’t in my area of expertise and I can’t give it the attention it deserves.” Those are easy to write and so they get answers right away. Then there are the ones where I kind of think, “Yeah I’d like to know a little more I’ll come back to it. And then two weeks later I got another letter saying, “Did you see the plan I mailed you two weeks ago?” So be persistent but the easier you make it for people to reply, the more they will.

Q: So you talked about trusted referrers. Who are your trusted referrers?

A: It will vary. It varies a lot depending on what it is. I mean it honestly, it does in fact depend on what what they are referring. It’s not you know, “Oh I see this comes from John Doerr, I’ll answer it immediately. I mean if it comes from John Doerr I will pay attention but I won’t necessarily, I always tell people I can get so-and-so to return my email but I can’t get him to say. “Yes.” And what it gets to make people say yes is the content rather, if you’re dubious certainly coming from someone I know that I think has good judgment is going to help a lot.

Q: What are your your common sources for new investments?

A: Trusted referrers. It’s amazing how much of a difference it makes partly because if a company can’t find a trust referrer it’s not a good sign and it means either it means nobody wants to recommend them or they’re too lazy. Whenever I get email saying, I get a lot of emails saying someone I don’t know said I should write to you so they say John Briggs and I don’t know who John Briggs is. I’m sure other people use my name that same way and I wasn’t really involved or maybe I used somebody’s name once or something the best for all really does come from the individual themselves they bothered to send an email they they like you enough that they’re not embarrassed to send out an email with your name and you have to earn that. I mean it is a pretty good filter. Life is arbitrary

Q: So when you’re make an investment what’s your expectation
on a return

A: So your expectations is always you’ll make millions and millions of dollars but I try not to make, I try always to make investments were expecting it millions and millions of dollars but where I wouldn’t really mind even if I didn’t. and there’s been bunches and bunches of those where I really like the people the investment didn’t work out, they were honest, I liked the idea. There were some cases where somebody lost me money and I’ll still invest with them another time. Partly as someone once said I spent so much money getting them educated now I should benefit. But I like to do things where even if the company failed, I learned something, they learned something, we did something worthwhile ideally even if the company failed maybe somebody picked up the technology or the three founders learned it a ton and now I can back them doing something else anybody in the angel business is used to a lot of their deals filling it’s not shameful. There are shameful failures but the mere fact that of a failure isn’t shameful and so you try pick ones where you will not feel your time was wasted even if your money was

Q: Would you mind sharing some some success stories you’ve had? what are some of the more successful investments that you’ve made? And it’s success by your definition.

A: So there haven’t been that many in health yet. It’s still early days for most of my health stuff. Though I was in Medstory and was acquired by Microsoft and became part of Bing. I wouldn’t say that one was a huge financial success but the technology lives on. I love the founder his name was Alain Rappaport. They’ve contributed a lot to Bing and some of Microsoft’s work in health. and so that was one where I couldn’t even tell you what return was I don’t think I got my money back but I got some money back but I’m perfectly happy with with that one. Roaring success—I spent probably ten minutes talking to John Doerr about one of his funds and that was the fund that had Google at 12 cents a share. So I did very nicely on that. It funded a lot of other things I’ve done so Yandex went public, Datome.

All these companies-none of them went off and became Zingo but a lot of them became interesting companies or parts of interesting companies. I know I’m sounding very vague. I’m trying to think of one or two that are

Q: Google’s not bad.

A: Yeah, but the one’s where you struggle more are-Flickr I still use almost every day I was an early investor in that. It’s now part of Yahoo it’s probably one of the best parts of Yahoo and I love it. We’ll come back to that

Q: Do you see best practices in the startups that you’re working that you can share with us? Best practices are obvious.

A. Bad practices are you forget to send out invoices, you’re too techy—you don’t hire a business person. you don’t test your product. You need to test your product on real people but you need to tell those real people that the product isn’t ready there’s a difference between a beta product that doesn’t have all its features and a buggy product which doesn’t have all its features and a buggy product that doesn’t work or does things wrong thats sort of an important distinction. There’s an awful lot of hygiene that makes business work you need to run the business right, you need to pay the people you hire, you need to be honest said but then the specifics of any business are very specific and you have to do those right and that’s the challenge.