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Thomas Korte of AngelPad sits down with Jason on today’s episode. The discussion covers, similarities/differences in the European Startup scene, immigration and how it changes startups, and the state of Silicon Valley today and in the future.
0:30 Today on the program Thomas Korte of AngelPad
2:40 Thanks to New Relic for sponsoring the program. Use code TWiST to get a free month of New Relic Pro
5:00 How many startups are at AngelPad currently?
5:15 How does it work, how do you decide who to host?
5:50 Is it more than just office space? Do you provide mentorship?
7:00 What is the difference between a venture backed business and a non-venture backed business?
8:15 Why do venture backed businesses scale first and grow revenue later?
9:15 Is it wrong to hate on companies who don’t initially focus on revenue?
10:45 Is it true investors want to see revenue earlier in Europe?
13:30 What was it like back then with Marissa Mayer?
15:00 Do you think it has become easier today for entrepreneurs?
15:45 What is the amount of time it takes to test a business?
16:50 How do you get a founder to quit their job and start their own business full time?
17:45 Do you have founders outside of the valley? Specifically Europe?
18:15 Do these people work harder? Do they appreciate opportunity more?
19:30 Coming from Europe do you have to have a product to get funding?
20:00 How big is the immigration problem for the US and Silicon Valley specifically?
21:10 So is America driving the most intelligent people out of our country?
22:00 Why are we blocking qualified people from coming in?
24:15 Should there be a way to gain entry if you raise an angel round of X-Amount or higher?
26:00 Thanks to MailChimp!
28:45 How do you find a non-technical cofounder?
30:00 What about people who are just great at UI? Is that as valuable as being a developer?
32:30 What about convertible debt?
34:30 What about uncapped notes?
35:15 Explain what an uncapped note it exactly?
39:40 Is there a bubble now? What is the state right now, is it out of control?
42:15 How does a founder know when they’ve hit a roadblock they can’t get through?
48:00 Are investors a leading indicator or a trailing indicator of when a market is dying?
54:30 You have purposely kept AngelPad to a boutique level, why?
57:45 Is there a danger that there are too many companies coming out of YCombinator?
61:45 What is the number one red flag when going through applicants?
63:30 What are you a sucker for? What really gets you excited about applicants?
64:45 Thanks to Thomas Korte and AngelPad. Go to angelpad.org
65:40 Thanks to Mailchimp and NewRelic. We’ll see you next time.
Visit http://www.CloudSigma.com/ThisWeekIn for a free 0 credit.Today’s episode of “This Week in Startups” is brought to you by NewRelic.
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To redeem, visit http://www.newrelic.com/thisweekin, and see why thousands of developers worldwide don’t deploy without it.And by MailChimp. Manage lists with up to 2000 subscribers, and send up to 12,000 emails per month, for free with MailChimp.Hey everybody, it’s Jason Calacanis, and this is This Week in Startups.Today on the program, entrepreneur and now founder of AngelPad, Thomas Korte is with us. He’s a really interesting character. Lots of insights, helping build tons of companies here in San Francisco, a lot of success, and a lot to say about starting companies, funding them, and making them successful. Stick with us, it’s gonna be a great show.INTRO MUSIC
Hey everybody, welcome to the program. It’s me, Jason Calacanis, your friend, serial entrepreneur, angel investor, journalist, and just… samurai out there fighting the good fight like you guys are, trying to build companies, trying to make a dent in the universe.
And one of the ways we do that, in my humble little operation, is to host this podcast, which we’ve done for over three-hundred episodes. And now, somehow, a hundred thousand people are downloading every episode. People are tuning in on Stitcher and TuneIn Radio and iTunes Podcasting and. It’s really grown into a big operation here, and I’m very proud of the team for putting together such an amazing program.
And today will be no different. We have a great, great angel investor, and somebody who runs one of the most-respected accelerators in the entire industry, Thomas Korte is going to be with us. And he started at, Google. Internationalized a lot of the Google products into Europe, and he’s just a really considered guy who I’ve gotten to know over the last couple of years… Very smart, and you’re going to learn a lot today about starting companies, raising angel rounds, and just the struggle that it is.
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Jason Calacanis: With me on the program, Thomas Korte, Founder of AngelPad
Thomas Korte: Thank you, thanks for coming.
Jason Calacanis: I appreciate you hosting us here, that’s fantastic, and I got to walk around with you and see all the creativity going on here. How many startups do you have here?
Thomas Korte: We have twelve startups in here right now. We usually do twice a year, twelve startups at a time.
Jason Calacanis: Yeah, and what do you look for in startups, and what do you provide for them? How does it work?
Thomas Korte: We spend a lot of time looking for startups. We spend about half the year looking for startups, about half the year hosting them here. So it’s three months, three months, three months… is our schedule.
We get about 2,000 applications, so we have a broad choice to go down to twelve.
Jason Calacanis: Wow.
Thomas Korte: What we really look for, what it comes down to is, a great team, that has a really unique insight into something, and then, ones who crack a really big market and solve a real problem. And we really have the gamut from cloud infrastructure to b2b marketplaces to consumer companies to mobile companies, everything there is.
Jason Calacanis: What do you provide? I mean, obviously, they’re getting office space, but I think mentorship is probably the key thing, yeah?
Thomas Korte: I hope so. We certainly have the office, and I think it’s an important part, not so much because it’s a free office, much more because you’re together with other founders and us 24/7. Not quite, but almost… here for this period.
The mentorship is really, what I think it comes down to. When you start a company, often you have this idea, you have often a product in mind, and often a product that solves a problem. But, often, to make it a venture-backed large company, you don’t back out how big this has to be, and what this really means to raise a lot of money and build a large company.
And so we spend a lot of time on market sizing, on the problem itself, defining the problem, the initial customer set. And we really are here with them every day.
Jason Calacanis: And entrepreneurs overlook that I think, in a lot of cases.
Thomas Korte: They do. They do very much. When you start a company it’s usually, you have a problem–hopefully you scratch your own back, as they say… you know, you solve the problem in a better way if you have the problem yourself. But, making that a business is one step… But, then also making that a venture-backed business is yet another step.
Jason Calacanis: What’s the difference between a non-venture-backed business and a venture-backed business in your mind? How do you explain it to these new recruits when they come in?
Thomas Korte: Let me start with a non-venture-backed business. It kind of goes down as the bootstrapped business, or the business that’s built on revenue, and I have nothing but respect for people who build companies like that. You know, this is the restaurant down the street, right… They have to get a loan to do something, to make money, to reinvest it, and eventually they grow and they will keep reinvesting. The same thing with a lot of software companies that choose not to take venture capital. 47 Signals, great example, building a large…
Jason Calacanis: 37 Signals.
Thomas Korte: 37 Signals, yeah right, 10 extra on that!
Jason Calacanis: It’s a new version, they’ve gone even bigger, they’re up to 47 Signals… 37 Signals, yes. But they took an investment from Jeff Bezos, so even… They may not have gone venture, but they definitely went angel.
Thomas Korte: That’s true, but for a long time they really have built… you know, let’s build a product, let’s sell it, let’s build the company on revenue. And I think that’s the big difference. As a real business you have to think about revenue. And how to get revenue to then grow the business. As a venture-backed business, you have to think about getting to scale, getting very large, and eventually charging for that… a lot more people…
Jason Calacanis: And why do venture-backed businesses take this approach of get to scale, then turn on revenue? As opposed to turn on revenue, grow with the revenue?
Thomas Korte: Usually it is because you grow a lot slower if you grow with revenue. Let’s take Gmail. If Gmail would have asked for a month, right, which I know you would pay it, I would pay it, no question. But it would have just not gotten to the scale where it is now. And when you’re at scale, you have a different set of revenue opportunities that you just can’t get when you ask people for money directly.
I think what the past 10 years has shown us, is that you can build very interesting companies, without directly asking the customers to pay for it. You know, Google’s a great example, Facebook, Twitter, a lot of these consumer companies are great examples of that.
Jason Calacanis: Yeah, but people sometimes, either in the industry or around the industry, will hate a little bit on companies not focusing on revenue.
Thomas Korte: Ah ha.
Jason Calacanis: Are they right to hate on it, or are they wrong to hate on it? You do hear this, “Oh my god, what are these people in San Francisco thinking? They’re just spending 10 million dollars, and they’re not even thinking about revenue.” Do they have a case, or are they just missing the point?
Thomas Korte: I think they do. You know, I look at it in two different ways. Now when you think about revenue, there’s a difference between understanding your revenue potential–seeing how you can make money in the future at what point, and kind of when that kicks in, kind of when do you layer revenue on top of it–and just the pie-in-the-sky, “Oh, we don’t worry about revenue, we’re going to be as big as Google, and then we’re gonna figure it out.” I think those are the two different sets of it. If you talk to an investor in New York, or even in LA, certainly in London or in Europe, revenue comes really, really early. It’s like, how are you going to make money with this?
We focus a lot on that too. We need to understand… Founders need to understand how to eventually make money with this, and in some cases how to make money with it fairly soon. On the b2b side, you actually do want to charge as a way to validate. People validate with their wallet if something’s a real problem that they’re willing to pay for.
Jason Calacanis: In the enterprise community.
Thomas Korte: In the enterprise, in the business side. I think a lot of businesses start worrying about not paying for certain services. I think enough of them have had experiences where a company goes by the wayside, or changes, pivots, and all of a sudden they’re stuck with something. And I think most businesses are willing to pay.
Jason Calacanis: Certainly if they’re getting value, they don’t want to see the company go out of business. They want to see the company reinvest.
Thomas Korte: Definitely.
Jason Calacanis: But in Europe, the investors do demand revenue early. But in Europe, we don’t see the breakout successes, do we?
Thomas Korte: Well you know I’m from there, so I can’t talk badly about them…
Jason Calacanis: Well it is the truth, I mean, entrepreneurship is looked at differently, and you’re in San Francisco for a reason.
Thomas Korte: Yes, exactly, and I think that’s why we see a lot of international founders that have different aspirations come out here, come to the US, come to Silicon Valley specifically.
I think in Europe it’s different market dynamics, you know, there’s less access to capital. The people who do invest tend to be with banking backgrounds, where things make a lot of sense on spreadsheets, and you can extrapolate out. You know, none of those rules apply at early stage. You can’t value a company, on paper, with a spreadsheet, at the earliest stage, right?
Jason Calacanis: Certainly not Twitter.
Thomas Korte: Yes, exactly.
Jason Calacanis: Nobody even knows if it’s going to work.
Thomas Korte: Exactly, and I think it’s the case with most of these companies. So I think in Europe and most places outside of San Francisco, or Silicon Valley I should say, revenue does become much more important.
It’s also, when you look at Europe, you have much smaller markets. The largest market in Europe is Germany with 85 million people or so. It’s a very small market. California is almost bigger than that. So, when you deal with smaller markets, the scale to which a consumer company has to grow, all of a sudden you have to say, well, we’re not gonna get 15% of all Germans to use it, we’re gonna have to get 50% of all Germans using it, and that’s only 40 million people. If you cut off the kids and the really old people, it’s just not that much left. So revenue becomes the other factor that really plays. You’re better off asking for money from 15% of the people, than never getting to a real company.
Jason Calacanis: And so, you spent time at Google. You joined in 2002.
Thomas Korte: Yep.
Jason Calacanis: Which I guess was maybe year three of the company, or something? Year two?
Thomas Korte: I don’t know, the counting is kind of… I think they started in 1996 researching, I think in 98 is when the company got off the ground.
Jason Calacanis: Right, so very early.
Thomas Korte: Yes, when I joined there was no revenue, there was barely any advertising products.
Jason Calacanis: So there’s a perfect example of a company that went for it, making a great product, and then turned on revenue, later.
Thomas Korte: Yes, I think Google was actually a little different, because Google had revenue through the deal with Yahoo. Which, in hindsight, turned out to be most genius. Get distribution. Get paid. Get all the data. Have the logo in the Yahoo search results. Really boosted Google.
Jason Calacanis: Hugest blunder in the history of Silicon Valley was Yahoo putting Google as their search result instead of building their own?
Thomas Korte: I think so, yes. I think so. But, they are fixing it now with Marissa heading Yahoo, so that’s a huge development.
Jason Calacanis: You were there before Marissa? No, she was there before you.
Thomas Korte: There were eight people on the product team. She was one of them.
Jason Calacanis: And so, what was it like back then, with Marissa, and what was the culture like back then? What was Marissa like back then?
Thomas Korte: Marissa was the same smart person she is now, back then. She was as opinionated back then as she is now. She has strong opinions, she backs everything up with data, she’s a very smart woman. Yahoo did a very good thing to get her to run their company.
You know, back then I think there was a clear understanding that we’re building something very big, that we’re touching a lot of people, that we have a chance to transform the way that people look for information, the way people use information. You and I, when we applied to college, we sent postcards or called someone to get a brochure, and then read through that, I mean, we had no insight beyond what the marketing material was like. Today, the same thing is happening with one click–any information, you connect to other people. It’s just a different world.
Jason Calacanis: Interacting with the students on a Facebook page. Asking them questions on Quora, whatever the case may be.
Thomas Korte: Exactly. You know there’s so much more information, there’s so much more insight. The same has happened for access to information in Silicon Valley. Ten years ago there was no information about how venture capital works, it was just a red velvet screen that you were invited into.
Today, there’s, between what you’re doing, between what AngelList is doing, between all the blogging, the VCs that are very open about how things work. We’re just in a different world than ten years ago.
Jason Calacanis: Is it easier for entrepreneurs? Or is it a false easiness?
Thomas Korte: I think what’s easier is you need less money, right? So, when I arrived in Silicon Valley, I joined a company, we raised twenty-five million dollars to prove a concept. And you don’t need that anymore today. We can scale companies today at a scale–other incubators do too–and really weed out, or not weed out, but have the cherries picked out and really accelerate.
Jason Calacanis: You can test at a low dollar amount.
Thomas Korte: At a low cost, and a fast turnaround too.
Jason Calacanis: What is the cost? What is the amount of time it takes to thoroughly test a business, to know, this is a good one, a bad one, an average one, or…
Thomas Korte: I think it’s very, very fast. I think it’s a matter of maybe six months or so.
Jason Calacanis: And 0,000, 0,000, 0,000.
Thomas Korte: If that. I think most people… I coach founders that want to be founders in some time out. And what I see is a lot, that people don’t think about taking the right steps to become a founder. So, one example is about the money. Most founders have more disposable income than anyone else. They work at Google or at Facebook. They make 0,000, 0,000. Sorry guys, for the guys who are in other places where engineers don’t make that much. But that’s the reality here. They can put money aside. And really, for a year, put 20, 50K aside in a couple years time to have that buffer to test something.
I think the most important decision as a founder is to quit your job and do it full time. It’s one of the most difficult ones. It’s one of the scariest ones.
Jason Calacanis: And how do you get them to do that? Because you must get, of the applicants, a lot of the good ones are people who are currently employed, but telling you, “I have this idea”, is that correct?
Thomas Korte: We are, I think, one step beyond that. In the application process, we really look for, teams that have committed to it. It’s rare that we have someone that is in a company still. The only time that happens is when they have H-1Bs, and they kind of have the golden handcuffs of Silicon Valley, which is a whole different conversation. But, most founders that we see have committed, are about six months into it, have prototype, do have kind of a hypothesis, and assumptions, have validated those, and really are onto something, the first iteration done.
Jason Calacanis: You have a decent number of founders who have come from outside of The Valley into the program, correct? And many from Europe.
Thomas Korte: We have. We have about, let’s say about 20% of the companies come from outside of the US, most of them from Europe. So we have a very strong… from the UK very strong, we have some Australian, Singapore. There are certain countries that really have an innovation engine. And those founders tend to be the ones who come over here more easily.
Jason Calacanis: Do they have an advantage coming here? Do they work harder? Do they not take it for granted, like some of the people who have been here for 10 years? Do they appreciate it more? Or, do they have a drawback in that maybe they think too small?
Thomas Korte: I think there’s a fine balance between the two. I’m a huge fan of the immigrant entrepreneur. You know, I am. I’m not saying, like, “I arrived here with nothing.” But, you have a different background, you have a different outlook, you have a different educational system. Some of the values are certainly different than the American ones. But, you know, a lot of them don’t have that entrepreneurial spirit that the Americans have.
On the other hand, a lot of them have this very hard-working, very dedicated to something. One huge advantage I think that companies from non-US… out of Europe, out of Asia have, is that they’ve spent more time on it. They can’t leave Google, raise a couple hundred K a few weeks later, and be like, “So, now what do we do?” Right? These guys have to have a product, have to have proven something out before they can come over here.
Jason Calacanis: The benchmark is higher for them, to get funded.
Thomas Korte: Much higher.
Jason Calacanis: Do they have to… In The Valley, you could just have an idea and get funded by your friends, or people who know people. But, coming from Europe, they actually have to have a product. Do they have to have performance on that product? Or do they just have to have a product?
Thomas Korte: I think a product. Something that works. Something to show that it works. You know, funnily, most of them have some sort of revenue. You know we usually, we’re like, “Let’s turn off the revenue, let’s figure out how we can scale this without revenue.” And so, they generally have… I mean, the bar is high. Look, if you come over here, between the immigration visas, which we deal with all the time–it’s a nightmare.
Jason Calacanis: How big of a… You talked about that, and were like, “That’s a whole side conversation.” But, sometimes the side conversations are the important ones. How big is the immigration problem, for Silicon Valley and the United States in the larger picture.
Thomas Korte: It’s serious. It’s very serious.
Jason Calacanis: Why?
Thomas Korte: One is because we don’t have enough access to engineers. So, any single one of these companies sitting out here is looking for engineers. There is just not enough engineers in the US to kind of feed the beast of Silicon Valley and other technology companies.
We really have two immigration problems in my book. The one is, the people that have H-1Bs existing, are in companies today, and are tied to those companies. Call them the golden handcuffs, because they’re always very well paid. They always work for very great companies. But they are tied to that company. And very few companies have policies where they let people leave and carry this on for even just a few months. It’s very strict HR, you know, you’re out. You have 60 days to transfer. My wife was put in that position before. Where she literally left a company, she had 60 days to find a new job, or would go back to France.
Jason Calacanis: Wow.
Thomas Korte: So, it is real. And this is like, it doesn’t matter how educated you are, it doesn’t matter how wealthy or how poor you are. This is a reality.
Jason Calacanis: So we’re driving the most successful people out of our country. America is driving some of the most talented people. We’re talking about the top 10% of skills.
Thomas Korte: I mean, getting an H-1B in the first place, you know how hard it is.
Jason Calacanis: Right. You have to show a unique skill.
Thomas Korte: Absolutely. Unique skill. Highly educated. For a company to sponsor you it costs quite a bit of money. So for them..
Jason Calacanis: 5 or 10 grand.
Thomas Korte: Easily. For them to sponsor you to come over here, you have to be really darn good. I mean, the bar is high to get an H-1B in this country.
And, once we have them over here, a lot of them establish their lives here. They arrive here when they’re 22 or 23… by the time they’re 30, life changes in that time, you know, very much. As you know… as I know.
Jason Calacanis: Babies, wives, husbands, sure.
Thomas Korte: Exactly, so that’s really, I think, one thing that kinda needs to be fixed, the H-1B.
Jason Calacanis: And why are we blocking… Why is the United States doing this? Is it because there are so many terrorists coming out of France? Clearly… I say that facetiously, obviously.
Thomas Korte: Right, right, right. No, I understand. I think immigration is… You follow the conversation like I do. You’re active in it like I am.
Jason Calacanis: It makes no sense.
Thomas Korte: It makes no… It’s sad.
Jason Calacanis: And we have Obama as President, which, you know, Silicon Valley lines up to pay ,000 to have lunch with Obama.
Thomas Korte: ,000. Not me, though. I didn’t pay him.
Jason Calacanis: Listen, I’m glad he got another four years, but how disappointing is it that Obama has not tackled immigration.
Thomas Korte: I think immigration is a major issue. It has to be addressed. I mean, obviously, we can talk about immigration overall, but high-skilled labor immigration, has to be a drag. I don’t think anything in Washington is a no-brainer. When it comes to policies, things just take time. The great thing is, you know I’m kind of reminded, you know, I’m an American citizen now. I became a citizen five or six years ago. You realize when you go through the political process, and you know, get involved at different ends, that at least there is a process that can induce change, both elections, through initiatives, through lobbying. Whatever it is, whatever it takes. And I think some people in Silicon Valley really have stood up, and kind of addressed this.
But I want… The other part of immigration that I haven’t talked about yet… so that’s the one, people that are already here, that we’re kind of, sending out.
Jason Calacanis: That we kick out.
Thomas Korte: That we kick out, literally.
Jason Calacanis: Well done.
Thomas Korte: The second one is, you know, coming over here. Being somewhere, and coming over here to start a company. And, it’s not impossible. Let’s just put it out. If you are a skilled person, it is not an impossible task to come here. But, it is not easy.
So far, we’ve had 100% success of founders coming here. Sometimes there were some hiccups. We had one company that actually left to live in Singapore for a year before they waited for their H-1Bs to come through. So, it does, it does happen.
Jason Calacanis: A year wasted… not wasted, but they could have been here, getting the mentoring directly.
Thomas Korte: And create jobs. They hired seven people over in Singapore.
Jason Calacanis: Those jobs are not coming here.
Thomas Korte: They’re now back. They’re now back. They took those seven people with them. So, they knew it was a temporary solution. But, you know, that’s what had to be done. But it is possible to get people over here. It is expensive, it’s time-consuming…
Jason Calacanis: Shouldn’t there be like a, and I know people have brought this up. I don’t know if it exists… Shouldn’t there be like some way, if you raise an angel round, or a million dollars, you just automatically get, for every million dollars you get five H-1Bs or something?
Thomas Korte: That, yeah, that’s a thought.
Jason Calacanis: Work for you?
Thomas Korte: It’s certainly a thought. I think putting money as a measure probably aligns the incentives incorrectly, because you don’t want to just raise money to get H-1Bs… But I think there’s certainly, I mean, the process… There shouldn’t be any limits on it in the first part. You know, right now, there’s artificial limits on it. It shouldn’t be a process that on October 1st you get all the allocations for the year, which usually are, in good years, they’re taken in days. In bad years, they expire. I just doesn’t make sense period.
Jason Calacanis: What if we gave them, for every million dollars they raised, two H-1Bs, and then for every five people they hire, five Americans they hire, they get a sixth H-1B.
Thomas Korte: Yeah.
Jason Calacanis: There’s a practical solution to this.
Thomas Korte: It would be very practical. But you know, what I’ve learned, through the last couple of years, being a little bit, very, very much on the sidelines, involved in Washington D.C., I mean, nothing is easy. Nothing’s easy. Everything is a deal. Everything takes long negotiations, and there’s always extreme opinions on both ends of the spectrum. And so, let’s hope that there’s gonna be…
Jason Calacanis: Ok, when we get back from the commercial break, I want to talk to you about some of the things my audience asks me about all of the time: finding a co-founder–very hard to do, pivoting and knowing when to pivot and why, and then France, socialism, 75% tax, and why we’re not seeing great companies and entrepreneurship in France, or are we and we’re just not aware of them… When we get back from commercial break…
And, it’s a very easy commercial, because, it’s MailChimp, ee ee eee e e. MailChimp. That’s it.
Thomas Korte: We use MailChimp.
Jason Calacanis: You use MailChimp. See, this is why my job is so easy. This is why the show, the ads are sold out for three, four, five months at a time. Because, we just pick the best products, and we say, “We use these products, would you like to sponsor the program.” And people say, “Yeah, we like the program, Jason, and we love that you use the product.”
I use MailChimp everyday. I’ve got three newsletters going out to 25,000 people. I sent two in the last two weeks. This is how I stay in touch with people. I email my list–Here are my thoughts on what’s going on in the world. I wrote one about Tesla, and I wrote another one about Facebook, and EdgeRank, and George Takei. They’re both, like, big thought pieces. But, I don’t put them on a blog, because, who cares?
I put them in the email box of people who matter. And then, they reply back to me. And I’ve got to tell you, this is the lifeblood of my career, is sharing information, and then getting back 10 times as much in return. This show, and email, are very similar. You put some great content out in the world, you get a lot back. If you’re not collecting emails everyday for your startup, you’re crazy. Because, MailChimp, it’s free to have 2000 subscribers and send 12,000 emails per month. So, as a Startup, you might as well just put an email signup form there, because, social networks come and go… but email…
Thomas Korte: Stays.
Jason Calacanis: It stays! It’s sticky. And how much are those emails worth? , each? Invaluable?
Thomas Korte: Invaluable.
Jason Calacanis: Invaluable. And man, people have built businesses just on email, and just on MailChimp alone. But it is, at least 20% of your effort as a startup should be to build that mailing list, I’m telling you. And MailChimp constantly releases new, awesome features, like mobile-friendly email templates, pop-up previews for mobile devices, drag-and-drop file uploading. And there’s no contract, no trial, the free plan is always free. Which, you know, like, if you’re really confident in your product, you just let people pay as they go…
Thomas Korte: Absolutely.
Jason Calacanis: And you have like you said before, a free program, because you know that they’re gonna get value and at some point convert.
You’ve been using MailChimp for awhile.
Thomas Korte: It’s the first one we went to, and never switched away, so…
Jason Calacanis: That’s what I hear from everybody, so there you go. See, I got Thomas to endorse MailChimp.
Thomas Korte: You know what’s a great feature? Every startup should look at this. When you have your email list, there’s actually the social rank in there, you get like a full profile of every single person just by their email.
Jason Calacanis: Ahh! So great.
Thomas Korte: This is stuff through fundraising, whatever it is…
Jason Calacanis: Just figure out who the baller people on your list are.
Thomas Korte: Exactly, exactly.
Jason Calacanis: #getonmylevel. Just figure out who is in there. That’s my favorite hash tag at the moment. Hey, listen, thank you MailChimp. Ok…
So, finding a co-founder. Let’s take that one. How, I mean, I hear people, “I’m a programmer”, “I’m kinda shy”, I’m not outgoing”, “I’m not gonna be giving a keynote at any conference anytime soon”, “I get panic attacks when I talk to VCs”, whatever, “I can’t look people in the eye”… how do they find a founder… and I hear, more often than not, non-technical people saying, “I need a technical co-founder.”
How do you find that, and are you kind of snobby about who you accept to the program? Like, I hear, YCombinator is like, “If you’re not a technical co-founder, maybe YCombinator is not the place for you”… is what I hear over and over again. What do you think?
Thomas Korte: We like technical co-founders too.
Jason Calacanis: Why? Why is everybody so biased.
Thomas Korte: We have a lot of business/product teams as well. Product/business, everything. But, in today’s… we talked about this earlier… when you look at how much things cost. If you can’t code it yourself, it’s going to be very expensive. And, so I think, if you can’t build a prototype… If you have an idea and you need to pay someone to build a prototype, or give them equity or whatever it is, it becomes expensive very quickly, and very difficult.
You also can’t iterate as fast, right. If you have a product and something doesn’t work, you try it, you A/B test, you change it, like, you can’t do that if you are not.. it’s not a static, like “I write a spec, I’ll do it, and it’s gonna take off.” It takes iteration. If you can’t code, learn to code.
Jason Calacanis: So you’re behind the 8-ball if you’re just a business person.
Thomas Korte: Absolutely.
Jason Calacanis: Now, what about, people who are great at, user-interface, making wireframes, is that as valid as being a developer? Or is it, like, the next rung down on your personal selection criteria?
Thomas Korte: I think its… Look, in a business, you need everything, right? You need someone that understands business, you need someone that understands customers, you need someone that understands…
Jason Calacanis: But for founding.
Thomas Korte: For founding, I mean, we like teams, above everything, we want to have a technical person, but above everything, we want teams that know each other, that have worked together. You can’t get divorced from your co-founder. It doesn’t work, right. I mean, he owns, let’s say half the company. It is the biggest dilution hit you will ever get.
So, people think about dilution through fundraising. The biggest dilution you will have is taking on another founder.
Jason Calacanis: Right.
Thomas Korte: So, we really look for teams that have known each other for a long time, have worked together, have a common understanding and a rapport. Founder break-up is just the most common reason for company failures in the earliest stages.
Jason Calacanis: Is it really?
Thomas Korte: Oh, absolutely. No question. No question.
Jason Calacanis: And, when they break up, there’s no resolution, you can’t put the genii back in the bottle, and tell one co-founder, “Give your equity back.”
Thomas Korte: You can, I mean, it usually works that way, but you go through a divorce, you’re scarred. You go through a founder break-up, you’re scarred. Not, like, publicly scarred, but just, it hurts. Like, you thought this was right. You built this with that person. You pitched it with that person. Maybe you raised money with that person. It’s very very difficult to take the pieces and continue on if you lose your co-founder.
Jason Calacanis: And if it happens in the second year, and they own 10% of the business, you have this dual resentment that goes on, like…
Thomas Korte: Yes, that happens a lot too… When founders think about starting, they need to think about putting the right structures in place: (1) Everyone should have a four-year vesting schedule, including every founder. (2) There should be a one-year cliff, so that if something does happen in the first year, at least there’s not some… Let’s say if it’s half/half the first year, you could easily have someone owning 10-12% of your company, before you’ve raised money, right… And we see that. We see people that come in having LLCs where they just say, “Oh, we’re each half. We’re 100% vested.”
If you start a company, go to a real lawyer that understands how to start companies. Come to Silicon Valley, most law firms, reputable law firms, do it for free–deferred fees–um, it is the best money, the best 5K you spend if you have to spend it.
Jason Calacanis: Now what about, doing a priced round Vs. doing convertible debt? Convertible debt’s fast. But, nobody seems to know what’s gonna happen with this incredible convertible debt bubble… that’s building… and is there… Some people seem to be panicked about it a little bit, like, “Oh, my god, all this debt’s gonna come due and everything’s just gonna go to hell in a handbasket”, is that, valid?
Thomas Korte: I don’t think it is, no.
Jason Calacanis: Ok, why isn’t it valid?
Thomas Korte: So–convertible notes–it’s great that you pointed it out, because it really is an issue, and a few years ago I was worried about it myself, but. So, convertible debt is basically a loan, right? An investor gives you money that is due, usually after a year… And then you are converting that in the next round of funding, to equity. But, in theory, they can ask for their money back.
So the fear, through the last couple of years was, isn’t this all walking skeletons? These companies, if the investors call their note, they’re all bankrupt, right? They’d literally have to go into chapter 11 by law, because they can’t pay it back.
I think that really hasn’t materialized. And that’s the importance of raising money from a skilled investor… from certainly an accredited investor, someone who has done this before…
Jason Calacanis: And why? Because they understand that losing is part of winning… and they don’t freak out?
Thomas Korte: Yeah. Yes. Well, there’s a couple of legalities around it, that you shouldn’t raise money in private markets from people who are not accredited. Basically, every investor on AngelList is accredited. That’s one measure…
Jason Calacanis: Accredited being, you have a couple million dollars, you make a couple hundred thousand a year. You’re not gonna get hurt losing 25K.
Thomas Korte: Exactly. You understand there is limited information, all those things. You know, when you look at that set of investors, one, they understand this. The second thing is, not just accredited investor, because literally every dentist in the country qualifies as an accredited investor.
Jason Calacanis: Sure.
Thomas Korte: Looking at people that have done investments before. People that, you know, in a way, have a reputation, and a reputation to lose, right? If I ask for my money back, you know, someone else will find out about it, and I will never get an investment again. But really, I’ve never seen any investor calling their money back.
Jason Calacanis: Let’s talk about un-capped notes. So, people do these promissory notes, these convertible-debt notes, and then, there’s usually a cap, right? Converts at a certain value. But we’ve seen, coming out of some of the accelerators–I don’t know if it’s in your case–un-capped notes, no discount.
Thomas Korte: I think it’s an important discussion to have. We don’t do un-capped notes. I actually see more un-capped notes outside of Silicon Valley from investors that don’t understand how this all works. They’re like “Oh, I get a 20% discount for the next round.” And they don’t ask for a cap. They don’t know about the cap. You know, the notion of caps is only about 3 or 4 years old, that we’ve been doing this here, and it’s been taking some time that it proliferates, the information.
Jason Calacanis: So explain what it is, technically. Take us through a scenario that would be typical.
Thomas Korte: Right, so if you have a… If you raise money let’s just say for easy math… If you raise a million dollars, from a group of investors, and it’s through a convertible note, this convertible note then sets usually a discount. So they get a discount to the next round of funding and a cap. So, if the valuation is… let’s just call it 5 million–again for the sake of easy math–five million dollar cap, you get one million, so you have a six million dollar post-money valuation of your company. Your company is now worth “six million”. And, caps and valuations are almost the same at this point… People really do talk about them in very much the same terms.
If you then, a year down the road, raise more money… Let’s say you raise another million dollars. At this point, the company is valued at 10 million dollars, so you put in another million, 10 million dollar valuation, is 11 million dollar post. This spread, the investors that invested early on, will convert at 5 million. So effectively, for every 100K they put in, they get 200K in the new round.
Jason Calacanis: Got it.
Thomas Korte: That’s basically how it works. The discount really applies when you have… Let’s say you only raised at 4.5 million, so you raised at less than you had the cap at, then they get a discount. So, 4.5 million minus 20%, they get a discount for that.
Jason Calacanis: So it’s protection from somebody doing, which I think Technorati did at some point with a convertible, where they were so hot–I heard this second-hand, so I don’t know if it’s true–but Technorati went from a convertible note to a 30 million dollar round, and the people who were angel investors converted at a 30 million dollar round, and they had put in 25K when the company was worth 2 million.
Thomas Korte: Yes.
Jason Calacanis: They should have owned 1%.
Thomas Korte: That’s exactly what it is. If you, as an investor, you put in money to these companies, they’re very risky to begin with, you know, time is a major de-risking factor. Over time, the company makes progress, hires engineers, builds IP, challenges their assumptions, re-does it, gets customer, and the value continues to go up.
So, if you don’t reward your earliest investors, something I think is wrong in the setup. When people talk about un-capped notes, my question to them is, and that’s why we really don’t do it at AngelPad–every founder decides it for themselves of course. But, the uncapped note sends a very strong signal–in my view–to an investor, that you don’t really value their money that early on. You do want to value…
Jason Calacanis: Kind of a slap in the face.
Thomas Korte: (silence with a smile).
Jason Calacanis: You might not say it, but I would. I don’t invest in un-capped notes. I don’t. I kind of find it like… And I wouldn’t do it as an entrepreneur. It just doesn’t feel right, that you don’t reward your early investors. They’re taking the risk.
Thomas Korte: I agree with you. But I think it’s a luxury problem to have. I think there are very few companies that can pull that off. And the ones that have pulled it off…
Jason Calacanis: Right… What about the crazy… I mean, I think some of the people coming out of the last YCombinator class, 15 million dollar caps…
Thomas Korte: I think that’s actually more dangerous–almost–than an un-capped note, right.
Jason Calacanis: Why? Why is that?
Thomas Korte: Well an un-capped note, there’s just no expectation. We’re just saying, “Look, it’s not capped. Like, we don’t know what the value is. You’re getting a discount for sure”… right?
If you say you have a 15 million dollar cap, you really are saying, “Look, this is what we think the value is today.” I think that’s everyone’s understanding, right? Technically it’s not that, but under everyone’s understanding. If you look at your A round, you know, investors expect a 2x, 2.5, or really 3x would be nice. So if you cap at 15 million… well that means.
Jason Calacanis: Your A round’s gonna be 30-45 million.
Thomas Korte: 30-45 million dollars!
Jason Calacanis: Good luck!
Thomas Korte: That’s hard to achieve. And now you have to look at how much…
Jason Calacanis: Now you’ve gotta have 10 million uniques, or you’ve gotta have 5 million dollars in.
Thomas Korte: How much money did you raise! Exactly. So, how much money… If you have a 15 million dollar cap and you raised 5 million dollars. Look, at least you have 5 million dollars worth of time to back into the next valuation of 35 or 40 million dollars.
Jason Calacanis: You’ve got 3 years… 2 or 3 years…
Thomas Korte: So I think there is… the valuation all depends how much money you raise, how much runway you have until your next round, and really what your expectation is.
Jason Calacanis: Is there a bubble now? I mean we saw color raise–essentially–an A and a B round at once… 40 million dollars. But Bill, very smart guy, we had him on the program… Color seemed like a really good idea, some good patent and IP from what I understand, proximity-based social networking… got it sounded like such a great idea, it never really got executed, but I mean people point to that as saying, like, that’s the moment that things got out of control. What’s the state right now? Is it out of control?
Thomas Korte: It’s not out of control, No.
Jason Calacanis: Why?
Thomas Korte: I think things have become much more normal. As more founders understand the implications of notes, as we’ve gone through one generation of founders that have raised at high notes now going to the A round, seeing where they’re at. I think things have become fairly normal again. I think, if anything, you see valuations have come really down a little bit. And, it’s probably ok. With higher valuation comes more money that companies raise, and more money doesn’t automatically equate to more success… more success faster
Jason Calacanis: Why?
Thomas Korte: Well, if you raise… I think of a seed round kind of like a chewing gum, right? Look, if you raise 300K, you make it work for 12 months, 18 months. If you raise 3 million, guess what, you’re gonna make it work for the same amount of time, right. If you raise a lot of money, you hire faster, you often–what I see–is you just kind of disregard some of the early signs of something not working, because you don’t have to worry about your next round as fast. So you’re just much more aggressive in spending, much more aggressive in hiring…
Jason Calacanis: And not as focused on the data.
Thomas Korte: Exactly. With money comes problems. I mean, they’re good problems to have, but if not really managed well… And you know, you want founders to be scrappy and resourceful, and kind of make it happen, have this urgency, like this… You know, when I look at founders, and the ones that really stand out from the pack, it’s the ones that have the urgency, the ones that can’t stop moving in their chair, and be like, “Look, I’m already thinking the next thing while you’re talking.”
And those are the founders that just run faster.
Jason Calacanis: Fidgety. Driven.
Thomas Korte: Exactly. This is a marathon. Starting a company is a marathon. But every day is a single sprint. Right? And the ones that get up every single day and sprint… Don’t rest on Saturdays and Sundays… and the ones that don’t say, look, let’s have a down day… They’re going to end up ahead. Because if you do 10% more every day, add that up in eighteen months. You are months and months ahead of the others.
Jason Calacanis: That’s a huge difference.
Thomas Korte: There’s no secrets…
Jason Calacanis: It’s compounding interest too…
Thomas Korte: Exactly, precisely, it’s hard work every day. It’s focus. It’s passion. And it’s drive. And never stop. That’s what it comes down to building companies.
Jason Calacanis: Alright. We talked about co-founders. We talked about convertibles. We talked about the angel bubble. Let’s talk a little bit about pivoting, and knowing when to pivot, and when to persevere. How does a founder know that they’ve hit a roadblock they can’t get through? Or they’ve hit a door that they need to open? How do you know that… When people… They must come to you all the time and say, “Thomas, you’re our mentor here, you brought us into this incredible space to be mentored… is this a brick wall that we’re not getting through? Or is it a doorway and we need to kick the door open. How do you assess that?
Thomas Korte: It’s a tough one. Let’s just define pivot real quick, because I think, in a way, in startup world, you pivot every single day… like, every day you have to adjust and find the right…
Jason Calacanis: Iteration.
Thomas Korte: Iteration, exactly. So pivoting is perfectly fine. People do it all the time.
Jason Calacanis: Major pivot.
Thomas Korte: Major pivot, exactly. That’s when you go from focusing on one thing… and really kind of like, look it’s a new business, like we’re gonna do…
Jason Calacanis: B2B – B2C.
Thomas Korte: Exactly. But if it’s in the same realm you can consider it a pivot, but I even see companies that are like going for something this… and then really doing something else.
Jason Calacanis: Social network, now we’re in auctions.
Thomas Korte: Yeah, exactly, that’s a good one! Haha… and I think, there are two realities, one is, you’re onto something that just doesn’t happen. It’s like, “Look, we’ve tried, we’ve iterated, we have done…” Let’s call it daily deals… everyone is like, totally down on daily deals… You know there was an early spike. Everyone thought this is like the next Amazon, Google, whatever… And we’ve seen it doesn’t work, right? The long term value of those customers is just not there. And the recent filings from Groupon puts that in black and white. So that vertical is done, right? If you think you can innovate in that vertical–which is the other problem, right–you cannot swim against a stream for four years straight. Eventually you’re just getting tired out. And this is literally a bird flying into the wind or flying with the wind… or an airplane. You need less fuel flying with the wind.
If you are in an area where there’s just no appetite from investors–and we can talk about that separately because that’s actually an important part of where your company is… are there actually investors who will fund you in that space–but if you are just going against the stream and you can’t get something… it’s tiring, it’s exhausting. Success is accelerating. Success carries you forward. Usually founders know when to pivot. When they come to me it’s often, it’s just like, “Look, I think we’re gonna do this.” And I say, “Look, I think you’re right. I think it’s time.”
Jason Calacanis: So they know. I mean it’s. You can only fly into the wind for so long, before you’re so exhausted, you know you’re not going to get there. It’s something in your gut, isn’t it?
Thomas Korte: Yep, it is. And you have that much fuel. If you need to get from here to here. Make sure you have enough fuel to get there. Otherwise you won’t arrive.
Jason Calacanis: Oh, so sometimes it is possible, you could fly into the wind for a long time and get to the new world, but, it’s just, the time is not right, the VCs don’t have the appetite for it. So maybe there is something with daily deals that could be done eventually, but the investors right now are just not going to come along for the ride.
Thomas Korte: I’ll give you a few examples. Daily deals, anything remotely related to that, most investors don’t have a big appetite for that. I think there are some smart investors that see a future… I mean, there is something… you don’t build Groupon, and LivingSocial, and a bunch of other companies… Google would be on it and Yelp. There are smart people on this problem, so we know there is something… We just haven’t quite figured out what exactly that something is.
Jason Calacanis: And how big it is.
Thomas Korte: Exactly. It’s huge. When you look at the really big markets… And that’s something we talk a lot about… really big markets. Look, we’re gonna eat three times a day. How much money have you spent today?
Jason Calacanis: Eating.
Thomas Korte: Probably half of the money you spent today was in food and beverages, right? And the other have was in..
Jason Calacanis: Taxis.
Thomas Korte: Taxis, getting here…
Jason Calacanis: Uber.
Thomas Korte: Exactly, Uber, a little plug there. I think that, we know there is something in daily deals, it’s just very few investors have an appetite for it. Local in general, everybody starts to realize how difficult it is to reach these local businesses–incredibly difficult.
Jason Calacanis: And that was one… Wasn’t “local” one of the ones where people were like, “Oh my god there’s so much money spent locally… And then they started trying, and they realize, “Oh my god, there’s a lot of money, but they spend it or dollars at a time… these advertisers and marketers… they’re buying ads in the yellow pages… it’s too much work..”
Thomas Korte: 0 ads… that’s the only money they spend. I think for me, local… I’m a huge believer in local. I worked on Google Local back in the very early days… took it into the UK… I still believe very much in the local space. We have a company in the local space in every session. We have one right now. I will keep believing in it. It is a massive market. Someone is going to figure it out. Very very few investors are behind it. It’s incredibly easy to lose all your money in that space.
Another one which is, I just had the conversation… with mobile apps. A lot of people say, “Oh, there’s not more mobile first companies, and what’s going on, it was the new promised land?” And the reality is, getting downloads, getting distribution on mobile is incredibly difficult.
Jason Calacanis: It is now. Crowded!
Thomas Korte: 3 years ago, 2 years ago, you could be featured by Apple or in the Android store and do quite well, today it’s just incredibly difficult. With that, investors look at, “What’s your cost of distribution?”
Generally speaking, in a consumer product, they don’t want you to pay for distribution… they don’t want you to pay to buy a customer, right. It needs to be viral, there needs to be some secret sauce, how you grow… And, in the world of mobile apps, it’s near impossible. We see very few mobile-first companies funded right now, that are not either infrastructure or have a very different approach to something.
Jason Calacanis: Right. And are investors a good proxy for this? Or are investors a leading indicator? Trailing indicator? Because, you’re independent in your approach, right? You don’t need to go to a bunch of LPs and beg permission, right? You can invest your own money. So you’re kind of a free spirit, if you will, as far as angels go… like myself… you place the bet that you want to bet.
Are VCs… Let’s talk about them for a minute…
Thomas Korte: (laughs) I love your facial expression…
Jason Calacanis: Because I guess… we all know as entrepreneurs, some of the VCs… they’re not created equal. There are some amazing ones who provide massive value. But, there are some, best described as “lemmings”.
Thomas Korte: So… Last night I spent the entire evening with the founders. We started at 6, we left here at midnight. And I talked about VCs. I talked about the different tiers of VCs. I think when people talk about VCs in general, they just, bucket everybody into the bucket of “VCs”. And I think we need to start to understand, founders need to start to understand the different types of VCs… the different types of investors. I’ll run them down really quickly how I see them, and where they fit in.
Jason Calacanis: Yeah, take me through that.
Thomas Korte: You have the angel investors–smart people like you that were successful as entrepreneurs–they put their 25-50K down in something they believe. They’re really, very much like retail investors… I like it, I see it, I can touch it, I’m excited about it, I want to do it.
The next step up from that is really the super-angels, which are the ones that do…
Jason Calacanis: The Sacca… Arrington… Dave McClure…
Thomas Korte: Sacca… no, those are funds… Those are funds. So the super-angels, I really look at, if you would be doing 30 or 40 investments…
Jason Calacanis: Instead of 5.
Thomas Korte: And like, three or four of your buddies in LA said, “Hey, you know what, I’m going to give you a couple hundred K too… Let’s all pool this together, we have a few million dollars or so… This is still, like, very much the friends approach.
Jason Calacanis: Still an angel.
Thomas Korte: Exactly, I look at this as angels.
And then you have the micro VCs. The micro VCs, I think is one of the best things that can happen, could happen, has happened for Silicon Valley.
Jason Calacanis: Dave McClure, Mike Arrington.
Thomas Korte: Dave McClure, Mike Arrington, you have PivotNorth, a lot of them don’t have a huge brand.
Jason Calacanis: 20-30-40 million dollars.
Thomas Korte: Smaller amounts. These guys often come from the traditional firms, are mostly a single LP, and the dynamics in those firms are very different. The decision process is very different. The economics for them to make money are very different. So, the carry that they get is only 2%, every fund gets that 2-2.5%, so, it’s barely like a salary for them, so it’s really about returning the fund and making returns on top of that.
Jason Calacanis: Yeah, 2% on 20 million is 0,000. They could be making a lot more money going to work for a VC firm.
Thomas Korte: Absolutely. They would work at a VC… They would work in M&A at Google or Facebook, they would make a lot more. These are very smart people. What’s interesting about those guys–and there are not enough of them in Silicon Valley today.
Jason Calacanis: Right.
Thomas Korte: They really spend time with the companies. They spend time in the way that I spend time at the seed stage, at the very earliest stage. They take them from the seed stage, really to the A. They understand this. They understand taking something that you can’t value on paper, to the point where the larger VCs can pick it up.
Jason Calacanis: They’re like the Sherpas. They escort them from this…
Thomas Korte: Yes, and they’re great. They really understand this. They have done this before. There’s a process to it. As boring as it is, there’s a process to fundraising, to building a company.
From there you really have the smaller funds. So those are the Blumbergh’s of the world.
Jason Calacanis: True (ventures). First Round…
Thomas Korte: True… 100 million dollar… First Round… Those are great… they’re great in a seed round if they are a major investor in your company… The smart ones really become–you know the True’s and the First Rounds–become major investors early on. They have a lot of support systems. Usually there’s multiple partners, there’s admins, there’s sometimes other resources you can tap into.
And from there you have this category that I call “the product/market fit VC”. Those are VCs you go to once you have product/market fit, and you have something that is very clearly defined. And you basically start getting to the point where you need to figure out… How we’re gonna make money with this. How we’re gonna hire salespeople. How we’re gonna open offices in one or two countries. Those…
Jason Calacanis: Leveling up. This is like a whole different level of operation.
Thomas Korte: Exactly, and those guys, these are the early investors in…
Jason Calacanis: Sequoia, Benchmark, Accel.
Thomas Korte: Yes, those are great examples, great examples of that, yes….
Jason Calacanis: They’re gonna put in 3 or 4 million dollars…
Thomas Korte: Easily.
Jason Calacanis: And they’re gonna go to work.
Thomas Korte: Easily, yet.
Jason Calacanis: And they’re gonna have high expectations.
Thomas Korte: They have high expectations, but they’re your partner in this. They take a board seat, they are there with you.
Jason Calacanis: So they’re not gonna be taskmasters, but they’re going to expect, of themselves, and of the management team, that progress is made.
Thomas Korte: Absolutely, these are, I mean look, if you don’t look at your investor as a partner in your business, don’t take them as investors, right. These are, I mean, look. People are begging for a partner’s time in any of these major firms. The brainpower they have, the things they’re seeing. As a founder, you do one company, it takes 6-8 years to exit the company and to be successful. You’ve done it once. These guys, sitting alongside the AirBnBs and the Dropbox and the Oracles, and the SalesForce, and the… You know, these guys go back for the last 10 years… you know, the Googles, like, they’ve seen companies going from a few hundred to 10s of thousands of people. So, those are great partners.
And the final one is really, almost the financial institution. It’s the growth investor. Those are the people that put 10 million dollars in, and it’s really just, “Look, there’s a small fire here… Let’s pour oil on it… Let’s make it a really big fire.”
And when we talk about VCs, we just lump them all together. So I think we don’t do them justice at which stage they’re the right people for.
Jason Calacanis: And it’s impossible to tell. If you’re a first time entrepreneur, how would you ever know? Just reading blogs and seeing tweets, you don’t really know.
Thomas Korte: Yeah. Exactly, and we have… A lot of founders say, “Oh, we’re excited, XYZ is coming in–Chris Sacca’s coming in”. It’s like, Chris Sacca has 80+ investments and is a busy guy, right? When you look at someone being with you, and he’s very up-front about it. Someone that actually takes you from here to the next step, you need someone that makes 8 or 10 investments a year, or puts in 6-7-8 hundred thousand dollars, you know, really is there for you.
So, we just need to start looking at these different tiers of investors. They’re all great at their right level. If you take the right investor at the wrong time, it’s equal a bad investor.
Jason Calacanis: You’ve kept AngelPad purposefully–I don’t want to say small–but not gratuitously large. You’ve kept it to an appropriate size, I would say. A dozen companies a year.
Thomas Korte: A dozen companies, yes.
Jason Calacanis: But you have the ability to raise, an almost unlimited amount of money given the track record. You could raise much more money. You would have a 5 times bigger operation, at least 2 or 3 times bigger. But you haven’t, why?
Thomas Korte: It really comes down to your approach. My approach is, we’re looking for the best founders we can find out of a large pool. 2000 applications, we pick out 12. And we really spend the time, with those 12, to make 12 of them successful.
It doesn’t always happen. We certainly have failure and we have success. But, we are so involved in these companies, in really thinking through everything, from… What is an interesting market? Is it really a large problem that you’re solving? How much is this worth to people? How much would they pay for it? How much is this possible to make money with in the future? What is the right composition of your workforce in the next year or so?
Everything, right. I’m in here. This is my office. We’re in here every single day with half-hour meetings with these companies. We iterate. We iterate. We go through. We challenge their assumptions. I’m the bad guy in this. I’m like, “This is not gonna do it. If you don’t figure out this, you’re not gonna talk to investors.” “If you give an investor this answer, he is done with you. He will never tell you to your face, but the signal just flipped.” So that’s what we do.
The other approach, is to say, we’ll take a very large mass in, and some of them will be successful. And, through our network and others, we’ll make them successful. But I do this… I started AngelPad… I was an individual investor coming out of Google. I left Google because I started having so many conflicts because Google started doing voice… Google Voice… you couldn’t, at one point invest in a company in Silicon Valley, without Google possibly being a competitor in the future.
Jason Calacanis: Sure. And it’s turned out to be absolutely correct.
Thomas Korte: Absolutely, yeah, so I left Google. Unfortunately, Google Ventures, at the time didn’t exist, because Google Ventures is a great place as well.
And, I started investing in these companies, and what I found is, you invest in them at a stage where they are out to invest. And they kind of have their hypothesis, and they kind of get their 500K or their 800K, and they’re very validated in what they do. And often, I saw it as false validation.
Investors didn’t invest in them because of the product they built. They invested in them because they saw the spark in their eyes. Because they saw the potential. But the founders say, “Well, we just raised 800K for this awesome product. Everyone loves it. We’re not gonna change something now.”
Jason Calacanis: Right.
Thomas Korte: You end up having this conversation where you’re like, “Wow, I wish we would have met six months ago, when you decided to go down this way, because I think this is actually a more interesting problem doing this, but over here.”
Jason Calacanis: It’s interesting. Obviously, the two big competitors in the space–not that you’re really competitors because there’s so much good that can be done–but TechStars and YCombinator of course. YCombinator pulling back actually… I think they peaked at 80-something, maybe even 90 startups in the last class. And people, multiple people commented to me, “Way too many. Can’t remember.” And it felt, a little cookie-cutter, and less personal. Is that the danger? That people are just pumping too many into the system, and there will be too many orphans and zombies?
I mean, everybody coming out of YCombinator now starts with Ron Conway and Yuri Milner as an investor. Which, to me, as an angel, If somebody came to me and said, I’ve got Yuri Milner and Ron Conway as investors, I’ve got to take the meeting. Now there are 250 people a year who have Ron Conway. It’s sort of created a signaling problem, for me at least. I don’t know if Ron Conway or Yuri Milner has ever met that founder. Right? So, is that a problem? Do you think they’re going too big? I know you don’t want to cast aspersions, but you’ve chosen to stay smaller. I think that your approach, is… intentional.
Thomas Korte: It is very much so. I want to be with the founders every day. This is the stuff I like to do. I like to talk product. I like to talk, you know I’m getting excited about this. For me, this is living through them, founding multiple companies, right? I know how hard it is to start a company. I know what they go through. I have the fun job of talking to them, to have these like really big ideas, and like, “What are we gonna go after?”
And I can do this 12 times, twice a year. I do this 25-30 companies a year. So, I have the best job in the Valley if you ask me, right? I love what I do. So, for me, it’s really getting to know these guys…
Jason Calacanis: If it was 4 times bigger, it would be miserable, wouldn’t it?
Thomas Korte: It would be intense… look…
Jason Calacanis: It would be miserable. Come on, if you couldn’t even remember the founders’ names… I mean, think about it. If you had to do 4 times as many…
Thomas Korte: I certainly couldn’t do it. The way I want to do it, I couldn’t do it. I don’t have a lot of sympathy for investors that say, “Oh, I can’t remember the 80 companies that went through YCombinator.” I mean, look, it’s an investor’s job to listen up and go through… You already have the luxury of sitting there and getting them in one three hour meeting. Right?
As hard as it is, that’s your job as an investor, to go through that… and to filter through that. For me, I’ve always said, I want to be in a position where, if an investor calls me and says, “Look, I’m looking at these three companies” or “I’m looking at this one company… What are they good at? What do they need help with? Where do you think this is gonna go?”
And I can truly, honestly, tell them because I know. I’ve been there. I’ve been through the journey. I know why they picked this. I know the founder-dynamics. I know what they’re going for. I know if they’re going to be tempted by an exit for 10 million to Facebook.
Jason Calacanis: You want to be able to speak credibly about the people you’re associating with.
Thomas Korte: Yes, exactly. And I think, with that, it de-risks the investment in a company coming out of AngelPad. Because investors can get a lot more background from someone who has been with them for 3-4 months.
Jason Calacanis: And the spring class of ‘12. 10 million dollars in 60 days.
Thomas Korte: Yeah, that was just the first 60 days, so it was pretty mad. It was one of those where, just, a lot of companies… you know, at the stage when investors say, “Look, we don’t need to put 500K in this company. We can put 2 million in this company.” You’re just at a different stage. Often times, Silicon Valley, technology is a winner-take-all game. There is only one search engine. There really is only one social network. There really is only one photo-sharing app. There really is only one local review site. And we know the names, right? It is a winner-take-all game in technology. If you’re in the consumer world…
Jason Calacanis: Winner-take-almost-all. Second-place takes a little. Third-place and on takes nothing!
Thomas Korte: Exactly.
Jason Calacanis: Takes home a lot of pain.
Thomas Korte: Exactly. So you really want to, if you see a company that you can see a category killer in anything, in whatever it is, not just consumer-side, but in cloud management, in everything, in mobile infrastructure. It’s like, “Look, how much faster can we run with more money?” And, if, the inflection of more money actually makes you execute faster, rather than just procrastinating on decisions and making bad decisions–it’s good. And that’s exactly what happened with the last class.
Jason Calacanis: #1 thing that’s a red flag for you when you’re looking through applicants? What’s your #1 red flag where you just go, “uggg… just, no..”? Is it a misspelling on the form? Is it…
Thomas Korte: It’s… actually, those things matter.
Jason Calacanis: Is it bad design?
Thomas Korte: It’s certainly. We ask people for a two-minute video. Look, if people don’t take the time to do the two-minute video, that’s very-much a no-brainer. I don’t care if you’re an ex-Google engineer and you think you don’t have to do it. That is the minimum requirement.
Jason Calacanis: Because, you are not motivated?
Thomas Korte: Exactly. It’s like, look. We’re not going to give you a huge amount of money, but we’re putting our name to this. If you don’t put that effort in, with me, are you going to put in the effort after you met a partner at great firm x? Who’s gonna come back to me and say, “Oh, I never heard from those guys again. They told me they were gonna send me something. They didn’t send it.”
Jason Calacanis: Some of that follow-through.
Thomas Korte: It’s really important. Look, you’ve got to be buttoned-up. You just… you have to be. That’s a minimum, minimum requirement.
So the other part really is–I think that I mentioned earlier–is if people haven’t committed. If people are still somewhere in a company. If one founder is in London and the other is in LA and they have never met. Like, those things are just like, “No, you can’t start a company like that. It’s not a game.”
I tell these guys all the time. It’s like, “Look, someone is gonna give you a million dollars. Are you really gonna walk around like this? Are you really gonna have your drinking pictures from the last party, on your Facebook profile? When you have 10 employees? Are you really? You’re gonna be the founder of a company, you’re gonna lead this company, you’re gonna hire people, you’re gonna have to layoff people or fire people. You are a role model your company. And look, I can’t train that in 3 months or in 6 months. I either see that and you have it. Or you don’t. If you don’t have it, we can’t do it.
Jason Calacanis: What are you a sucker for? If you see something in a presentation, you just go, “I gotta meet them.” Like, “Get them in here as quick as possible.”
Thomas Korte: I’m a sucker for ex-Google engineers, ex-Twitter engineers, people that really have… Ex-Apple engineers. The companies that have the highest hiring bar in the Valley. Palantir… we had a bunch of ex-Palantir engineers. Look, I mean, if you got into that, and especially if you got in early…
Jason Calacanis: You’re good.
Thomas Korte: I’m gonna talk to you. Unless you’re really, really off-limits and you want to do a recipe-Facebook.
Jason Calacanis: For me it’s like a great domain name and design. I see like a great domain name, and I’m like, “How did you get that domain?” I just want to know how you got that domain name. Like, “Ok, really, you have square.com?” “How did you get that domain? I just want to hear that story. How did you get that..”
Thomas Korte: That’s true.
Jason Calacanis: Or just, “That design is just stunningly gorgeous”… Path, great domain, great design…
Thomas Korte: We always see companies where it looks great, and you’re like, “Damn, that looks good.” Absolutely, great design matters an enormous amount.
Jason Calacanis: Alright, listen, Thomas. We could talk literally for five hours. But, you have to go run your business, and I have to run mine too. And, listen, the audience really thanks you. You’re so honest, and you went over so many of the blocking and tackling things, and that’s why I really wanted to have you on the program. Because I know that you help these startups here at LaunchPad block and tackle… I’m sorry, AngelPad. What’d I say, LaunchPad? LaunchPad is LA. There’s a LaunchPad in LA. Damn-it. No, AngelPad, and if everybody wants to get more information on AngelPad, they can go to…
Thomas Korte: AngelPad.org
Jason Calacanis: So just go to AngelPad.org, and if you want to follow Thomas, he’s @thomask on Twitter, and… apply. And, build a team. Right.
Thomas Korte: Yeah, think early. Think early about starting a company. Give yourself time to prepare it. And then do it.
Jason Calacanis: Yeah, I mean, the downside risk is what?
Thomas Korte: Yeah, a boring job at Google.
Jason Calacanis: Exactly, exactly. Hey, and thank you to our friends at MailChimp and NewRelic for sponsoring the episode. We couldn’t do it without you. And thanks, Brandis, for lugging all this crap up here, and, being my partner in crime on all these great episodes–thanks Brandis. She busts her ass, carrying all this stuff. What time did you fly up here, 6am? 6am! She takes… It’s hard for me to get on that 8am flight.
Thomas Korte: She showed up here in the office. There were barely any engineers here.
Jason Calacanis: She takes two flights earlier than me. Warrior. I love Brandis.
Thomas Korte: She was in here earlier than most people working in San Francisco here.
Jason Calacanis: I love Brandis. She’s one of my samurais. All right, we’ll see you all next time on This Week in Startups.
Thomas Korte: Thanks Jason.
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