20VC Jason Calacanis on The 4 Questions Investors Must Ask Founders, Whether YC Have Scaled Their Process Successfully & Why Early Founder Liquidity Is Good Not Bad

Summary Notes


In this episode of "20 Minutes VC," host Harry Stebbings interviews renowned angel investor Jason Calicani, known for his investments in Uber, Thumbtack, Evernote, and Tumblr. Calicani, a former Sequoia founder and scout, discusses the release of his book "Angel" and shares insights on successful angel investing, wealth creation, and the need for founders to focus on skills and customer development rather than networking distractions. He also touches on the evolution of Silicon Valley, the role of incumbents as disruptors, and his views on Y Combinator's approach to early-stage investing. Calicani emphasizes the importance of understanding the founders' motivations and the timing of their ventures, while also advocating for more participation in speculative investment rounds and a return to profitability as a key startup goal.

Summary Notes

Introduction to the Episode

  • Harry Stebbings introduces the show and guest Jason Calacanis.
  • Jason is recognized for his success as an angel investor with a portfolio including Uber, Thumbtack, Evernote, and Tumblr.
  • He has been a scout for Sequoia Capital and is the founder of the Launch Festival.
  • Harry recommends Jason's book "Angel" and promotes Pendo and Treehouse.

Welcome back to another week in the world of the 20 minutes VC with your host Harry Stebbings at H Debbings with two b's on Snapchat. Today's episode is a slight fly on the wall show. I'm thrilled to welcome back Jason Calicanis to the show today. Jason's also previously been a scout for Sequoia Capital, where he made the original Uber investment. Today he's the host of this week in startups and founder of the launch festival.

The opening statements set the stage for the conversation, introducing Jason Calacanis as a significant figure in the startup and investment world, and highlighting the importance of his book "Angel" for understanding angel investing.

Jason's Career and Podcasting Achievement

  • Jason's appearance is a return visit, previously being guest number 50 and promising to return for episode 150.
  • Harry's podcast has now reached 850 episodes, with Jason acknowledging Harry's impressive work ethic.

You were number 50 and you said you'd come back number 150. We're now at 850.

The conversation highlights the growth of Harry's podcast and Jason's previous commitment to return as a guest, emphasizing the milestone of reaching 850 episodes.

Jason's New Book "Angel"

  • Jason discusses his reasons for writing the book and his expertise in angel investing.
  • He has a track record of hitting "unicorns" in his investments.
  • The book aims to address the truth about wealth creation in the 21st century.
  • Jason's motivation was to educate people on the real pathways to wealth, as opposed to outdated or misleading advice.

I thought when I got an offer, somebody had read a story in the Wall Street Journal about my uber investment, my thumbtack investment in the Sequoia Scouts program, and they know, would you write a book? I looked, and I was like, nobody's written about angel investing. The truth is ugly, and the truth is also inspiring. But nobody has just laid out the absolute truth about wealth creation in the 21st century. And that's what the book attempts to do.

Jason explains the gap he saw in literature about angel investing and his desire to provide a truthful and inspiring narrative on wealth creation, which led to the writing of his book "Angel."

The Tech Elite and Wealth Disparity

  • Jason discusses the comparison of the tech elite to an aristocracy and the potential for societal upheaval.
  • He disagrees with the aristocracy analogy, stating that venture capital is not inherited but earned through hard work.
  • The book was partly inspired by the need to address the unfair wealth distribution and the broken system for social mobility in America.

I disagree with the aristocracy part. But I will say that we are, because of the polarization of wealth in society and the rigged system in America that makes the wealthy ultra wealthy and the ultra wealthy absurdly wealthy, and the poor and the middle class are getting ground down.

Jason refutes the idea that the tech elite are like an inherited aristocracy, but acknowledges the issues with wealth polarization and the challenges faced by the middle and lower classes in America.

Silicon Valley and the Funding Environment

  • Jason shares his perspective on the macro environment of Silicon Valley and the startup funding landscape.
  • He mentions the decade-long bull market and the financial crisis, clarifying that the tech industry was not at fault.
  • There is a discussion about high valuations for companies like Blue Apron and the implications for the industry.

Well, we're about to hit a decade long bull market. We had the financial crisis in 2008 time period, and that wasn't caused by tech, but the 2001 was caused by bankers overhyping tech, obviously.

Jason provides insight into the economic cycles affecting Silicon Valley and the tech industry, separating the influence of tech from other factors in the financial market.

Market Valuations and IPO Pricing

  • Companies may lower their IPO prices from the initial target range when the market is not willing to buy at the high valuation.
  • Fidelity buying shares at a higher price than the IPO indicates that even sophisticated investors can overpay.
  • High valuations are set by sophisticated financial entities, suggesting that the market is in the hands of experienced investors.
  • Companies like Airbnb, Uber, and tech giants of the previous cycle are generating substantial revenue, contrasting with the dot-com bubble era.
  • Snapchat, despite competition and previous losses, is on track to reach a billion-dollar revenue run rate.

"They were going to go out in a $15 to $18 range, and maybe they're going out at ten or $11."

"Fidelity will be $2 underwater when the company goes public, or $3 underwater, perhaps."

"The people who are setting those valuations are the most sophisticated financial people in the world."

These quotes highlight the adjustment of IPO pricing based on market willingness to pay and acknowledge the expertise of the investors setting these valuations, implying trust in their judgment.

Market Health and Company Performance

  • Companies are generally profitable, with some exceptions where unit economics are not favorable.
  • The current market situation is healthier than the dot-com bubble because companies now have actual revenue streams.
  • Companies like Uber and Airbnb could become profitable by reducing spending and focusing on profitability over market share.

"The only reason they're losing money is because they've chosen to capture market share in the early stages of a market."

This quote explains the strategic choice of companies to prioritize market share over immediate profitability, suggesting a long-term growth perspective.

Incumbents and Disruption

  • Today's incumbents are disruptors rather than just category creators, with a high awareness of potential disruption.
  • Companies like Facebook have demonstrated the ability to aggressively compete with and disrupt established players like Google.
  • The current incumbents are considered the most sophisticated and understand the importance of focusing on core strengths to fend off competition.

"So these are the most sophisticated set of incumbents. They have already crossing the chasm. And they all understand disruption."

This quote emphasizes the strategic acumen of current incumbents and their proactive stance on disruption, which is a departure from previous generations of companies.

Acquisition Philosophy

  • Companies are typically bought when they show undeniable growth and potential, rather than being sold through active marketing.
  • Founders selling their companies early is not seen as a failure but a rational decision based on personal financial security.
  • The ability for founders to sell some of their shares early can incentivize them to continue building their companies for the long term.

"So the truth is, if you go out and you try to sell your company, people are going to look at it and go, what do you do? Who are you? Why would we need this?"

"So even AOL and Yahoo, which went through decades of mismanagement, each, they are still alive and they still exist and they still have a combined billion users."

These quotes discuss the dynamics of company acquisitions, suggesting that companies with strong growth attract buyers naturally, and even poorly managed companies can have longevity due to their established market position.

Founder Decisions and Opportunity Cost

  • Founders may sell their companies due to the opportunity cost of continuing to run them and the life-changing financial security an acquisition offers.
  • The venture capital industry now sometimes allows founders to liquidate a portion of their shares to reduce the pressure to sell the entire company.
  • Selling a portion of shares can lead to founders staying invested in their companies for longer, potentially leading to greater long-term value.

"If you can bank a quick $10 million or $5 million, I'm not sure if you are a lord. So unless you're one of those lucky sperm club members, of course you have to bank a win."

"Selling a little bit early makes people stay in the game for the long term."

These quotes explain the rationale behind founders selling their companies or shares early, focusing on personal financial security and the positive impact of partial liquidity on founder motivation and company growth.

Liquidity for Investors in Later Rounds

  • Liquidity options vary based on the investor's timing and relationship with the company.
  • Early investors may have more flexibility than later-round investors.
  • Loyalty and support towards a company can lead to different opportunities for investors.

"So typically, people in the later rounds are locked up, but the earliest investors are not."

This quote explains that there's a distinction in liquidity options between early and later-round investors, with early investors generally facing fewer restrictions.

"And depending on your relationship with the company, you can have a different opportunity than other people."

The relationship between an investor and a company can influence the liquidity options available to the investor, suggesting that stronger relationships might provide more favorable conditions.

Pre-Investment Evaluation Questions

  • Jason Calacanis emphasizes the importance of asking open-ended questions to understand founders' motivations and visions.
  • Questions like "What are you working on?" and "Why are you doing this?" reveal the founder's passion and dedication.
  • The timing of the venture is also crucial, hence the question "Why now?" to understand the unique opportunity at the present moment.

"What are you working on? Why are you doing this?"

These questions are designed to get to the core of a founder's motivation and the essence of their project, which can be very telling about their potential for success.

"Why now?"

This question seeks to uncover the reasons why a particular business idea is viable at the current time, which could not have been the case previously due to technological or market limitations.

The Role of Enthusiasm in Founding Ventures

  • Founders' enthusiasm can be indicative of their commitment and belief in their venture.
  • Enthusiasm is seen as a positive trait that can help founders persevere through challenges.
  • The reasons behind starting a venture are telling; founders with a mission beyond financial gain are often more resilient.

"If you ask Elon Musk, why are you doing this? And nobody really asked him why he was doing the rocket ships, but I asked him."

This anecdote about Elon Musk's motivation for SpaceX illustrates how a founder's deep, purpose-driven reasons for starting a venture can lead to extraordinary commitment and resilience.

Successful Investing: Picking vs. Access

  • Access to deals can be as important as the ability to pick winners in venture capital.
  • Being part of a strong network can result in access to the best deals.
  • The debate between picking and access is ongoing, with some believing that access to a flow of high-quality deals can compensate for less optimal picking strategies.

"Yes. The answer is yes."

Jason Calacanis acknowledges that both picking the right investments and having access to quality deals are essential components of successful investing.

Scaling Y Combinator and Its Impact

  • Y Combinator's growth has led to debates about the quality of startups and the fairness of the investment process.
  • Jason Calacanis argues that while Y Combinator has been successful, its scaling has resulted in a disparity between the top and bottom startups in each cohort.
  • There is criticism that Y Combinator creates an environment where the best deals are secured by insiders before Demo Day.

"So it's easy to criticize Y combinator because they're a little persnickety on the edges."

Jason Calacanis acknowledges that while Y Combinator has its critics, much of the criticism may stem from a competitive or threatened stance.

"If you're in the audience at demo day, you're kind of the sucker at the table."

This quote suggests that the best investment opportunities at Y Combinator are often taken by insiders before the public Demo Day, leaving less desirable options for external investors.

Investor-Founder Dynamics and Tactics

  • Jason Calacanis discusses the aggressive funding tactics used by startups and the investor response.
  • Founders sometimes manipulate investors with tactics like sending unsolicited Docusigns for investments or using variable valuations.
  • Calacanis emphasizes the importance of honesty in investor-founder relationships and the ineffectiveness of manipulative tactics on experienced investors.

"Literally, there was one class where one of the people sent me a docusign for $100,000. And I almost clicked on it, and I did click on it to open, and I was like, what is this?"

This quote illustrates the aggressive tactics some startups use to secure funding, such as sending unsolicited investment agreements to investors.

"It's a bad idea to try to manipulate investors. It's a bad idea to try to do these safe documents where you give five different investors five different valuations in the same month."

Calacanis warns against manipulative tactics like variable valuations, highlighting that honesty is crucial in investment dealings.

Jason's Writing Process

  • Jason Calacanis details the intensive and collaborative process of writing his book.
  • He wrote in the mornings, and his friend Brian Alvey would review and edit the content, providing honest feedback.
  • They organized their work in an Excel spreadsheet and had a rigorous schedule, including writing retreats, to meet deadlines.

"We did it in 19 days. I would write in the morning for an hour or two. Then my best friend Brian Alvey would come over."

This quote describes the daily routine and collaborative nature of Jason's writing process.

"When we got to the end, we were under deadline and we needed 15,000 more words. And I said, speaking at Mark Schuster's conference down in LA, let's go to LA."

Calacanis explains the deadline pressure they faced and the focused effort required to complete the book.

Career Highlights

  • Jason Calacanis reflects on his career achievements, including writing his book, becoming a Sequoia Scout, and notable investments.
  • He takes particular pride in being an early investor and the thrill it gives him to write the first checks for startups.

"Getting Peter Rojas to join and stealing him from Gizmodo to Engadget was a massive highlight."

This quote highlights one of Calacanis's significant career achievements in the tech media industry.

"Investing in 125 companies was just extraordinary for me. I love writing. I love interviewing people and I love being the person who writes the first check."

Calacanis expresses his passion for his work and the joy he derives from being an early-stage investor.

Startups and VC Industry Changes

  • Jason Calacanis shares his desire for more VC participation in early-stage investing and for founders to focus more on skills and customer development.
  • He criticizes the distraction culture in the startup world and advises founders to prioritize profitability over networking and attending conferences.

"I would like to see on the VC side, I would like to see more people participating in the speculative rounds."

Calacanis encourages VCs to engage more in early-stage investing rather than outsourcing it to others.

"Stop going to web summit or summit at Sea or TEDx or other bullshit, and start adding more skills and get more focused on their customers and revenue."

This quote is a strong recommendation for founders to concentrate on building their businesses rather than attending numerous conferences and networking events.

Book Recommendations and Acknowledgments

  • Jason Calacanis expresses gratitude for the support and readership of his book.
  • He recommends his book "Angel" for aspiring angel investors and discusses the helpful resources provided by Pendo and Treehouse for product managers and coders.

"Most of all, thank you for reading it and producing such great content."

Calacanis shows appreciation for the engagement with his book and the content produced by the interviewer.

"You really must check out the book angel. You can find the links on the website at the twentyminutevc.com."

The recommendation and directions to find his book "Angel" for those interested in angel investing or the startup ecosystem.

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