In this episode of "20 Minutes VC," host Harry Stebbings interviews prominent New York angel investor Jerry Newman, known for his deep insights into investment mechanics and portfolio management. Newman, who has backed companies like The Trade Desk and Datadog, shares his journey from managing director at Omnicom's venture division to accidental venture capitalist, emphasizing the importance of hands-on involvement with startups and the power of a well-constructed portfolio. Newman and Stebbings discuss the nuances of early-stage investing, including the value of prorata rights, the significance of second-round funding, and the pitfalls of bridge rounds. Additionally, Newman advocates for VC's role in actively supporting founders beyond mere financial backing, underscoring the critical nature of board guidance and the founder-VC relationship in steering startups towards success.
"Now Jerry is one of New York's leading angel investors with a portfolio including the likes of the trade desk, which ipoed in 2016, Datadog and Flurry, which was acquired by Yahoo, just to name a few."
This quote highlights Jerry Neumann's successful track record as an angel investor, emphasizing his involvement with high-profile companies that have either gone public or been acquired.
"So I became a venture capitalist primarily by accident, learned on the fly. Nobody there had done venture investments before, so it was an interesting experience."
This quote explains how Jerry Neumann's venture capital career started unintentionally and without prior experience in venture investments, making his journey a learning process from the beginning.
"It's embarrassing to think about the first few deals we did because they had none of the usual protections a venture deal did."
Jerry Neumann reflects on the inexperience evident in his early venture deals, acknowledging that they were unconventional and lacked typical investor protections.
"So I'm a believer in more hands on in being there to help the entrepreneurs when they need it."
This quote underscores Jerry Neumann's belief in a proactive investment approach, where venture capitalists actively support and guide the entrepreneurs in their portfolio.
"I absolutely believe that vcs can increase the company's success."
This quote affirms Jerry Neumann's conviction that venture capitalists play a significant role in driving the success of the companies they invest in through active involvement and support.## Early Stage Board Dynamics
"So there was a company where I was the first investor and the board was me and the founder. Now, this was very early stage, and every month we'd sit down and we'd say, all right, well, I would ask him, what have you done this month?"
This quote highlights the simplicity and focus of early-stage board meetings, emphasizing progress checks and planning.
"But having somebody who could come in and say, great, I'm glad you're focusing on details, but we need to continue having major improvements made every month."
This quote underlines the importance of a board member in helping the founder maintain a balance between detail orientation and strategic progress.
"I think they should have a board from day one."
This quote suggests that having a board from the onset is beneficial for founders, providing structure and accountability.
"It's also not a control thing. The board can be me and you and your dog, and hopefully your dog likes you better than me."
This quote emphasizes that a board's purpose is not to exert control but to serve as a sounding board and accountability partner, regardless of its composition.
"So a board member has a lot of hats. One of them is, as a board member, I am responsible for the investors interest in the company."
This quote acknowledges the dual responsibilities of a board member: to the investors and to the company's success.
"I think being explicit about which role you're playing, depending on what you're saying, is important."
The quote stresses the importance of transparency about the capacity in which a board member is speaking, ensuring clear communication and trust.
"Well, you have to be company first. But my experience is when you remove the founder from a company, the company almost always does worse."
This quote conveys the delicate balance between prioritizing the company while recognizing the founder's critical role in its success.
"Who are you going to hire in a company which is clearly not doing well? Because that's why you're removing the founder that is going to be more motivated to make that company work than the founder was."
The quote questions the logic of replacing a founder, highlighting the difficulty of finding someone with equal motivation and vision.
"Josh Coppleman was awesome. I was on a board with him for a while."
This quote introduces an example of an effective board member, setting the stage for discussing the qualities that make a board member stand out.
"He could challenge founders on their premises from a base of experience, and also because when he did so, he didn't do it in a way that the founder would have a hard time accepting."
The quote illustrates the importance of experience and the ability to communicate challenges constructively in board member-founder interactions.
"I think there's two steps to winning a deal. One is being one of the first people they talked to, right, being top of their list."
This quote outlines a two-step strategy for winning investment deals, emphasizing the importance of being a preferred choice for founders.
"And two is having an open and transparent and rapid process to coming to a decision."
The quote highlights the necessity of an efficient decision-making process in securing deals amidst competition.## Venture Capital Engagement
"So if you want to be one of the first five VCs that a founder talks to, I think you need a couple of things."
This quote emphasizes the prerequisites for a VC to be among the initial contacts for a founder seeking investment.
"You need to have a good reputation among other entrepreneurs because they're going to ask and say, which of these people should we talk to and who shouldn't we waste our time on?"
The quote highlights the importance of a VC's reputation in the entrepreneurial community for securing opportunities to engage with founders.
"So you need to have a way that entrepreneurs can reach you quickly, but not so quickly that the people who really aren't qualified flood you with deals."
This quote suggests the necessity for VCs to be accessible but also to have a system in place that filters out unqualified deals.
"I am price sensitive. I don't believe in the binary outcome that Silicon Valley has been sort of talking about for the past ten years."
Jerry Neumann challenges the prevalent Silicon Valley mindset that entry price is irrelevant due to binary outcomes in investments.
"I have a spreadsheet of hundreds of exits in enterprise software. And I kind of have a feel, having done all that research for what the sweet spot for an exit is..."
Jerry Neumann uses a data-driven approach to understand exit valuations, which informs his pricing decisions.
"The hardest thing about being solo is that there's nobody to tell you that you're making a stupid decision."
This quote reflects on the challenges of solo investing, particularly the lack of a sounding board for decision making.
"I never make this snap decision, because if I made snap decisions, I would always say yes."
Jerry Neumann emphasizes the importance of taking time to reflect before making investment decisions to avoid impulsivity.
"I write myself an investment memo... I talk to investors who might fund the next round."
Jerry Neumann describes his thorough approach to decision making, including self-reflection and seeking external opinions.
"A lot of conversations I have in the first year with founders are along the lines of, your company needs to look like this, you need to get there, or else we can't raise more money."
Jerry Neumann discusses his hands-on approach in directing founders towards achieving a state that makes their company attractive for further investment.
"I always insist on getting prorata in a company because I think that the second investment is a much better investment than the first investment."
Jerry Neumann explains his strategy of securing the right to invest in future rounds, emphasizing the value of follow-on investments.
"I spoke to Mike Maples and he said that, Harry, bridge rounds are often a bridge to nowhere. How do you view bridge rounds especially, given your appetite for those earlier?"
This quote introduces the topic of bridge rounds and their perceived value, setting the stage for a discussion on the subject.## Investment Strategies and Outcomes
"So if you raise a precede round of 500k, you're almost certainly going to need at least another million to get to the series a."
This quote emphasizes the reality that initial funding rounds are often insufficient to carry a company to Series A, necessitating additional investment rounds.
"I think part of the reason that my returns have been good is that for the companies that have failed, I haven't lost a lot of money."
Jerry Neumann explains that by investing smaller amounts initially, he minimizes losses when companies fail, which has positively impacted his overall investment returns.
"I don't tell them I always will, but I have always."
This quote reveals that while Jerry does not promise to always provide follow-on funding, his track record shows that he often does when another lead investor is involved.
"You have to have done these things. You have to have gotten this far."
Jerry Neumann insists on clear milestones and progress from companies before considering leading a second investment round.
"There's no such thing as work-life balance. There are only trade-offs, I think."
Jerry Neumann quotes Jack Welch to convey that balancing work and personal life is about making choices rather than achieving perfect equilibrium.
"I believe that the world is getting better."
In this quote, Jerry shares his optimistic viewpoint that the world is on a path to improvement, despite challenges and setbacks.
"I'd like to see VCs go back to really taking more risks in trying to help founders who are inventing really new things that really change industries."
Jerry Neumann expresses his desire for venture capitalists to prioritize innovation and industry-changing ideas over safer, short-term profitable ventures.
"Risk is measurable... Uncertainty is unmeasurable."
This quote differentiates between the concepts of risk and uncertainty, with Jerry advocating for venture capital investment in the latter, which involves unquantifiable outcomes.
"New York is well ahead of any other place except for the San Francisco Bay Area, which is amazing to me how much it's changed over 20 years."
Jerry Neumann reflects on the remarkable growth of New York's tech ecosystem over the past two decades, recognizing its significant position in the industry.
"I think it's going to be enormous here."
This quote conveys Jerry's bullish outlook on the future of the New York tech ecosystem, anticipating substantial growth in the coming years.
"They had found a problem which people were solving in a small, inefficient way, and decided that it could be solved in an efficient way and create an entirely new and very large market."
Jerry Neumann explains why he invested in Edmit, highlighting the team's approach to solving a widespread problem in a new and efficient manner.
"Great team, big idea, new market that could grow quickly and big problem."
This quote summarizes the factors that led Jerry to invest in Edmit, encompassing the team's quality, the scale of the idea, market potential, and the gravity of the problem being addressed.