Ben Littauer - "#1 Fundraising Mistake" - Ep. 3

Ben Littauer travelled an unlikely path from philosophy to communications technology. He brings to life the exciting turns in his careers as founder and angel investor.  In his light-hearted style, Ben provides a thoughtful tour of Boston’s angel scene in this episode that ranges over many topics including equity crowdfunding.  In particular, he explains what leads founders to make the worst fund-raising mistake of all. The philosopher’s clarity of thought and the engineer’s practicality are in evidence.

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Transcript of:  Ben Littauer "#1 Fundraising Mistake"

Guest: Founder, Angel & Advisor Ben Littauer

SAL DAHER:  Welcome to Angel Invest Boston. Conversations with Boston's most interesting angels and founders. I am Sal Daher, and my goal for this podcast is to learn more about building successful new companies. The best way I can think of doing this is by talking to people who have done it. In our third episode, we'll be speaking with founder, angel, and advisor Ben Littauer. Ben, I'm so grateful you agreed to be interviewed. Welcome.

BEN LITTAUER:  Sal, thanks for having me. It's a pleasure to be here.

SAL DAHER:  Delightful. Ben Littauer founded Baranof Software, a provider of widely adopted products for managing enterprise email. After selling Baranof, Ben worked for a decade advising institutional clients on technology strategy. Since 2008, he has been an active angel investor in more than 35 startups. Ben continues to work as an advisor and a much sought after speaker in the art of angel investing.

Ben is active in Walnut Venture Associates and Boston Harbor Angels, two different angel groups. He's on the board of The Capital Network and a judge at Mass Challenge, the accelerator Mass Challenge. Ben, how did studying math, philosophy and the law lead you to a career as an expert in communication technology?

How Ben Found His Calling

BEN LITTAUER:  Well, it was a tortuous path, I have to admit. I came to Boston after graduating Cornell in Math and Philosophy as you pointed out to come to Harvard Law School. When I took a personality assessment there. They said "You know, you're at the wrong side of Cambridge, and you really ought to be an engineer at MIT." I went through half of Harvard Law School, and did fine there, but I didn't find it satisfying and at that time, my former Cornell roommate came back from California and got a high paying job in the computer industry as it said on the inside of the matchbook.

I said "I could do that too." And I ended up working at BBN, which at the time this is the early '80s. It was growing at a tremendous rate, 40% a year and they would take anybody who could spell C in order to come in. BBN had a very inspired recruiter I have to say, hiring that this fellow did, during the whole time I was there was always very interesting people but not necessarily people with a lot of training just like myself. I've had a couple of computer courses.

That's how I ended up doing Internet programming and the rest as they say is history. I have a logical mind and that's why programming fits with what I do, so I was a geek for many years alternating between actually programming and being an engineering manager until I got fired for my first startup and ended up having to start my own.

Connection Between Coding & Philosophy

SAL DAHER:  Excellent. It's interesting the connection between philosophy and coding. I have a daughter who went to Cornell as you did and she studied biology but she always wanted to be a philosopher. The reason for that is just really treasures logic, having things make clear sense, and philosophy involves a lot of that. Now she discovered that she can get a lot of that satisfaction in coding, in writing computer programs because it is so perfectly logical.

BEN LITTAUER:  Absolutely. It's a wonderful thing. You say she went to Cornell which probably gives her a very good view of philosophy as a logical.

SAL DAHER:  She stayed away, at my advice, perhaps wrong advice. She went and did biology at Cornell, spent all the time. Prior to that, she had had a great interest in philosophy and continues to have one. She finds that her interest in philosophy is satisfied in coding, so I think that that's very interesting that you, this math, the philosophy thing.

BEN LITTAUER:  Yeah. It tends to be a very structured logical point of view. The logicians obviously make great programmers, but oddly enough so do musicians.

SAL DAHER:  This whole for philosophy majors out there, you can start coding.

BEN LITTAUER:  Absolutely. Don't see Citibank hiring a lot of house philosophers at the moment but coders probably so.

SAL DAHER:  Well, at Citibank, it's mostly COBOL, right?

BEN LITTAUER:  Let's hope not.

SAL DAHER:  How did you come about founding Baranof Software?

BEN LITTAUER:  Well, as I said I had taken a job with a startup. It was about 10 people.

SAL DAHER:  This is after BBN.

BEN LITTAUER:  This was after BBN, Lotus, Sun Microsystems.


SAL DAHER:  Let me just stop here and give a little bit of context. BBN is a company that used to be Bolt, Beranek and Newman, couple of MIT professors and another engineer. Got together and they basically developed a lot of the technology.

BEN LITTAUER:  The original BBN was an acoustics consulting company and they added in, somehow they managed to invent timesharing and then over time through the '70s they were instrumental in developing the ARPANET into the late '70s and early '80s, and then the ARPANET itself morphed into the Internet and so I was very fortunate to be there during that time.

There are wonderful stories of BBN where we were obviously inventing a lot of protocols and inventing a lot of what became the Internet. We had a young woman come in from recent graduate from Brown and we were having a meeting about developing some new protocols, and around the room are some of the big names in protocol development in the early history of the Internet.

At the end of the meeting, she said "So when are we going to ask someone who knows?" She had not yet quite grasped the idea that we were actually inventing things at this point to advance the state of the art as opposed to just trying to figure out what an academic exercise was going to look like.

It was a very exciting place to be at that time. I ended up staying there for about five years doing first terminal access and then working on network management, and then I ended up going up to Lotus which was ...


SAL DAHER:  Yeah. Explain a little bit what Lotus did.

BEN LITTAUER:  Lotus was of course 1-2-3 was their flagship product.

SAL DAHER:  Precursor to Microsoft Excel.

BEN LITTAUER:  The successor to VisiCalc. The precursor to Microsoft Excel. It was the spreadsheet of the time in the DOS world the MS DOS world on the IBM PC. It was largely, it could be credited with making the IBM PC a success, in everybody used 1-2-3, and Lotus was one of the biggest software houses in the world at that time, started by Mitch Kapor.

They had bought VisiCalc, so Bob Frankston who is one of the co-inventors of VisiCalc was at Lotus and he was doing special project and one of those was an email project, and a former BBNer, was one of the managers on that project and he hired me, and so I was working with Bob Frankston who is an amazing character. I've had a very lucky career that I've worked with some very astonishing people and we developed a product called Lotus Express, that was not mainstream for lotus. We were a spreadsheet company, not a communications company.

That product shipped in 1987 I believe and then eventually it was too small for Lotus to pay attention to, so they canned it, I left Lotus at that point and went to a small company in Bedford called Think which had recently been acquired by Symantec and Symantec was looking at Think because they had a compiler and they also had an email program and that's why I was brought in. That product got sold immediately to the TOPS Division of Sun. This was in the era of companies eating companies all over the place.

Sun Microsystems & Java

SAL DAHER:  Explain a little bit who Sun Microsystems was.

BEN LITTAUER:  Sun Microsystems. Another company that doesn't exist anymore.

SAL DAHER:  It was a very, very influential company of its time.

BEN LITTAUER:  Terribly influential. This was a Bay Area company started by Scott McNealy that built high-performance UNIX computers, workstations so these were the first desktop UNIX computers, and they had a very strong feeling around networking and in fact their motto for some years was the network is the computer, and that was the way they had made a lot of progress. Lotus eventually got brought by IBM, Sun eventually got bought by Oracle I believe which was more of a spite move than anything strategic.

SAL DAHER:  Its competitor, what happened to them?

BEN LITTAUER:  Apollo. I don't know who bought Apollo or whether they died but certainly some of the Apollo people ended up at Sun. One of the inventors of Java was a neighbor of mine and he was at Sun, he was an early Apollo guy too. It was a high growth time.

SAL DAHER:  Java came out of Sun.

BEN LITTAUER:  Java was a Sun product, absolutely. I was at Sun and I was working on an email product there that was the successor to Think's original inbox product and that product wasn't going very far very fast, and they wanted me to move out west and I wasn't ready to do that, so I said "Let me find something else to do." I ended up working at a small company called Notework which was a dos-based email program. This is the 1990 or so.

SAL DAHER:  DOS being the operating system which preceded Windows.

Bob Metcalfe Makes an Appearance

BEN LITTAUER:  Right. This was the MS Dos character-based system that Bill Gates had licensed from someone else and turned into a major company that some of you had heard of called Microsoft. I went to Notework which was this little DOS-based email system and learned that technology wasn't actually what was making Notework successful, what was making Notework successful was sales and marketing.

I looked at that and said "Wow, that's pretty cool. This technology is really ugly but it sells well." I was there for about six months before they fired me. I was the second of six engineering managers. Eventually they figured out that the engineering manager wasn't really the problem in the company, and so I don't feel terrible about that but I ended up on the street.

At that point, I had happened to run into an idea at a conference. I was down at an electronic messaging association conference in New Orleans I believe, and I'm walking around and listening to the presentations and all of these people with LAN email systems, in the old days, this is pre-Internet email as a consumer good. [crosstalk 00:11:08].

SAL DAHER:  Local Area Network, a network within a company.

BEN LITTAUER:  Network usually at the departmental level with a lot of PCs on it and a small server. Someone had decided, well, we can build an email system on top of that.

SAL DAHER:  On the basis of Ethernet.

BEN LITTAUER:  On the basis of Ethernet and on the basis of file-sharing, you could build an email system.

SAL DAHER:  A little namedropping here. I was at an event at MIT this Saturday, and next to me.

BEN LITTAUER:  Bob Metcalfe.

SAL DAHER:  Bob Metcalfe.

BEN LITTAUER:  Yeah. He's the guy.

SAL DAHER:  He's the guy who started all that, yeah. Anyway, please resume.

Ben Gets the Idea for Baranof Software – The Role of Luck in Business

BEN LITTAUER:  Basically I realized that all of these LAN, these email systems which were extremely fragile because they were made up of a bunch of PCs in closet somewhere were terribly susceptible to failure and yet there were a lot of companies saying to the EMA was made up.

SAL DAHER:  PCs being personal computers.

BEN LITTAUER:  Personal computers.

SAL DAHER:  These boxes.

BEN LITTAUER:  Tiny boxes. Basically the equivalent of your phone today.

SAL DAHER:  The size of a overgrown bread box versus things that used to be the size of a room before.

BEN LITTAUER:  The EMA was made up of customers, people like Chevron, that size.

SAL DAHER:  EMA meaning?

BEN LITTAUER:  Electronic Messaging Association.


BEN LITTAUER:  Also vendors, and so it was an industry forum and the vendors were all saying "Hey, you can do workflow-based stuff. You can do all of this operational business thing on using email, isn't that cool?"

SAL DAHER:  Explain a little bit what you mean by workflow.

BEN LITTAUER:  Well, so for example you could say route A message through email that says "I want a purchase order." And it will route through all the approvals automatically by email and that would be the transport mechanism and the big companies were saying "But this stuff doesn't work. I can't rely on it for doing business critical processes because I won't know if it gets stuck somewhere."

That was my a-ha moment and I said "You know, I can tell you if it's been stuck somewhere by looking." What I and the proud inventor of is there is a concept in the Internet called ping which is basically a very small message that you send over to someone else and they're responsible for sending back a reply. It's been used for low-end network management and human-based network management since the inception of the Internet.

Where you'll occasionally ping a host and say "Are you there?" and it'll say "Yes" and then you say "Good, then I can talk to you and I can figure out what the problem is." I invented ping at the email level, so I would send out a little message by email now and expect to get a reply within a certain amount of time and if it didn't, I would raise my hand, and say "You know, there's a problem on this link."

That very simple concept turned into Baranof Software. I joined up with a former BBN colleague as my partner and we started this company and grew it organically. He ate ramen and I had a few box from a previous company and we started this thing basically on a shoestring and sold product in order to fund it, which is a very odd idea, and at that time it was already a little odd not to get some infusion of outside capital, although it was not yet the Internet boom that we know of in the late '90s.

SAL DAHER:  I think it's a tribute to your ability to execute, and also to the fact that there was probably so much demand for that type of product.

BEN LITTAUER:  Absolutely. We were in the right place at the right time and fortunately, I had that a-ha moment but I am a strong believer that a lot of the element of success in a company is locked in timing. I've seen companies come and go where the timing is wrong or some market occasion came up and it kills the product, so there's so many ways that things can fail, but you have to have a lot of luck to have the stars line up and you succeed.

SAL DAHER:  Yeah. This is a third episode of this podcast, and you're the third guest to say exactly that luck is an enormous factor in a success of startups.

BEN LITTAUER:  Absolutely. I took up angel investing after years of some paid consulting but more on paid consulting with small companies on strategic issues and product issues and tech issues. I realized that I could either do this work for free or I could pay to do the work and I figured that must be a better model if I pay to do the work, they must listen to me.

SAL DAHER:  What you mean is that you sold Baranof Software in 1998.


SAL DAHER:  You spend about a decade working as a consultant, paid or unpaid. Paid by large enterprises, unpaid in small interesting companies and then you said "Heck, why don't I put some of the piles of money that I got instead of putting into the stock market, I can put it into these little companies."

BEN LITTAUER:  It's not quite simple as that. I was initially looking for a job but I started having way too much fun and I enjoy working with the small companies and being able to put a small bet on each one that I really like gives me the opportunity for some upside and honestly it does make them listen to me more.

SAL DAHER:  You also roll up your sleeves.

A Common Mistake Angels Make – Investing Too Much Too Fast

BEN LITTAUER:  I certainly roll up my sleeves with many of the company and anyone who'll accept my advice, and I tend to work closely with about six or eight companies in my portfolio at any time. I've been doing this as I said since 2008, I started off knowing nothing about investment, that's why I joined Boston Harbor Angels and then Walnut because there's no better way to learn the ropes than to work with people who've been doing this for a long time.

I did this full time so I'm pretty committed to it, I jumped right in, and I'm certainly perfectly happy to have lost some money early on through some rookie mistakes. One of the mistakes that most angels do is they spend too much too early and discover that that won't let them build a big portfolio, so I've been steadily decreasing the amounts of my investment. Still hoping to find that 100X return in one of them that will cover the portfolio.

Peculiar Features of Early-stage Investing

SAL DAHER:  It's a peculiar feature of the early-stage investing in the sense that in economic or finance theory tells you that you have to diversify your portfolio in order to reduce risk because the market doesn't pay you to take the risk of a particular company. They call it the idiosyncratic risk or risk particular to a company.

The market pays you to take the general market risk, so called beta. Therefore, in a portfolio, if you're investing a lot of money in one or two companies you are, you better really know something about those companies because otherwise, the market is going to take you to the cleaners eventually and this is very clear.

However, in the situation of private companies, there's a substantial evidence to the fact that you diversify not to minimize your downside but to increase your upside. If you're a large publicly-listed company like Exxon, you're not going to discover new refinery. It could increase your revenues by 20% or something.

You could have a blow up in a refinery or you could have a tanker that runs aground somewhere. Whereas if you invest in a startup, you put a little money in a little startup and there can be really substantial upside surprises which are not existent in publicly-traded companies.

BEN LITTAUER:  Right. The downside is the amount of your investment.

SAL DAHER:  Yes. Exactly which is very limited. It's like buying a lot of call options on extremely way out of the money call options. I just think that it's very interesting to note that diversification in angel investing is extremely important in order for you to capture upside, not just to restrict the downside.

Some Angels Do Make Concentrated Bets

BEN LITTAUER:  Absolutely, since angels are individual investors, we each have our own philosophies so they're all over the world. One of our colleagues at Walnut as you know tends to focus on two or three companies and put an awful lot of money to work in each of those. He believes that he has enough influence and a good enough selection to be able to do that, not build a very broad portfolio.

I on the other hand tend to follow what is the more conventional wisdom which is to diversify. I'm looking for 10X returns in some of my companies. In order to do that, assuming that 90% of them fail.

SAL DAHER:  Eventually, yeah.

BEN LITTAUER:  I have, this 1 in 10 that's going to hit that 10X return and the rest are going to be well below that and usually zero. I need to invest in far more than 10 companies to give my statistical chances of actually recognizing that profile because there's a lot of skew here.

Paul Graham & Y Combinator

SAL DAHER:  There's an amazing tape on the Internet, of an interview with Paul Graham of Y Combinator out in the West Coast. He was talking about at the time I think they'd had something like 565 companies go through their program. Of course, now they've ramped up and had a lot more companies going through but up to that time, from inception, I think 2007 until 2014, they'd had something like 565 companies.

Those companies I believed raised something like $2 billion and their valuation at the time was something like $14 billion. You could say that the valuation had increased by 7X, but the most impressive data from this conversation with Paul Graham. It's available in the Internet, you can look it up. It is the fact that 2% of those 565 companies account for two-thirds of that additional value going from two billion.

You Can’t Pick Winners, Better to Avoid Sure Losers

BEN LITTAUER:  Absolutely. There's some outliers that make the portfolio. I think if you talk to, you've talked to Michael Mark he'll tell you the same thing that this isn't a short thing on any of them and I've realized early on that I can't pick winners, and so my own philosophy is I'm going to try to avoid some losers and then I'm in good shape.

SAL DAHER:  Because you can never predict Slack (a messaging-based collaboration tool). The technology of Slack, you've seen it around for decades, nothing special but they just happen to come at the right time with the right marketing with the right setup, user interface and so forth and it's a huge hit.

BEN LITTAUER:  Absolutely. Who would have predicted it?

SAL DAHER:  Exactly, many people who have been at that before, and have struck out.

BEN LITTAUER:  Yeah. Absolutely.

Angel Investing Ecosystem in Boston

SAL DAHER:  Excellent. Please go back then to your, to what you're saying about, I think we were talking about angel groups. Yeah, it might be a good moment to compare and contrast because the first two people we've had had been just members of Walnut as I'm just a member of Walnut so I'd be interested to see your perspective, Walnut, Boston Harbor Angels, and you also do ...

BEN LITTAUER:  I was also a member of Launchpad for a couple of years. They each have their own style. I'm a seed stage investor, and what I mean by that is I'm mostly looking at companies on the very first round after friends and family where usually they don't have any revenues, they may not even have gotten to market really yet, and that's a stage where I can provide the most value I feel as an advisor and it's the stage where you potentially have huge outcomes of course the failure rate is much larger as well so it's a sort of Yin and Yang thing.

I joined Boston Harbor first. I didn't know anything about what I was doing but Boston Harbor has a very networking focused meeting, in other words, there are a lot of guests there and there's full introductions across the room and so you get to meet a lot of people in the echo system, and I found that very valuable. In addition, it meets up Babson during the day is sponsored by the chair of entrepreneurship there, Candy Brush. She brings in a lot of students.

SAL DAHER:  You talking about Boston Harbor or?

BEN LITTAUER:  Boston Harbor.


BEN LITTAUER:  Walnut is also hosted at Babson. We don't have an open door policy. It's a somewhat different dynamic in the room. The advance from my point of view of having students in the room was when we did see the next Facebook. People my age would all glaze over and have no clue what they were talking about but if the students were nodding, we would pay a little more attention.

The kinds of questions the students would ask would be far more relevant at times than the ones we have. Since then that's good eight years ago, we've learned a lot in the angel community, and so we sometimes can actually understand what Facebook does. On the whole it was very refreshing at that time to see some young faces in the room, so that's why I joined Boston Harbor first. I also joined very soon thereafter Walnut. Ed Belove who was a Lotus colleague.

SAL DAHER:  Yes. We schedule eventually to have ... I've been trying to schedule him.

BEN LITTAUER:  He brought me in and I thought it was a very good group. Boston Harbor is a very eclectic group, will invest in anything anywhere and so we looked at everything from consumer products. We've invested in LED lighting. We've looked at mobile elliptical bike, things like that, all the way up to therapeutic, so one of the big wins for some of the Boston Harbor Angels.

This was mostly before my time and I wasn't ready to invest in pharmaceuticals myself was this company called Smart Cells that exited at the end of 2010 for 10X on the table, and a potentially infinite upside if it goes to market, this is a diabetes medicine.

SAL DAHER:  Wow. That's fast work for biotech startup.

BEN LITTAUER:  It's amazing and now of course, every company that comes in to pitch to us says we're just like Smart Cells, because they know that's the winning formula is to exit pre-clinical for a nice multiple. Boston Harbor will do anything anywhere. We've got investments in California, in Canada, in Baltimore, all over the place.

SAL DAHER:  Whereas Walnut is much more geographically focused.

BEN LITTAUER:  Walnut is specifically New England. We want to be able to drive within two hours with our baseball bat to whack the CEO. That's our goal there, and so we're very focused on that. Historically Walnut has been much more software focused and less life sciences focused, although we have a little more interest in life sciences with the current membership makes.

SAL DAHER:  I've done a few life science deals and a few Walnut members have been in on that.

BEN LITTAUER:  Absolutely. We're a little more diverse than we used to be, but historically that's been the core of our capabilities has been around IT(information technology). Launchpad which is now the largest angel group in the Boston area is a very professionally-run group, run by Christopher Mirabile and Ham Lord. It's the merger of the original Launchpad group which is now 10 or 12 years ago.

They were founded and Christopher had started his own group called Race Point and he and Ham decided that they were better off together than apart so they merged the groups. It is now 150 members and limited to 150 members. They can put a lot of capital to work. Their membership has moved them by their desires to a little later stage in the funding ecosystem so almost all of their deals are an equity round rather than convertible note.

They tend to run between three quarters of a million and a million and a half in total dollars raised. When you're working at that level, there's a lot more to look at. They have a very structured process, a very developed process, a very rigorous process.

SAL DAHER:  You mean there's a lot more to analyze.

BEN LITTAUER:  There's a lot more to analyze.

SAL DAHER:  They have sales.

BEN LITTAUER:  They have sales. They may actually have these customers you can talk to. Often with an early stage startup, you don't want to talk to the customers because they don't know that this is two people and a dog and you don't want to inform the customer that they're working with a fly-by-night.

SAL DAHER:  The customers themselves don't yet know if there really is a demand for this or not.

BEN LITTAUER:  Absolutely. There's a lot less to know at the stage that I work at than when Launchpad works. They have a lot more to look at.

SAL DAHER:  At the earlier stage, it's more I guess about the team and see if the space makes sense, and if the team is capable of doing. Would you agree with that?

BEN LITTAUER:  Absolutely. The diligence that we do when seed stage investors come in and we have a number of high profile seed stage investors in town that I'm sure you'll be bringing to the podcast.

SAL DAHER:  Yes. Yes.

BEN LITTAUER:  When we look at a deal. We're primarily spending time with the CEO or the founding team depending on how big the founding team is and how involved they are to understand how they think because we know that the business plan that they are operating on today. If we write a check tomorrow, the following day, the business plan will be different.

We know that's going to happen and I know you're planning to ask me about pivots, and I'm going to say, this isn't about pivots. This is about refinement of a business plan because we weren't actually on a track yet as a company, an early stage company is still looking for the right rails to get on as opposed to knowing where they're going. Working with those early stage companies is a very exciting time, we get to shape the companies which is why a lot of us do it. The risks are way higher.

SAL DAHER:  Much higher. Yeah.

BEN LITTAUER:  Launchpad with their very formal process is trying to identify those that are really ready for a growth stage.

SAL DAHER:  That plays to their strength.

BEN LITTAUER:  Absolutely.

SAL DAHER:  Companies that are more developed or they have product market fit, can show some traction, have some numbers behind that, which allows the formal process that Launchpad has. They actually have paid staff that analyze the financials of the companies versus Boston Harbor and Walnut. Does Boston Harbor have paid staff?

BEN LITTAUER:  We have a CEO who is paid and a couple of interns from Babson who I assume gets some stipend of some sort. As Walnut, we have a single.

SAL DAHER:  It's the most informally organized, no paid staff, except for the interns.

BEN LITTAUER:  It's more of a collaborative than any of the other groups in town. There are some two dozen angel groups in New England, it's an astonishingly large number.

SAL DAHER:  The moral of the story is that there's a angel group for every taste.

BEN LITTAUER:  There is an angel group for every taste. We have Golden Seeds that focuses on women-led companies. We have Mass Medical Angels that does what you'd expect, and each group has its own flavor, its own style. Hub Angels is a fund and so it also tends to syndicate with Launchpad very heavily. They have very similar philosophies of what they're looking for.

SAL DAHER:  It's really exciting to look at all the various ways that you can follow angel investment. My personal preference is I also spend a lot of time real estate is one that I like the freedom and the informal environment. I can tell you, I really appreciate the work that people at Launchpad do, sometimes when we share deals with them. I find it's very professional and as well as Boston Harbor. I think we're working on a deal in common with them.

This is another point and that is that angel groups work with each other, not only that they collaborate within the angel group but also angel groups collaborate with each other. There's a treaty. [crosstalk 00:31:27].

BEN LITTAUER:  I think that's maybe not unique to New England but certainly we're the most mature angel ecosystem in the country.


BEN LITTAUER:  Partly as a result of that angel treaty which is a very simple piece of work that says that we won't sue you on your diligence. If we accept your deal, we either can take your diligence or not, but we're not going to sue you on it.

SAL DAHER:  We're grown-ups.

BEN LITTAUER:  We're grown-ups. We'll make our own decisions. [crosstalk 00:31:54]. We have the Angel Capital Association which is the national or international group of meta group of angel groups and individual angels. The ACA hosts quarterly syndication meeting in New England. I don't know if they do it anywhere else in the country where we all get together and each group brings in the deals that they have put together as with preferably with term sheets in place, and says "Hey, anybody want to take a look at this?"

We've done a lot of that, and because Walnut is a small group. We're about 25 to 30 members. We don't have the kind of that wallet that 150 members at Launchpad brings. We can start a deal but we may not be able to get it to the point where they need the 1.2 million that they're asking for. That's why it makes sense for us to start the deal, develop a term sheet, do a lot of diligence, the appropriate level of diligence and then take it to Launchpad and say "Hey, look. Do you guys want to come in? You folks want to come in and fill out the deal."

It brings a lot more money to the table. In New England, we are renowned as angels for underfunding our companies. Most of the companies that come out of the angel groups here are under-capitalized and it means they have to go back to the trough often. It's what we do and so we have to live with it and the consequences but at least we can get to the point where we're only [crosstalk 00:33:27].

SAL DAHER:  It creates an opportunity for angels to have a better funding environmental. Let's say in the Silicon Valley bay area.

BEN LITTAUER:  Absolutely.

SAL DAHER:  Where a lot of times if you have a little bit of cache, you're dictating terms to your angel investors. We're just jumping over each other to throw money at you. Whereas here, I think there's a better balance between entrepreneurs and angel investors.

BEN LITTAUER:  I think we filter more here and that's either a good thing or a bad thing. It's a bad thing because we're not diversifying as much as we should be. It's a good thing in that we probably have a higher hit rate for smaller successes.

SAL DAHER:  Yeah. I guess Boston really is an exporter of startups. I'm trying to remember who said it, I think it's someone from 406 Ventures. Two-thirds of capital in I guess series A capital invested in Boston companies comes from outside of Massachusetts.

BEN LITTAUER:  That doesn't surprise me. We don't have a very strong VC community here. Nothing compared to Silicon Valley. In terms of dollars amounts I'm not sure we have the greatest angel community. In terms of number of participants I think we do, percentage of participants. We have so many active angels in town, it's a wonderful thing.

We also have a tremendous ecosystems of startups with Mass Challenge, bringing in a lot of startups, but with all of the co-working spaces, I understand CIC has something like 600 companies in one building.

SAL DAHER:  In one building, that's impressive.

BEN LITTAUER:  That's just one building and there are many buildings like that. One of the things that is an interesting balancing act, Boston Harbor will invest in anywhere. Walnut won't, but we don't need to. We have plenty of deal flow. There's so many good companies. Yes, we will miss some gems.

SAL DAHER:  This is such a startup rich environment because as I said before Boston is an exporter of ideas and importer of capital. It makes sense because there's no place anywhere else where you have all these universities string together in this very practical minded attitude of some of these academics.

BEN LITTAUER:  We're conservative New Englanders.

SAL DAHER:  It's an amazing ecosystem from being an angel. I love being an angel investor here in Boston.

BEN LITTAUER:  The ecosystem has developed tremendously even in the time that I've been doing this. It was a lot quieter in 2008 than it is now. The city put in a tremendous amount of effort into the innovation district and mass challenge which is a not for profit, did some things amazingly right and I think a lot of that was lucky.

SAL DAHER:  Yeah. I think some of that startup under Mayor Menino but I think Mayor Walsh has been very very active and very supportive as well.

BEN LITTAUER:  Absolutely, and Deval Patrick was involved as well as the governor and I assume Charlie Baker as well.

SAL DAHER:  Some of the members of the city council in Boston are very forward-looking in this.

BEN LITTAUER:  Yeah. I think that both the state and the city government really understand that the innovation economy is critical to Boston success.

SAL DAHER:  To the point that we have a very enlightened attitude towards Uber.


SAL DAHER:  We're not Austin. Ben, couple of things I wanted to touch on. What you find is the advice you're more, because you give advice to so many companies. What's the advice you're giving companies most frequently? What's the thing that if you could write it down and just hand it to them, you would be doing. What's number one piece of advice you'd give?

BEN LITTAUER:  Well, with regard to funding, the advice is to be very practical about what you're asking for. It's very as an entrepreneur to get wedded to your idea, and say "This is so hot and it's so unique." Now seeing as I do probably an average of one new company a day between judging 30 companies on one day and meeting individually with a bunch of companies, your idea isn't unique, what's going to sell is execution.

You have to sell yourself far more than you have to sell the idea. When you're looking at raising money you tend to say "Well, I want to give away as little of the company as I can so that I'm going to be in charge and in control." That turns out to often be a mistake that kills the company.

You come in, you say "I want a $6 million valuation." It turns out that you really aren't worth that, so on the next round you have a down round and all of a sudden it is very depressing, nobody wants to invest because you look like you're failing. If instead you would have more modest goals at the outset and been willing to take a little bit more of a haircut on the equity.

SAL DAHER:  You would have a much bigger pie.

BEN LITTAUER:  You would have a much bigger pie because everybody would say "Hey, you're actually not getting out of the ball park." That's the key thing, one of the key things that I say.

SAL DAHER:  It's important to keep in mind here that you're an investor, you put money into a company, you're an advisor, you're getting some equity in here, so you're already in the company. When the company is negotiating these fund raising terms, you're being diluted along with the entrepreneurs. You're giving that advice that dilutes your position but in the long run is beneficial for the company.

BEN LITTAUER:  Yeah. We often will see deals being floated around by inexperienced investors where they try to take too much of the pie or something like that and then so on the investor side, we will also sometimes have that problem and then the next investors in who are going to be in control because they're putting much bigger money in.

They say "Well, we want those nice for [patient 00:39:17] terms too." Guess who loses on that? It's not only the entrepreneur but us as well, so having a very forward-looking. Look at your entire funding profile, not this round is probably the best piece of advice I can give you. The other thing that I say to every company and is sort of my mantra these days is let's not talk about valuation, let's talk about price.

This is a marketplace and if you think you have an inherent value, you're mistaken. You have a napkin with some diagrams on it, and that's not worth a million dollars, I'm sorry. What will matter is how do you fit into the ecosystem, so if I see a company coming, and I often see them coming out of the boonies with some absurd valuation on their first round.

I tell them you price yourself out of the market. Down here a company with a similar risk profile sells for $2 million to $4 million pre-money. I can tell you that and I can tell you even within that having seen so many deals where you're going to fit in, what you should be asking for your company, what the asking price should be. Not the valuation.

It's not about valuation because really what, are you going to do discounted cash flow? I don't think so, you have no cash flow. We're going to base it on your projections? I don't think so. It's a pricing question and you have to look at the market and it's a vibrant market here so it's not like it's a one-off, your deal looks like a lot of other deals, let's price it similarly to them.

SAL DAHER:  Wise counsel. Really wise counsel. Ben, we have about a little under 20 minutes left in our time here, and there's a lot of stuff that I wanted to cover with you. The first, what I wanted to do is I wanted to invite listeners to this podcast to review the podcast in iTunes and to help get the word out about Angel Invest Boston, particularly interesting reviews be quoted in future episodes.

We're hoping to have episodes on a monthly basis. In the future perhaps we might be doing more frequently, but initially they'll be monthly, on a monthly basis. After the release of the first three episodes, there'll be a monthly episode or a month. Now Ben, you talk about angel investing, and we talked about the range of the type of angel investing groups that exist in Boston, the important of working in an angel investing group, and all that stuff.

Now there are new developers in the horizon which is equity crowdfunding for a long time. We had crowdfunding, Kickstarter, Indiegogo where you could put money to back a product that was interesting to you, but you didn't get a piece of the action, and if the company succeeded, you got the joy of having back a winning product in the beginning but you didn't get a participation on the upside of the company. That has changed and speak a little bit about that and about how that ties in with angel investing, all the different varieties with angel investing exist.

BEN LITTAUER:  Well, some years ago congress passed the JOBS act which is what enabled this, and it took the SEC a few years and on May 16th of this year they turned on what's called Reg CF or equity crowdfunding and what that allows is in a limited way that you can raise up to a million dollars from non-accredited investors. Accredited investors.

SAL DAHER:  You being an entrepreneur, a startup.

BEN LITTAUER:  A startup can now raise money from people who don't have over $2 million in net worth or whatever the current accreditation standards are.

SAL DAHER:  Yeah, the current standards is $200,000 in annual income or $1 million in net worth outside of the primary residence. That I believe is a credible investor and those are the traditional angel investor. Now you don't have to have that kind of net worth. You can be someone with less net worth, less income.

BEN LITTAUER:  Depending on your income level, you can invest $2,000 a year in companies or more if you have more net worth. Again it's a sliding scale but the idea is that a company can go to its customers and say instead of getting the next widget that we make for your money, we'll actually give you shares in the company. What those shares look like is not defined, you can get convertible notes, you can get safes, you can get equity, you can get preferred equity, any of those, you can just do it as debt, straight debt.

Any of these instruments can be used. You can raise up to a million dollars. At the moment since May 16th I just did a panel on this, and the nice thing about Reg CF is it's all public, so this is all public information. As about a week ago $12 million had been raised in total since May 16th.

SAL DAHER:  How many startups?

BEN LITTAUER:  That was in 53 startups.

SAL DAHER:  53 startups.

BEN LITTAUER:  Three had raised a million dollars each.


BEN LITTAUER:  Of those companies. Two more were within 500 to a million.

SAL DAHER:  Okay, and then the rest is 70,000 to 80,000.

BEN LITTAUER:  Is small dollars. Exactly. That's $12 million in six months. Angel investors invest about $23 billion a year. VCs a similar amount in fewer companies. $12 million. This is startup territory, this is real startup territory. There are probably a dozen equity crowdfunding portals. All of this has to be done on the Internet through a portal. The largest ones of these is Wefunder, full disclosure, I'm an early investor in that company. They have the most deals and the most successful deals.

SAL DAHER:  That's a company here in Boston.

BEN LITTAUER:  That's a company based here in Boston.

SAL DAHER:  I've met the founder.

BEN LITTAUER:  Yes. Mike Norman.

SAL DAHER:  Yeah. I want to have him on as well.

BEN LITTAUER:  They have the most deals. They have a very open process as it must be and there's another one that I'm involved with as an advisor that I'm actually launching a company through called Netcapital, they just launched and so there are a lot of these companies out there. Each of them is trying to figure this out.

SAL DAHER:  How does a due diligence work in equity crowdfunding?

BEN LITTAUER:  There isn't much. You publish stuff in a form C, I think. The entrepreneur publishes a bunch of information. You asked about the interaction between equity crowdfunding and regular funding and the answer is there's a lot of suspicion in the angel community, in the professional angel community about these deals as to, well, you've disclosed all your financials and you're required to for Reg CF. You've disclosed all your financials. You're telling your competition everything.

SAL DAHER:  What does it mean to disclose financials in a company that's seed stage?

BEN LITTAUER:  Well, they can look next year and see how well you're doing. You have to update that. There's some worry about competitive disadvantage.

SAL DAHER:  The thing is presumably these companies that are using Reg CF are early stage companies when financial is really meaningless.

BEN LITTAUER:  Because they're projections and true financials. Past financial, which usually have a lot of zeros and negatives in it. Over time you have to update those, and if you're successful, people can see how you're successful or how successful you are. There is a downside to this, there's no question. How that's going to work out is an open question. I happen to be of the opinion and I think most angels are that this will work itself out and be a legitimate funding source.

SAL DAHER:  It'll probably work out in a sense that, you have this whole spectrum of angel groups that you're talking about from very formal later stage as a Launchpad to highly informal due diligence process, Walnut Angels, no less depth.

BEN LITTAUER:  Individual angels who are even crazier than that.

SAL DAHER:  Exactly. They'll all find their place in the ecosystem. They'll be companies that will filter out. Do you have any guesses as to what it'll be good for?

BEN LITTAUER:  My suspicion is that there are two kinds of things that will work very well there. Maybe three. One is the mom and pop pizza shop. That's going to get a little bit of seed funding there and probably do it on a straight debt basis. [crosstalk 00:47:59].

SAL DAHER:  Get the pizza oven.

BEN LITTAUER:  Get the pizza oven and we'll share profits with you.

SAL DAHER:  Beautiful. Yeah.

BEN LITTAUER:  That's a great use for it, and doesn't involve angels at all because this is a profit sharing system. Another is the first big million dollar success story was a corporation called, I'm not going to remember its name but you can look it up on Wefunder because it's one of their companies.


BEN LITTAUER:  That does an artificial pancreas. They're a B corp, that's a benefits corp which is an interesting thing. They don't have to worry about shareholder interest, that's the main thing there. They can do things for the mission. They allowed people to invest as an alternative to Kickstarter because it gives them more feeling of ownership even though the fact is that that is unlikely to give them money and the CEO is upfront about that. There's going to be no returns on this. It's just you get to feel like you're owning a piece of the pie.

SAL DAHER:  Interesting.

BEN LITTAUER:  These B corps may have a space there, but I think that for your regular for profit companies we angels think that we're so smart, the professional angels but we pass over deals over time. Some of those deals are really good deals. They're going to end up on Reg CF and then I suspect the VCs and professional angels will go out there, look at the Reg CF companies and say "I'm going to go spearfishing and find the one that's looking like a 100X trajectory and I'm going to pull that one out and use that as a deal source, top of funnel deal source for me to pre-identify the really good companies that I missed before."

SAL DAHER:  What you're saying is they're going to compare their negative portfolio, the portfolio they turned down versus the companies that are successful on let's say Wefunder and all these crowdfunding.

BEN LITTAUER:  Pull them back out.

SAL DAHER:  So they get another bite at the apple.

BEN LITTAUER:  They get another bite at the apple, and it may be that we as early and slightly less early stage professional investors, the Walnuts and Launchpads of the world are going to miss out on those opportunities because the cost of pulling them out of that pool at that point will be VC territory rather than our territory.

SAL DAHER:  Now it seems to be that if a company is going to succeed in under Reg CF kind of funding, this equity crowdfunding. They are likely to already have advise on board, they're already be heading in the right direction because I don't see how from a crowdfunding platform they're going to get input, the kind of input that angels provide.

BEN LITTAUER:  There's nothing to say that a Reg CF company can't do a parallel raise.

SAL DAHER:  With angels.

BEN LITTAUER:  With angels or with VCs, and in fact the company that I'm sponsoring, Troupe Jewelry is doing exactly, that I've invested as an early stage investor, there's already a good deal of money in the company on the basis of a convertible note. We're also doing a Reg CF raise in parallel. There's nothing to prevent that, in fact, many companies are doing exactly that.

With the professional money, if you will, you're getting advice. With the unprofessional money, you're getting a network, and so social network is very important these days.

SAL DAHER:  Network can't help you with money immediately but also people who are aware of your products so they're going to be pushing you helping you sell your product later on.

BEN LITTAUER:  That's it, it's a social media play as much as anything else.

SAL DAHER:  Interesting. Very interesting. Yeah, Ben this is really really mind opening. I'm learning a lot. I think this is the whole point of this podcast is to learn and I can say that I'm really learning. Almost everybody that I talked to at Walnut and other groups, I really learned. It's amazing.

BEN LITTAUER:  That's why I love my job, I get to learn something new every day.

SAL DAHER:  Isn't this fun? I want to get to companies now.


SAL DAHER:  You were talking about Troupe Jewelry. Explain a little bit about what they do.

BEN LITTAUER:  This is a custom jewelry company. Doing what Teespring did for t-shirts, 2D customization, individuation if you will even. You can have anything on the t-shirt, they're doing it in 3rd for jewelry.

SAL DAHER:  What is it? They're sculpting?

BEN LITTAUER:  Basically they have an end user running in the browser CAD tool that was the hard piece of technology then they using existing technologies like 3D printing and going down to Rhode Island for finishing you get a real piece of jewelry, not a piece of plastic that has your puppy on it. That's the sort of thing we're talking about but it's 3D, it's not just an image of your puppy, it's a sculpted image of your puppy which looks a whole lot better on a piece of polished jewelry than it does if it were flat.

SAL DAHER:  One of the founders has a pedigree who's founded Kitsy Lane before.

BEN LITTAUER:  He founded Kitsy Lane which sadly did not succeed. That's life.

SAL DAHER:  A lot of gray hair.

BEN LITTAUER:  A lot of gray hair. A lot of learning from his mistakes. He's a repeat entrepreneur. He's been successful in four of six of the companies.

SAL DAHER:  This is another. What we're talking about before, public companies, the finesse theory for public companies. If you had a public company and it went under, you're not someone ...

BEN LITTAUER:  You're not getting a job again.

SAL DAHER:  If you have a bunch of startups that went under. It means that you've made a lot of mistakes on someone else's dime and you're someone who is respected as an entrepreneur because you will find a way to do it. It really depends on how you do it.

BEN LITTAUER:  It goes with a question you asked earlier about is it the founder? Yes, it's of course the founder.

SAL DAHER:  Or founders.

BEN LITTAUER:  The founding team is what we're betting on is that they will figure things out, and so we spend time with them to see how they think more than about what they think.

SAL DAHER:  Getting to pivots. In early stage companies, it's not unusual to discover that the original business plan is impractical and that a new direction is needed. It's called a pivot. Can you talk a little bit?

BEN LITTAUER:  We were just talking about Kitsy Lane. Kitsy Lane is another jewelry company. They were an e-commerce company. Basically the idea in five years ago was we will use Facebook as our marketing tool and bring in custom jewelry but Kitsy itself manufactured in China and in New York. The demographic which was young millennial women would put up a boutique on Kitsy Lane and then sell with Kitsy's assistance through their social graph on Facebook and other platforms to their friends and their friends' friends.

That was a great idea when it was started, and the numbers were supporting it as a wonderful idea. Then Facebook made an important change I think in 2013, and they said "We're not going to post things to your friends' timelines unless you're influential, and so suddenly 90% of the boutique owners.

SAL DAHER:  The dreaded algorithm came in.

BEN LITTAUER:  The dreaded algorithm came in, so this was a change in market circumstance. All of a sudden they had to do a whole lot more work to get the sell through and it turned out that most of their boutique owners weren't interested in doing work. No surprise. This was supposed to be easy money and work is not easy.

SAL DAHER:  It might have worked better in another platform that's much more.

BEN LITTAUER:  Much more open.


BEN LITTAUER:  Absolutely.

SAL DAHER:  Maybe even Twitter, maybe that's the use for Twitter.

BEN LITTAUER:  It could have been but in any case, Andy identified this problem early on.

SAL DAHER:  Andy being?

BEN LITTAUER:  Andy being the CEO, Andy Fox is the CEO of Kitsy, and not Troupe.

SAL DAHER:  Now founder of Troupe. Yeah.

BEN LITTAUER:  He identified this problem early on but VCs on his board said "Let's keep going. See if we can squeeze it to work." In my opinion it ran for a year too long before the pivot, which was to basically a thing called V party, which was a virtual Tupperware party, and that showed very good promising numbers initially but the money ran out, and so Kitsy shut down.

That's life in the universe here. It was a pivot. It looked promising but it didn't work, and if you want to consider it, it maybe that Troupe is a second pivot, but it's a new company, so it's not a pivot, we're on new rails.

SAL DAHER:  Right. If you're a founder looking for advice on how to raise money, I can think of no better place or starting point than Ben's site, In the speaking gigs, I think you should change it, you should make it clear that it's videos of you giving advice. [crosstalk 00:56:44] because it just says speaking gigs, and I looked through them and it's like "Geez, this is great."

BEN LITTAUER:  Well, thank you.

SAL DAHER:  If you're starting out on a race. Go to the speaking gigs section there and listen to some of Ben's video because he's been in a lot of races, and he can probably save you a lot of headaches, your blog, that you called musings. I think that is also really valuable. [crosstalk 00:57:09].

BEN LITTAUER:  No. Mostly because I don't update it often enough.

SAL DAHER:  I know, your modesty gets in the way I think that is really valuable information. Very valuable lessons presented in a very easy to take manner.

BEN LITTAUER:  Well, thank you very much.

SAL DAHER:  Really. Yeah. Also you really been kind to come all this way here and to sit down with me to have this podcast and to share your great wisdom with our audience, so I'm very grateful and I look forward to seeing you around in Walnut and so forth.

BEN LITTAUER:  I would like to mention one more thing which is part of the reason that I do this podcast and that I speak at every occasion. It's not just because I like to hear myself speak which is of course true but also because one of the things that's a key to success in entrepreneurship is networking.

If you can't network your way into a Walnut or Launchpad, you're not a very good entrepreneur and we don't want to talk to you. I want to stick my face out there as often as possible. You can give your card, send me an email, very likely I will respond, maybe not immediately and you've started on the road to networking. These sorts of events, podcasts are virtual one but we have them in person as well. You need to get out there and talk about your idea.

SAL DAHER:  Talk a little bit about TCN.

BEN LITTAUER:  TCN is The Capital Network. It's a nonprofit that's been around for many many years. We're all about educating entrepreneurs on the funding process. [crosstalk 00:58:44].

SAL DAHER:  We have a lunch. We sit down with entrepreneurs and we talk about problems they're having and so forth. The networking process. Angel investing is highly, highly collaborative. When the founders are engaged in this networking, they're refining their ideas about the company. How they present it, it helps them think through what's going on.

It seems very painful to have to explain to people all the time but in the end, the difference between a company that has gone through a fund raising process, and a company as a starting is enormous, have you noticed that?

BEN LITTAUER:  Completely. Completely. I said before that no ideas are unique. What we're going to be looking for is execution, and so part of that execution is the messaging. You refine your messaging by talking to people. See what resonates, what doesn't. There are only a few exceptions to when you shouldn't be networking your ideas as a opposed to networking yourself.

One is if you have something that needs to be patented and you don't want to disclose it at this point. Talk to your lawyer and you should have a lawyer when you start your company, period, end of story. Other than that case, I don't believe in stealth. Stealth companies are companies I'm not interested in.

SAL DAHER:  Yeah. Talk to the whole world about your idea. Because ideas are easy and execution is hard.

BEN LITTAUER:  Absolutely. Right.

SAL DAHER:  If you keep your idea under a hat, you're not going to prevent other people from stealing it. You're going to prevent yourself from making connections with the other people that can help you develop your idea.

BEN LITTAUER:  And or customers.

SAL DAHER:  Customers, exactly. Talk to the whole world. 95% of the time, you have to expose your idea to as many people as possible. Talk their ear off about your idea. Get all the feedback you can and don't be afraid they're going to steal it because it's very hard to steal an idea. It's really hard to get things to work. Most ideas do not work.

BEN LITTAUER:  It's a rare case that Google is actually going to steal your idea.

SAL DAHER:  Exactly.

BEN LITTAUER:  Very rare. Yes, they can do it. We know they can do it. They've got a million PhDs, and a million bucks for each one.

SAL DAHER:  There are a million ideas, and before you can get the attention of Google.

BEN LITTAUER:  You have to have some traction. Traction is important.

SAL DAHER:  In order to get that traction, you have to expose your idea to lots of people who are going to help you get to the point where Google can be a concern for you.

BEN LITTAUER:  Yeah. Your biggest hope is that Google cares.

SAL DAHER:  Excellent. Ben, this is tremendous. I just want to say now that listeners if you enjoy this podcast, kindly review it on iTunes. I'm Sal Daher, this is Angel Invest Boston. Conversations with Boston's most interesting angels and founders. Thanks for joining us. Our engineer is James Willits. Our theme was composed by John McCusack. Our graphic design is by Maywood Art. This is Angel Invest Boston. I'm Sal Daher.