Ed Belove, "Harvard Goes Tech," Ep. 8

As an undergrad at Harvard, Ed Belove hung out with people at the campus radio station that liked to play with computers. This eventually led to a brilliant career that included building software products with the visionary Mitch Kapor at Lotus Development. Ed co-founded a company that greatly expanded the Apple II’s ability to communicate. The company would eventually pivot to supplying the hardware for early Internet services such as CompuServe and AOL. This successful trajectory allowed Ed to dedicate his time to building early-stage companies and doing philanthropic work. As a much sought-after angel investor, Ed puts his capital and energy to work on behalf of promising startups. If you are building a software startup, you would be well served to listen to the thoughts Ed expresses in this podcast.

During our conversation Ed Belove made mention of a document written by Alex Schiff, co-founder of Fetchnotes, a company he and I were very interested in. The link to the document can be found here: Lessons Learned from Doing Fetchnotes

Click here for the transcript for Episode 8.


Here are some of the topics covered in our conversation:

  • Ed Belove's Bio
  • Data General in the Early 1970’s Was a Hotbed of Entrepreneurship – Many Startups Came Out of Data General
  • Software As It Was Before It Ate the World
  • Data General Gave Away Software to Sell Hardware
  • Space War Video Game on PDP-10 Computers
  • “Soul of a New Machine” by Tracy Kidder
  • Now There Is a Huge Number of Software Building Blocks That Anybody Can Put Together – This Did Not Exist in the 1970s
  • Telex and TWX Emulation for the Apple II – Got Around Apple II’s Inability to Multitask
  • Ed Belove Went to Work Lotus Development – Mitch Kapor Was a Real Visionary
  • Ed Belove Runs into People Who Are Still Using Lotus Agenda
  • WorkFlowy!
  • Ed Belove, Lessons from Fetchnotes – Alex Horak & Alex Schiff
  • “Ease of use can't be overestimated”
  • Interchange Online – Put the First Major Paper Online, The Washington Post – Ziff Davis
  • AT&T Still Had a Monopoly Mindset despite Deregulation & Divestiture – No Hurry to Make Decisions in Fast-moving Market
  • “The Innovator’s Dilemma” by Clayton Christensen
  • “The Road Ahead” by Bill Gates, Nathan Myhrvold and Peter Rinearson
  • How Ed Belove Got into Angel Investing
  • Do Help Get the Word out About Angel Invest Boston by Leaving a Review on iTunes
  • What Ed Belove Looks for in a Startup
  • Knowing What You Don’t Know
  • CEOs Need to Have People to Talk to In & Out of the Startup – There Are Now Many More Resources than in the Past
  • CEO, Don’t “Manage” Your Board, Work with Your Board
  • CEO, Founder, Know Thyself
  • Shares, Notes and SAFEs, Oh My!

Transcript of: Ed Belove "Harvard Goes Tech"



Sal Daher: Welcome to Angel Invest Boston, conversations with Boston's most interesting angel investors and founders. I am Sal Daher. My goal for this podcast is to learn more about building to successful new companies. The best way I can think of doing this is by talking to people who have done it, people such as my guest today, pioneer software developer, angel, philanthropist, Ed Belove. Ed, it's awesome you could be here today in our eighth episode.

Ed Belove: Thanks Sal, it's a real pleasure. Thank you for inviting me.

Ed Belove Bio

Sal Daher: Listeners may notice that Ed has a radio voice. We'll explain later on how he put that to use. Ed has been an active angel investor since 1992 and has worked with various startups and accelerators including Idealab and Interval Research. He has held a series of executive positions in technology and product development for Ziff Davis Interactive, responsible for Interchange online service, Lotus Development, involved with Agenda, Improv, Magellan, and multimedia products, et cetera, Microcom, which is a company involved in email software, intelligent modems, MNP protocol, et cetera, Data General Corporation, operating systems, networking and systems architecture.

Ed has an A.B. in applied mathematics from Harvard. Ed is also very active in charitable causes in Boston including being on the board or having been on the board of Social Venture Partners, Project Place, the Appalachian Mountain Club, and something that's very close to his heart right now, the Cambridge Public Library Foundation. Ed, welcome again. It's awesome to have you on the show. I always like to start the show by asking a question about how you've got into your career. How you've found your way basically in your first job and so forth, how that went. Tell me how you went from studying math at Harvard and the story there.

Ed Belove: I should say, applied math at that point was computer science. There was no computer science. All of us computer weenies were in applied math. When I actually got started, my mom was a secretary at IBM when I was growing up. I ended up with a scholarship and summer jobs from them. I learned how to program Fortran at the time.

Sal Daher: Yes, I have scars from that, yes.

Ed Belove: Exactly. I did that for a couple years, and summers when I was at school, I worked summers and needed a job and I worked at various computer things. I worked for Xerox Data Systems, the old scientific data systems. I worked on the ARPANET. I worked part-time for Bolt, Beranek and Newman who are the people who did that. I also, you mentioned radio. I did radio when I was at school. Among other things, I met my wife there. She was doing folk shows while I was doing news and rock. There were a lot of people at the radio station who were interested in computers, among other things, lots of things.

There were hackers, back in the days when hacking meant trying to figure out how these things worked. We had a time sharing system, an early time-sharing system, the SDS 940 and then later 10X. We would hack into that just to see what we could do. It was a time when if they caught you hacking, generally they go, "Okay, how did you do that, how can we fix it, and by the way, would you like a job?" I did that all through school. I was actually originally an economics major that switched over to applied math. When I was graduating, I was looking at law school and did law boards and didn't know what I wanted to do. Took some time, I was tech director of a dinner theater in Hartford for a while. I drove around the country for a while.

Data General in the Early 1970’s Was a Hotbed of Entrepreneurship – Many Startups Came Out of Data General

I ended up back in Boston actually in Cambridge. I was running out of money and realized I still had this salable skill. I went and sent resumes to a bunch of people and I ended up at Data General. It was a great place. This was the Data General of the early 70s. It was incredibly entrepreneurial. It was growing incredibly quickly. I fell in. I probably learned more in my first couple of years at DG than at any time before or since just with this group of not what I would call traditional like computer science or anything like that, but space people who were making mini-computers do things that at that time were new to them.

It was an amazing pace. In fact, many, many, many startups came out of Data General because it was a place that encouraged people. As somebody said, "You got enough rope to hang yourself." It was growing so fast within a couple of years of being there, I was managing a group, again, because I had been there long enough. That got me started. Again, I ended up learning a lot about everything from hardware, we did hardware design, software design, operating systems. At that point you literally were building computers from the ground up and operating systems. I learned a lot. That got me, and again, I got the startup bug there. There it came.

Software As It Was Before It Ate the World

Sal Daher: The Data General experience led you to your interest in startups. I just want to go back a little bit and set computer science in context, computer science as it existed then. At the time when software hadn't eaten the world yet, software was a very nascent thing. There weren’t computer science departments yet. It was useful around the edges of things. It wasn't at the center of things the way it is today.

Data General Gave Away Software to Sell Hardware

Ed Belove: Yeah, in fact, there was much more emphasis on hardware, electrical engineering and all of that was the big thing. In fact, even at Data General, we gave away the software. You bought the hardware and you got free software. The software group existed initially to sell the hardware. I think again, computer science, it was interesting because there weren't too many professors. There were people who had come out of industry was most of it.

Space War Video Game on PDP-10 Computers

In fact, there were people, the best hardware classes, of course the hardware was taught by Severo Ornstein who worked at BBN and was officially a lecturer part-time. George Mealy who had done early operating system work at IBM, it was his retirement job, came and taught there. It was the only the beginnings of, again, what was a science. As my friend Jerry Kaplan once said, "Any science that has to have that in it name really isn't." It was hacking computers. It was the early days of the first games, not Star Wars, I'm trying to remember. The games on the PDP-1 was called, it was pre-Pong. This was on the PDP-1, early machine.

Sal Daher: Yeah, I remember the ...

Ed Belove: Space War.

Sal Daher: Space War, yeah.

“Soul of a New Machine” by Tracy Kidder

Ed Belove: Space War, That came from MIT to us. Somebody else did games that played with the lights on the front of the PDP-10, bouncing them back and forth, a kind of early Pong. Software was this thing as you said, it was this amorphous thing. We were a strange group of people. While I was at Data General's, while Tracy Kidder wrote  “Soul of a New Machine”, which was a really interesting book about the development of the computer. Very interesting, if you look at it, it's all about the hardware and the microcode. There's almost no mention of the software people who were really involved in both the design and of course what necessary of the operation of it. Again, the whole technology world at that time was this weird outlier. We didn't wear ties. We didn't show up for work at nine o'clock. If you were there at midnight, there were people working. Now, that's expected. This whole generation is like that.

Sal Daher: Time-sharing costs were much lower at two in the morning.

Ed Belove: Partly it was that, but we had mini-computers. It was also that these weird people would stay up late. It was a world that as now mainstream at the time was a real outlier.

Sal Daher: Very unusual people doing unusual things.

Ed Belove: Oh, yeah. Some very unusual people.

Sal Daher: They were very groundbreaking at the time, but which today you think back and say, I mean, for graphics. How much it has developed since then that you had the program. I remember Beth Marcus describing how they had the hand, the computer hand, they had to spend weeks programming it to do anything.

Ed Belove: Oh, right, yeah. Early biomechanics. Again, at the time they were amazing. Things that we now take for granted at the time where, I mean, go back to here we are streaming a podcast. I'm going to blank on the company name but they first did streaming over what was the beginnings of the Internet. It was amazing because the codecs that encoded and decoded, which is not very good. The first companies that did that were, hmm, that's interesting. I wonder if you can make a living doing that. Here we are.

Sal Daher: We take all this sophisticated software for granted.

Now There Is a Huge Number of Software Building Blocks That Anybody Can Put Together – This Did Not Exist in the 1970s

Ed Belove: Right. It's available with open-source software with the availability of things. Anybody can put things together with building blocks, and it's great.

Sal Daher: Yeah, which opens up room for all sorts of really wonderful applications. You were at Data General doing very nitty-gritty stuff on the computer. How did you go from that to Microcom where you were involved with communications, that's another thing. Computers in those days didn't talk. You just did number crunching. They didn't communicate with anybody.

Ed Belove: We had done some very early networking. This is in the early days of Ethernet. We had done some of that at Data General. We had some. Computers always had these expensive modems for people who remember, taking a phone and putting it in these cups to get it to work. It was the early days of that. What happened is the Apple II had come along. Hayes had built a modem for it. That was early. My partner, Jim Dow, who also he was a salesman at Data General, spent quite a while figuring out what he wanted to do and went out and said, "Hold it, communications is happening."

Telex and TWX Emulation for the Apple II – Got Around Apple II’s Inability to Multitask

When we did that, the first software we did at Microcom was we did a Telex and TWX [pronounced twix] machine to turn your Apple II into that, which was interesting. The more groundbreaking thing we did was an email program for the Apple II, which sounds mundane but at the time there was very little email. There was email within machines, but there wasn't across machines very much. There was the ARPANET email, so we had a lot of models to follow. The way it worked, because the Apple II couldn't multitask, you set up your email and then what would happen is it would at night communicate to other Apple II's. Since there were no standard protocols yet we didn't have that option. That's how we ended up designing our own protocol.

Over time, we said, "This doesn't work very well because people want to communicate quicker." We, in the words of today's terminology pivoted, although at that time we didn't know that's what we were doing. We got into the hardware business. We started as a pure software company. We built a little outboard modem that had a processor of its own. It could do the communications while you were still using VisiCalc or whatever your word processor. It could communicate to other modems of its same type.

Sal Daher: Was Microcom a going concern when you went over there or did you start it ...

Ed Belove: No. We didn't have any products. It had been incorporated.

Sal Daher: It had been incorporated. Your colleague at Data General, you founded Microcom?

Ed Belove: Yes. Officially, Jim was the founder. He had found some, he had some software done by a couple consultants that was the beginnings of what we used when I joined. Then we built a team to finish that software and do the other things. Then hired a guy to do the hardware and I had another friend of ours from Data General. What that enabled us to do in the pivot, all of a sudden people could do email. Some companies like this said, "Oh, this is really nice." Because they could talk to each other. Again, there was an issue of standardization. The network effect wasn't there. There was not enough people doing it to make it really big.

One of our customers said, this is really nice because as part of the protocol, we had designed error correcting into it because at that point modems were really unreliable. They were just starting to come out with 4800 baud modems which are deathly slow today, but at the time seemed really fast. They were really, they had real error issues though because they were going over regular phone lines. We did some forward error correction which was really nice and made things very fast. One of our customers said, and we had exposed just the error correcting so you could use the modem normally with your other programs. One of our customers said, "This is really great. It makes modems much better."

We put out a version for the Apple II that had just error correcting. It was a little cheaper, it didn't need as much memory, again, something very expensive at the time. People really liked that. Then somebody else, I'm trying to ... I don't know if it was one of our sales or one of the customers who originally had the idea said, "Why don't you just sell the modem?" Each of these required an infusion of venture capital, which was really the only source. A little bit of our own, but mostly venture capital. We tried it and we'd be successful but not enough to really get the company going in order to become profitable.

What happened then is we took these modems and took the boards they were made on and started rack mounting them and selling them for industrial usage. This was the beginnings of really high networking over the phone lines, CompuServe, people like that were coming along. People for companies were using that as well. People would dial into their company from their remote offices. Having these error correcting modems, that was what eventually enabled the company. The company went public over time and was successful in a business and selling to customers that had nothing to do with Jim's original idea of how he started. We stuck with it again and again and again, and then eventually it took off.

Sal Daher: Yeah, it's funny that you're talking about the 1200 baud modem, 2400 baud, 4800, 9600. This would have been at what time, like in the early 80s?

Ed Belove: Early 80s.

Sal Daher: A little after that, I was involved in in buying and selling emerging market debt in a company here in Boston. My partner was, the only technology he mastered was a teletype. He had this teletype machine that used to type and send, this is where all his missives from then were all in caps because the teletype, it was as big as Telex machine. I remember well today that Western Union came to take the teletype away. My partner was heartbroken because that was the machine that he mastered. Then he had to go to email. He got used to email. They said, "We don't support a 24 baud network anymore." 24 baud.

Ed Belove: It was interesting. Those machines were the international communications. That's why, I mean ...

Sal Daher: For decades.

Ed Belove: We sold more actually of our turn your Apple II into a Telex machine than we did of the email.

Sal Daher: Amazing.

Ed Belove: Because again, it was the cheapest way to get a Telex machine. Then you also had the spreadsheet and the other things that Apple II gave you. That was a groundbreaking machine.

Sal Daher: Concurrent with that, the fax machine became widely available and had been available for decades.

Ed Belove: It killed all those other things. In fact, in the early days I think email didn't take off as much because of the fax machines. The fax machine was a standard. I could fax to anybody. All they had to do was give me a phone number and I knew my fax would go through.

Sal Daher: Well ...

Ed Belove: Email in the early days, good point.

Sal Daher: Having spent a lot of time next to a fax machine, yeah.

Ed Belove: I had a pretty good chance, yes, trying a few times. In the early days of email, if I used MCI mail and you didn't or if I used UUNET and you used something else, it was a difficult situation and it wasn't until the Internet really as we know it today took over, the RCA 32 and the various, and MIME as the way of doing attachments that it really just went through the roof in a really short period of time, though.

Sal Daher: Yeah. Well,and the fax machine is still with us because it's so difficult to hack that when you send the data point to point, it's still analog. It's hard for people to hack into the line.

Ed Belove: The phone network, as in many ways as obsolete as it is, does provide some capabilities that you can't really get on the Internet, although increasingly of course since all the phone calls are going over the Internet, it is harder and harder.

Sal Daher: Yeah. Ed, you were one of the three people who built Lotus Agenda, a hugely promising free-form spreadsheet for words that ultimately didn't thrive, but it was a tremendously interesting experiment. Tell us about your time at Lotus in general.

Ed Belove: Yeah, I went to Lotus. Actually, going back to how does your career evolve, when Microcom, at one point we made the decision to go to a completely industrial world. That was the world we were in. It was the absolutely the right decision for the company. At one point when we did our plans for next year, I looked and said, "Yeah, this is exactly what we should be doing, but it's not what I want to do." I looked around and Mitch Kapor at Lotus was setting up a group to do R&D.

Ed Belove Went to Work Lotus Development – Mitch Kapor Was a Real Visionary

I went and joined that. To a large extent, I did go back to doing my own work rather than managing things. I was able to do that. What came out, I did a few other products but the big one was Agenda was basically a collaboration, Jerry Kaplan on the West Coast, an AI guy. Mitch who was a tinkerer. I don't know, visionary is a really strong word to throw around but Mitch saw things certainly in the personal computers way in advance of a lot of other people.

Sal Daher: He was a visionary, yeah.

Ed Belove: And myself. The spreadsheet had done these things for numbers and we had been playing around with, how else do you do this? How do you deal with your thoughts, throwing things on a paper, and what does it mean? That's how Agenda came. It was basically it was an object oriented database.

Sal Daher: Correction, is a visionary.

Ed Belove Runs into People Who Are Still Using Lotus Agenda

Ed Belove: Yes, Mitch is still doing interesting things, that's true, yes. We were playing around with that in a lot of different ways. One of the ways by the way was Iris's notes, which became the basis on which Lotus ended up selling itself to IBM and being wildly successful. Agenda was a personal information manager. That's the term we came up with for it. We learned a lot of things about it. It continues, by the way, I don't know if even now but a few years ago I still would run into people who would say, "Yes, I still use Agenda."

Sal Daher: For me, reading the description of it, because I never used it but I was preparing for the show I read about it. The fact that it was so flexible, that would have been a really useful thing for me in a lot of things that I did.

Ed Belove: It's good news and bad news. My life was a series of little pieces of paper that I wrote things on and throw in my pockets and then I go down. I and Mitch had the same kind of thing. You'd try and use a word processor to do it, try and use a list manager. The early, there were some hierarchal organizers, kind of outliners and try and use those. None of them really captured the way you wanted to think about things. You'd have a thought, it had to do with a person, a company, an idea, and all of these things. You wanted to be able to look at it in different ways. That was the biggest thing Agenda gave you is you had these little notes. Basically these independent thoughts that you could organize in multiple views. You could look at it in a lot of different ways.

A lot of people ended up using it as a place where you can just throw … catch your ideas. It's almost like in the old days of 3 by 5 cards. You'd be doing your research for a thesis and you'd just write down these things on 3 by 5 cards. Instead of doing that, lots of people ended up using it for this kind of use, researching a book. You'd throw these things in and then you'd be able to manipulate them, move them around, reorder them, reorganize them until they started to make some sense to you. You tried in lots of different ways. Each time you reordered it, it wasn't that you lost the old organization. You could hold onto that and add a new dimension to it. The flexibility was wonderful, but it was also daunting to people. Where do you start?

That I think was one of the learning experiences. In some ways, if your mind worked like mine or Jerry's or Mitch’s, it was great. If your mind didn’t work that way, it was overwhelming. In fact, what ended up replacing it at Lotus was a thing called Organizer which was a much simpler thing. In fact, if you look at what people who used the Agenda use today, they're much simpler manager to-do lists or things like that. But, the hurdle to start using them is much lower. That's a real key to any product getting in there.

Sal Daher: What you do with them is a lot less.

Ed Belove: A lot limited, yeah. I don't think anybody has yet gotten both right. Agenda also did some really interesting little hacks like you could do things like say call Sal next Thursday. It would put that away. On Thursday it would pop up in front of you on your to do list.

Sal Daher: Like a calendar function.


Ed Belove: Like a calendar combined with your to do list, which people have tried to do. Microsoft has been trying to do that forever in Outlook. Again, it's good at certain things but there are real limits to how well it works in that completely open-ended part. I happened to use a program, I'll put a plug in here for a program called WorkFlowy, which is ...

Sal Daher: WorkFlowy?

Ed Belove: Yes, F-L-O-W-Y, one of the worst named products as far as I'm concerned. [Laughter] It's basically a list manager that allows you to do hierarchical lists and then put hashtags on them. So for my to do list, it's pretty good. There are an awful lot of things I was able to do in Agenda I can't do in it. Unlike some people, I haven't kept a non-graphical version of Windows running around so I can continue to run Agenda, not worth it to me. Again, it was a learning experience in a lot of ways as to how to get adoption of software, because Lotus at that point was a powerful enough place in the industry that if we brought something out, people noticed. They did notice Agenda, and yet we couldn't make it successful.

I think you look at some of like Google's experiments where they'll bring something out. They've had the same problem. Just because it comes from you and is useful will not make it successful. It's not that simple. In fact, I think Google suffers from some of the things that Lotus suffered from at the time of trying to do really interesting new things and not really understanding the whole cycle of how these new things get into people's daily lives. That's what's ultimately successful. If it sits there on your computer open most of the time, that would make a successful product.

Ed Belove, Lessons from Fetchnotes – Alex Horak & Alex Schiff

Sal Daher: Yeah. There is something there, something similar to Agenda. I remember there was a company that pitched to Walnut, Fetchnotes, remember?

Ed Belove: Yeah.

Sal Daher: I get the feeling that they were heading in an interesting direction.

Ed Belove: They were.

Sal Daher: They failed ultimately, they weren't able to ...

Ed Belove: Although those were really good. I don't know if you have notes to go with these podcasts. The guy who did Fetchnotes, I spent some time working with him coming out of that because of the Agenda connection.

Sal Daher: I can add notes, because each podcast will have a page.

Ed Belove: Okay. He has a lessons learned from doing Fetchnotes. It's a very idiosyncratic lesson learned but it is, it's very interesting. I think there's some useful notes in there. Click here for Lessons Learned from Doing Fetchnotes

Sal Daher: There were the Mikes, right? Like Michael Horak and Mike something, was it Steve? [Alex Schiff and Alex Horak]

Ed Belove: Gosh, it's been a while since I've looked at it.

Sal Daher: Yeah, yeah, The last thing Horak sticks ...

Ed Belove: There's actually another object lesson there which is that at the time we were talking about, like with Agenda, it was a very small business, personal computers, we all knew each other. Now of course the whole world is doing that. On the other hand, I had done some work with these guys at Fetchnotes. Never had done investing for the same reasons I think you didn't. It was not quite there.

Sal Daher: I was intrigued by it but it wasn't, it's a pity because they're doing something, really capable guys.

Ed Belove: Exactly. I hadn't seen him for a while, they were based in Cambridge, and I’d see them there. My wife and I were out for a family event and we're walking along in San Francisco in Buena Vista Park, late at night heading towards dinner. Going the other way was the guy who was the founder of Fetchnotes. He stopped and said, "Ed?" We had a nice conversation, got back in touch with each other which is how I, this was a number of years ago. It is still a small world.

Sal Daher: Send me that article.

“Ease of use can't be overestimated”.

Ed Belove: Okay, I will do that, the note. I think people will find that interesting. There have been other attempts to do that. Echo is one of the best known. Some of the fans Agenda, I get things, again, hasn't been for a while, but I used it for a long time about things. What about this, what about this? Various of us, Mitch tried it with something. He tried open source version of something even more powerful than Agenda. I tried it a couple of times. At this point it's a lot of work that there seem to be enough things that are close enough, not as powerful as everybody would like but for the 90% of the world or the 80% of the world who don't really want that power, so much easier to use. Ease of use can't be overestimated.

Sal Daher: I know. That is such an unknowable thing. Are there any stories you want to tell about Interchange Online, which is like a proto-database for computer professional, pre-Google days?

Interchange Online – Put the First Major Paper Online, The Washington Post – Ziff Davis

Ed Belove: It was actually a whole online service. It was a response to CompuServe, these other online services. When AOL was at that point the leading of that. Bill Ziff who at that point ...

Sal Daher: People may not know what AOL, AOL is America Online. Basically allowed you to send emails.

Ed Belove: You could do all kinds of things. You dialed up into it originally. It had all kinds of databases that you could get to.

Sal Daher: Via the portal that you use. It was like a very safe garden.

Ed Belove: Right. It was a walled garden because there was no alternative to being a walled garden. Within it, it was like a small ...

Sal Daher: They tried to continue living as a walled garden in an open world.

Ed Belove: That was a little later, but at the time it was essentially a small Internet in the sense that there were lots of places you could go in it and find data, other people who were interested in the same things you were in forums and all that. All of a sudden, it was the beginnings, and CompuServe before it, again, I keep playing at CompuServe because that was the real predecessor, of where it turns out you collected model artichokes. There are 18 other people in the world and they're on CompuServe.

Today, we joke about the fact that, and there's some serious issues about that when you start thinking about politics, particularly radical politics of people finding each other who never could before. Also, it meant that people who were interested in things or who had a problem, a disease or things like that could find other people they could compare notes with, both for hobbies and for other things. CompuServe was first, but AOL really took off because AOL was, back to those words, easy to use. Anybody could make AOL work on almost any computer at the time, any personal computer. You could dial in and do all of the things you could do on an Internet today, with the limits of technology at the time.

Ziff wanted to work on that, but was looking for one particularly for magazines and newspapers. At that point, Ziff Davis was the leading publisher of computer interest magazines. It and IDG were the two competitors. They published PC Magazine, PC Computing, PC Week, things like that. IDG had PC World and they communicated with each other. They wanted to do this online service. We built an online service pretty much from the ground up. It was called Interchange. We had the Washington Post went online, it was really the first of the newspapers to start publishing on that.

Two or three things happened, again, were lessons learned. One was in some ways as one of my friends on it said we had too much money. We had backing from a big organization, it was essentially intrapreneurship. It was a startup within an existing company. What that meant is in some ways we did too much rather than looking for what is now called an MVP, the minimum viable product, at the time I used to think of as what's critical mass? What are the things we just need to do? We tended to say, "Oh, we have to have this and we have to have this and we have to have this."

The truth is we didn't have to have as many things, which took us a lot longer to get up and going. It also meant when it was there, it didn't run as zippily. It was not as efficient as AOL. It was a little slower. Just as it was getting established, here we were, the early 90s, 94 and 95. The Internet came along as a standard and just ran right over us, and everybody else by the way including AOL, who at the point had millions of customers. We didn't have that yet. We were not established. There was that ...

Sal Daher:             Then a few years later, Google came along and made searching for information like that ...

Ed Belove: One of the things we had built into Interchange was it was completely searchable. Anything in it was indexed and thus searchable. Other people can along, and you say Google, before Google there was AltaVista. There was Yahoo. There was all of these people who were indexing the web. There were five or six companies doing that before Google. Again, what Google had is simplicity and speed. There were a lot of things, the most interesting thing about Interchange in some ways over time was that the alumni of Interchange ended up everywhere because we had done things that in terms of being able to format what things looked like, because newspapers wanted to control how things looked.

Sal Daher: They wanted everything to look like a newspaper, yeah.

Ed Belove: Whereas AOL was very limited. Again, very simple because it had to be in order to work on dial-up. All of a sudden, people were able to do things they wanted. We had off-line storage. You could use Interchange when you weren't connected or when you were, and when you reconnected it synced up again. A lot of people, they went off to things like Kayak, eRoom, and a bunch of other places in the Boston area. A bunch of startups. Another part of it was it encouraged this generation of … the next generation of people who saw this very entrepreneurial organization within a larger organization, but who had that bug of creating things from the ground up of not just going to work at a Lotus of the time, which had become a big company, although that was a good place for some people, but to go to these other startups that Boston was spawning at a big rate.

Sal Daher: So at Ziff Davis you didn't have the typical problem that you have in intrapreneurship in the sense that you were not cannibalizing an existing product line.

Ed Belove: No.

Sal Daher: You were building something new, but you suffered from the curse of having too much money in an environment … and you built too many things without sufficient focus.

AT&T Still Had a Monopoly Mindset despite Deregulation & Divestiture – No Hurry to Make Decisions in Fast-moving Market

Ed Belove: Exactly. Even there, though, there was some competition, because there was who publishes PC Magazine online? Was it the PC Magazine people who didn't really early on understand what it meant to go online? We were all just feeling our way. Even without a direct competitor inside, it's hard. It is a real challenge for any existing company to do that kind of innovation, even in an area where they don't exist because there is a mindset to it.

Another object lesson there, Interchange was bought by AT&T. What happened is Bill Ziff retired and his children who inherited it decided to break up and sell the parts of the company. Bill had always said to them, "Don't be absentee. Either run the company or sell it." They sold pieces. Our piece, Interchange was sold to AT&T. They bought it partly because they were looking for online and they were way behind at that point. Partly because of the idea of being entrepreneurial.

A few of us ended up to work at AT&T, I was an internal consultant basically at AT&T on networking and things like that, spent a lot of time saying, "How do you be entrepreneurial?" That was not going to happen at AT&T. It still had the monopoly mindset even though it was competitive. Part of the reason that AT&T had problems was what I refer to as the Israelites wandering the desert. Until every senior manager in that company who was pre-divestiture, who was involved when it was still a monopoly had moved on. They were never able. It turns out they could never make it in a competitive landscape because they always, the art of management is something I've had this discussion with somebody at AT&T with is making decisions on insufficient information. AT&T can afford to wait.

Sal Daher: Let's set the context here. AT&T was American Telephone and Telegraph, the … basically the phone company.

Ed Belove: The phone company. We don't care, we don't have to.

Sal Daher: The phones are all black, made of Bakelite [an early plastic], and you dialed them and so forth. In the 70s it was deregulated and competition came in and you could began to have long-distance competition. It was just a whole landscape ...

Ed Belove: The AT&T we know today has no resemblance. Yeah, they were a monopoly of the phones. They didn't ever understand that. A lesson, and again, the way I thought of it is as I start to say, management is making decision on insufficient information. The monopolies didn't have to. They could wait until everything is in place. It's then saying okay, once you made the decision, constantly look and saying, "It's still right." At some point you say, "It's not quite right." How do we salvage as much as possible of what we've done, figure out what the next direction is, and start moving that way? Again, it's the pivot. It's understanding when you do that. I think that is an art not only of a startup but of existing companies as well. It's harder for existing companies because the investment they have and where their money is coming from, they're risking. There are times you just have to bet your company.

“The Innovator’s Dilemma” by Clayton Christensen

Sal Daher: This is the Clayton Christensen “[The] Innovator’s Dilemma”. Just want to set some context here. People might be saying, "What are these old fogeys talking about? Didn't know what you put on the Internet. It's obvious what you put ..." Let me tell you those wise guys who think they should have known then what it is that went on the Internet and what didn't and so forth, I want to ask them, what's going to happen in VR? Tell me how things are going to go in VR.

Ed Belove: There are a couple great examples of that. Bill Gates who's not exactly… he's a smart guy, wouldn't you think?

Sal Daher: Absolutely.

The Road Ahead” by Bill Gates, Nathan Myhrvold and Peter Rinearson

Ed Belove: Wrote this book called “The Road Ahead” with a couple other people at Microsoft which made almost no mention of the Internet in the early 90s. Microsoft was playing catch-up on the Internet. Again, not through lack of any intelligence, it's just some things you see and some things you can't.

Sal Daher: They were hugely successful on the desktop computer. They owned the desktop with pretty crummy operating system. Why did they have to bother with it? You don't have the bandwidth to think about other things.

Ed Belove: They tried to. It wasn't that they, they would take these retreats and try and figure out what it was.

Sal Daher: It's really hard.

Ed Belove: It's hard.

Sal Daher: At the end of the day, the bottom line of the company was Microsoft Excel, Windows, and so forth.

Ed Belove: The other part is your point about VR which is, futurists I always find amusing. One of my best friends, a very good friend who's a futurist. Part of the issue is any time you're looking more than about five years in advance in technology, it's going to involve technologies that we don't understand today.

Sal Daher: Not at all [implying agreement].

Ed Belove: There are attempts to do that. The best of them was Xerox PARC which brought us the mouse, graphical [interface], the Ethernet, laser printer. The way they did it is by saying, assume money is no object. What would you do? And having a bunch of brilliantly creative people. Other labs have attempted to do that, other companies have attempted to do that. It doesn't always work. Remember when the iPad came out or before that, the iPhone. A lot of people said, "Oh, that's really interesting." It's a nice little product as opposed to something that would change the way people communicate.

Sal Daher: Absolutely.

Ed Belove: I think having that insight, there will always be somebody that has that insight and there are 10 other futurists who have that other insight. There's a bit of a crap shoot as to who happens to be right. Anyway.

How Ed Belove Got into Angel Investing

Sal Daher: Ed, how did you get into angel investing?

Ed Belove: Again, I was involved in startups and knowing them. You'd go off to conferences and talk to people. It was shortly after I left Lotus, although I had, because before that I was an officer of a corporation and basically couldn't do it. Friends had talked to me and said, "Oh, were starting this company. Would you think about investing?" I really can't do that. It's a conflict of interest. Shortly after I left Lotus we were sitting in the backyard with a couple other friends and one of them was saying, "I've been thinking about doing this." He and the other guy ended up starting together and I said, "Okay, I'll throw some money into that." I didn't know what it was called at the time, and got very interested in doing that. That led to one thing leads to another. You end up saying, "This is kind of intriguing." At that time, I had made a decision to take some time off. Shortly after that we did Ziff. I left that.

Sal Daher: This is after AT&T consulting period?

Ed Belove: It was during the AT&T consulting period, actually. I had a decision that it was time to get some distance and make a trade off of my work life for other parts of my life in that doing companies, developing products, you don't do part-time. That's an intense thing. You own it. I decided I would start working with other people who were doing it, but leaving myself some flexibility to do other things with my life. Angel investing gave me that flexibility. I could go skiing in the middle of the week. I could take a month off and go actually to Nepal and go climbing with a friend of mine. But, I was still wired into and tied to the stuff I found exciting. I found that it was rewarding in its own way.

Again, not quite the same as building your own products but there was still seeing other people build companies and products was exciting. Also, there was a bit of the giving back. People all along the way had helped me and mentored me at various points. This was a way of keeping the community going. To this day, when somebody calls and says, "I have a friend who's starting something or I'm starting something. Would you talk to them?" My answer is always yes. I won't necessarily invest in all of them but taking the time to ...

Sal Daher: You are investing with your time. You're investing.

Ed Belove: Yes, but that's, yeah. I'm willing to take, and I guess maybe you're right. That's the difference in my mind. I will invest my time in almost anything, within limits obviously. To have lunch with somebody or spend a couple hours with them, that's part of this business.

Sal Daher: That is hugely generous.

Ed Belove: This business has given me,  I've been a very lucky person. It's all because of other people who gave me the time when I needed it. Like I said, it's my way of giving back. It may be generous but it's a pretty inexpensive and fun way. I don't come out of any of those, even the ones where I look and say, there is nothing in this company or this person. I still learn something almost every time.

Sal Daher: With these conversations, I'm having conversations with people that I see all the time. It's amazing what I learn in these interviews. It really is a learning enterprise.

Ed Belove: The other thing is for those of us who are on the other side of middle age, it keeps you young in the sense that there are people out there who are doing things and it keeps you not only informed in the sense of reading it but hearing them talk about how they think about things, how they do things, how they work, and how their friends work. It keeps you understanding from a distance what the rest of the world is like, because it's easy to fall into this gap particularly when you live in a place like Boston or in Cambridge where I happen to live. It's easy to look around at your friends and what they're doing and all of that and think, this is the world.

Sal Daher: That's right.

Ed Belove: There's ways to get around that, getting out of the state, getting to other states for that kind of stuff. Also, talking to younger people and seeing how they work and how they're involved. If you're going to do investing, you can't do it from the perspective of what worked for you. You have to do it from the perspective of what's going to appeal to the next generation and the generation after that. The only way to have any insight into that is spend time with them.

Do Help Get the Word out About Angel Invest Boston by Leaving a Review on iTunes

Sal Daher: That's absolutely true. Coming up next, I will add ask Ed Belove what he as one of Boston's most astute angel investors looks for in a startup. First, however, I wish to invite you, dear listener, to review our podcast on iTunes to help to get the word out about Angel Invest Boston. I will read interesting reviews in future podcasts. For example, health-HP left a very nice review titled, "Great!". The review says, "I had a preview of the interview with Michael Mark. Honest, insightful, and surprising would be three words to describe. Have a listen." Thanks, health-HP for taking the time to write this pithy review. We really do read the reviews on the show. Interesting ones.[Laughter]

Ed Belove: That's good.

What Ed Belove Looks for in a Startup

Sal Daher: Anyway, here's what everybody's waiting for. So Ed, what do you look for in a startup?

Ed Belove: I guess we all have our own reasons. There is the classic, you look for who the people are. Obviously. There's a bit of cliché at this point, but that's who it is because as we're talking about pivots and things like that, I don't know. There are precious few successful startups who end up being successful in what they wrote their business plan, whether they wrote a formal business plan or not, but what they started doing. It's the people and how they think. Beyond that, there is some, you have to understand the business they're in and what they're in to evaluate, whether they're the right people to do that.

The way I tend to think of things is I start with what problem is this solving? Because everything has to solve a problem. Again, problem in the broadest sense of problem. That leads you to a whole series of other questions. Who has this problem? Do they know that they have this problem, or do you have to convince them of it? Can you reach them? Again, it's a problem that everybody who's left handed and over 6 feet has, every one of them will buy it, that's great. You'll never get to that audience. It has to be a reachable market.

What other solutions to this problem are out there, either existing or potentially existing? What do they cost? What do they pay for this? Can you make money selling this solution at that level? You just follow this whole series of issues like that. For me, the real key to following that path is you follow it with the people who are doing it or the person. In some cases, you start out with a single founder and you don't have a team yet. That's a little harder.

To the extent there's a team, you start looking and thinking, how do they think? The way they answer these questions and the way they have written or talk to you about it tells you a lot about how flexible they are, how much they understand the market that they're going after, and how much the product is. A series of other questions, because I tend to look at things early stage. I love very early things. It's a whole different thing.

Sal Daher: As do I, yeah.

Ed Belove: There's also always some technology risk. The question you start looking at is, do we understand it or is it somebody's going to have some golden moment to make this work? In other words, is it a research project? One of the reasons I tend to stay away from pharma myself is most of those require some advance in a technology that I don't understand. For me to judge whether these people have a chance of making it or not is hard. On the high-tech side, on software and hardware and Internet, I have a better chance of judging that. There's a technology risk, there's a development risk, can this be done for a reasonable amount of money in a reasonable time frame? There's the market risk, there's the product risk.

You look at all of those, and again, when I talk to people, it's very interesting. One of the things I always look for is do they think they know all the answers? Which is I'm happy to have somebody say, "I don't know the answer to that." How are you going to find it? Here's how I'll go about it. Or we'll know the answer when we get to this point and it's early enough that we can change. I feel much better than the person who blithely says, "Oh, in this case we will do this."

It's for sure that none of us know all the answers, and more importantly if you think you know all the answers, you're going to miss the signposts that say, "Uh-oh, the road ahead has changed or something has modified." You've got to keep open to both your customers, your market, and other people doing product like yours and be out there thinking all the time about what does this mean for me? That questioning, that openness is really important to me. Again, back to the people. Related close to that is they listen to you, or are they just telling you.

Sal Daher: Coachability, right.

Ed Belove: It's coachability. Although that's a limited thing, one of the smartest venture capitalists I ever knew said that his role on the board of a company is to ask questions, is to ask the right questions. He said, "Because if I know the answers better than the people running the company, we're in trouble." That's how I feel. I can help somebody in general ways, but if I end up knowing more about how to market their product or their markets or what their competition is doing, they're not the right people.

Sal Daher: No, no.

Ed Belove: For me, it's a matter of, again, this interaction with people. The meetings, people who can produce a 46 page business plan or worse than that, I don't hold that against them, but it's not to me the most important thing. I can work with shorter plans. One of the things about being an angel investor versus a venture capitalist is since I'm dealing with my money and not other people's money, I can be more subjective. And so the due diligence I do, and it's one of the things I actually love about the way Walnut works is it's not filling in a fixed form answering these questions, although I appreciate that because that helps you do that.

Sal Daher: We all go through mental checklist I think.

Ed Belove: Exactly. You need that. The formalism does help in terms of making sure you haven't missed anything, particularly doing reference checks and things like that. Ultimately it's a gut feel decision for me. That gut feel comes down to having looked at all of these pieces. Do I trust this person to build a team or this team to successfully being able to run a company that will grow, change, morph in ways that will ultimately make money? Part of that actually, and I say this, are these people driven? Because you got to love what you're doing. There was a period, and I've seen it a couple times with the booms and busts that we've been through. It' is one of those other things about having gray hair which you can't see because this is radio, and a gray beard being one of the few people ...

Sal Daher: The marketing term is silver hair.

Ed Belove: It used to be called gray beards. As one of the few gray beards who actually has a gray beard, I can get away with this. You've seen some of these cycles both technologically, but also from investing, and let's face it, it is a fad business, certainly venture investing is. One of the things ...

Sal Daher: When it's running, you get these people who don't necessarily have the passion.

Ed Belove: Yes, but ... thanks, Sal, I just had that momentary senior moment. The point is ...

Sal Daher: Too much information.

Ed Belove: ... you saw this in the late 90s when everybody and his brother wanted to be successful. It was the change from people who first, when you'd ask about their company, would say, "Wow. Let me tell you about how this is going to change the world and what's exciting about it or at least change a part of the world." People said, "Let me tell you how we're going to make money and how I'm going to sell this company for a billion dollars to Yahoo." Or these days it's Google or Facebook. That luckily, many of those people have been washed out, but not all of them. You want people who have that, A, it's the fire in their belly but also that excitement of making something happen. Of building something, of creating something, a product, a business, whatever. That's really crucial.

In fact, the product and business is another set of those questions. Is the thing you're looking at a feature? Is it a product? Is it a product line? Is it a business? That affects how partly the valuation of how you think about this. Also, if it's too narrow and you don't see how over time it'll do things that you don't see things today, I'm concerned about that. I look for a broad scope because, again, we can beat this into the ground. Things will change.

Sal Daher: Absolutely, yeah.

Ed Belove: Having that scope and openness to doing those changes when necessary is crucial. Having the drive to not abandon this prematurely, and that art of ...

Sal Daher: That balance is so hard to strike.

Ed Belove: ... of finding that point of where you say, "That was really good, but ..." Is an awful lot of the art of making a successful startup work.

Sal Daher: I get your point. Basically early on, you're making subjective decisions because it's really the decision about people's character and how they're able to work together. It's a character and the dynamics of the team and some knowledge about the market, some knowledge about the technology. Ultimately the really determining factor is how the team works together, what kind of a team it's going to be, and is it a learning team?

Knowing What You Don’t Know

Ed Belove: Exactly, exactly. I'm sure you've seen this, seen teams that ended up in markets they never thought of which they didn't know very well. Obviously you have to have some insight, but were smart enough to know what they knew and perhaps what to me is one of the most essential characteristics in the world is knowing what you don't know and having a team that says, "We're moving in this direction. We better find somebody who knows more than we do about this and bring them on as well."

Sal Daher: Knowledge about your state of knowledge is to me, it's one of the things that ... I bumped into this idea when I was a grad student at Stanford. There was this professor, Prof. Ron Howard who taught probability and decision analysis. The second course, I remember it's like a graduate course on decision analysis. The [mid-term exam of the] course, it was multiple choice but you weren't, you didn't see A, B, or C. You assign probabilities of which A, B, or C was correct. You could get 25% because there were four choices if you just assigned equal probabilities to everything. You could get 25% grade on your test. There was a thing that if you were wrong, there was a negative score. If you put very high probability that said 100% that this question is right and the question was wrong, that cost you like 20 points. The median score for that test was a 23.

Ed Belove: Interesting.

Sal Daher: That's below 25, everybody's saying ... because most people are overconfident in their state of knowledge. One mistake that they make, because they think they know more than they do, can cost them enormously. After that test, I really ...

Ed Belove: To think of that in the context of a company, I think it is an accurate reflection of what the real world is like, which is that overconfidence in your own ability really comes back to bite you. Questioning yourself, and again, this is to me part of what the team does is you need partners who will classically speak truth to power but who will also question it, or that you feel comfortable going and saying, "Hold it, Sal, I'm pretty sure this is the case. Would you take a look and make sure that I'm not missing something?"

That's necessary in the little decisions day to day, but even more so in the big decisions. That's where having a good board is important, having good advisors outside as well. The crucial part to it is having partners. Whether they're explicitly partners or small p implicit partners. The person in the company who in this area, you can go in and say, "Let's talk about this." Sometimes it's just validating your own insights and making sure, again, making sure you haven't missed something.

Sal Daher: Networking and communicating with people is also a vital part of the formula.

Ed Belove: Networking both inside and outside. Today, the wonderful thing is there are many opportunities. In fact, it's almost too many opportunities. You can spend your entire universe ...

Sal Daher: Communicating, yeah.

CEOs Need to Have People to Talk to In & Out of the Startup – There Are Now Many More Resources than in the Past

Ed Belove: Again, when it was a smaller world, there was a few key conferences that you could go to or meetings in Boston. In fact, it was hard. There was a time when there were precious few people starting things in the Boston area. That's not the problem anymore. It's understanding which of those networks are valuable to you and which aren't. To some extent, the only way you find that out is sample them. Get out there in the early days of your company really when you're shopping around and starting to think about what you're doing and seeing, is it the Venture Cafe at CIC? Is it some other meeting? If you're a woman, is it working with Commonwealth Institute or She-EOs or things like that?

There are places that have that. Everybody needs that. Particularly for CEOs it's hard, because you're by yourself. While you can have partners in the company, and I think that's crucial, you also need people outside. You need them at two levels. I know you've talked to various of these things about your board. I think there are two or three levels, your Board of Directors is a crucial resource.

Sal Daher: Talking about communication, Board of Directors, yes.

Ed Belove: Partly it's communication, but the other thing is there are people who know a lot about the company but are not living with it every day. They don't have their faces pressed up against the glass. They give you a little bit of distance. They, again, are a key part of pushing back at you. I've seen this happen too many times where people start to get defensive when their Board of Directors asks hard questions. That's their job, and you should think about this as actually not, the last thing you want is a Board of Directors says, "Oh, great, everything is doing well." You want a Board of Directors saying, "What about, hold it. Is there a possible cliff here? Is there a pothole?" The best thing is when you can say, "No, actually we looked at that and here's how we approach that." And you all say, "Oh, great, okay." You want them to push back at you and question.

CEO, Don’t “Manage” Your Board, Work with Your Board

Sal Daher: I'm thinking of someone that I just listened to an interview recently. The entrepreneur was saying, "10% of my time is dedicated to managing the board."

Ed Belove: To some extent, you always manage up. We all have to do it.

Sal Daher: I think that misses ....

Ed Belove: Managing as opposed to working with ...

Sal Daher: I think it misses something because there really should be more openness with the board. Otherwise, you have the wrong board.

Ed Belove: There is that. Sometimes it's unavoidable. I've watched where sometimes they take venture capital and end up with somebody on your board who you have trouble with.

Sal Daher: You have to manage, yeah.

Ed Belove: There's some of that. Again, I think you're right. Spending 10 or 15% of your time, how do I work with my board and get the most out of them? That's how you should look at them is think of them as a resource. How do you extract help from them?

Sal Daher: How do I get help from the board, the thing they're really good at doing?

Ed Belove: There is one thing that the board has which others don't, which is they have a fiduciary responsibility. They are responsible to their shareholders, both of the company in general and those that represent a venture group or something, their specific investors. They're not necessarily on the CEO's side. They are on the company's side. I think that's an important thing to remember. There's some level. I think a CEO needs advisors who are mentors or other advisors who don't have that same fiduciary responsibility could be on the CEO's side who can coach the CEO in a way the board can't.

One of the early Walnut investors actually made that point. He was helping coach a CEO for a startup who then said, "Paul, would you go on my board?" He said, "Think about whether you really want me to. It's going to change my role in my relationship with you." This entrepreneur ended up deciding that Paul was more valuable as a coach to him. He was an investor in the company, so obviously had some concern about he wasn't going to go against his own interests. He could help the CEO for example in dealing with the board, because there will be conflicts. There will be issues. I think that kind of advisor is important.

The other is the third level is people who may not know much about your company, but this is where the networking comes in. People who also have their ear to the ground both in your area and just in startups in general. Other people doing similar things, hopefully not competitive, but even sometimes competitive. I've watched this with companies where competitors, there's a level of openness which benefits both of them, because it's not a zero sum game in most cases.

Sal Daher: No, it's not.

Ed Belove: I think there are ways for both to benefit from that sharing of knowledge.

Sal Daher: It's really hard to say that you have in the markets that we have today that someone is absolutely completely 100% a competitor.

Ed Belove: Right. Exactly. I think that's understanding where you can learn from each other. Again, a friendly competition hopefully makes both of you better. I think that's a really important piece there.

CEO, Founder, Know Thyself

Sal Daher: That openness, basically we go back to the oracle at Delphi, ”gnothi seauton” know thyself, know what you know, know what you don't know, know what kind of a person you are, know what you need to help. I think the modern layer that we have to add to that is that now we are so surrounded by all kinds of inputs that we have to discriminate to choose what input we take and what input we don't take because it is very easy for you to be overwhelmed with input.

Ed Belove: Not only what inputs we take, but even what inputs we spend our time learning to take.

Sal Daher: Exactly.

Ed Belove: How many different daily whatever, pieces of information, MarketWatch and Espresso from The Economist and The Globe headlines and The Daily Kos. There are a zillion, you could fill your entire world with just people who every day will tell you what's important for you to know. Figuring out for yourself what's important, and perhaps like in so many other ways, what's not important? What are the things, and this works at so many levels too of what you can say not important enough that I should be spending my time on it.

Within your company there are times too where you say, "Let's face it. What color the walls are painted, interesting but not crucial. Somebody else can worry about that. We don't have to have a company meeting to decide everything." Again, knowing, the other thing about decision, some of them are reversible. My best example of this is if you're remodeling a house, knowing where you put the granite down is important because granite, once it's in place, it's unbelievably expensive to move. Knowing what color to paint the walls, no big deal. Worst case, a few hundred bucks later you have a new color wall.

Is Your Decision “Granite” or Is it Wall Paint? – Is a Decision Irreversible or Not?

There are analogies for your company too. There are decisions are going to make that are just absolutely crucial and are going to be hard to change. There are other decisions where if you make them wrong, three months later you reverse it. Knowing which fall into which category is part of the art of running a startup, or for that matter again, any company.

Shares, Notes and SAFEs, Oh My!

Sal Daher: Yeah, absolutely. Absolutely. Ed, a growing trend when you're investing in startups we're seeing is that it is much more convenient for founders to use a convertible note instead of using equity because it requires a valuation. Now we're seeing an even more rarefied type of document called the SAFE. It's not even a note. It's basically a promise of something in the future, it could be a note, it could be equity, and you have some rights there, very up in the air. What are your thoughts about this topic?

Ed Belove: As you say, it's very interesting how this has changed. To some extent it's the Y-combinators and the Techstars and things like that that have encouraged the SAFE and the note. I have problems with certainly both the SAFE and convertible notes, not that I haven't done convertible notes. The SAFE in some ways is a real problem because you do need some protection for your investors. You need some interest. The bigger issue that I see is convertible notes versus equity, with a convertible note, to some extent the investor and the company's interests are not aligned. If I invest in a convertible note and I get some discount to the next round, I'm torn. At one point I want the company to be successful so I can raise a next round, and I also want to raise the next round at a really good evaluation.

The problem is if that valuation is too high or very high, the higher it is, the less I get for whatever my investment was. It's almost like as long as I'm sitting on a convertible note, I don't want the company to be too successful. Obviously I don't want them to go out of business. I want them to be somewhat, but I want them to be successful so that first note, the point where my convertible converts, is not very high. In fact, in if anything I want it really low, whereas it's the interest of the company and the management to have that very high. Misalignment like that, it's not crucial to the future of the company but I think it's not a particularly good idea.

It discourages an investor. I look at, there are a number of companies I've looked at and I look and say, "I'm going to wait until the next round." Because getting a 20% discount is not really that important to me. In most cases, truth be told for startups, it's a binary thing. Either you get back your money hopefully many times over, or you don't. There are very few cases where you're getting back 80% of it. The difference between a 20% discount and not, yeah, you make a little more money, but truth be told most of the time you're making a lot of money, so you're happy either way. I look and think, this is pretty risky. Let's talk in a year when you do your Series A, so I'll pay a little bit more but I'll know a heck of a lot more about the company at the point where I pay it. The middle ground there is putting caps on. At some extent, when I look at a cap ...

Sal Daher: And then putting follow-on rights, investment and follow-on rights [The right to invest in future rounds of fundraising].

Ed Belove: I think you always need follow-on rights as an early investor. Although again ...

Sal Daher: The rights to invest your pro rata share when the company raises more money, yeah.

Ed Belove: Although hopefully the company quickly gets the point where in fact you don't want to invest because it's out of your range. It's raising venture capital level money, and angel investors are investing an order of magnitude less money. The cap, at some respect you put a cap, again, that means the maximum you will pay inequity is X million, 3 million, 5 million, whatever it is. I think many of us, I tend to look and say, "Okay, that's what I'm going to invest in the next round." Do I believe this company, I value the company at the cap. That's how I look at it. If they did inequity round at that cap, it would be exactly the same.

In fact, I think that it would be better for most entrepreneurs if they're willing to do a cap is to just do it at the cap level, because there are two situations. Either they raise the next round at a higher valuation, in which case every one of the investors is at the cap, in which case you might as well have done its equity. Or they raised it less than that, in which case you're actually getting something as an investor, in which case the company is getting less money than if it had raised it at the cap. I don't see any reason that any advantage the company in doing it that way.

Sal Daher: Once you give a cap, why the heck not go all the way to equity then?

Ed Belove: Just go equity then. Because I guess there are investors ...

Sal Daher: Documentation is heavier. It costs them more. It's more involved.

Ed Belove: I don't think it has to be that much more involved.

Sal Daher: It's not that much more, but more.

Ed Belove: Big lawyers do tend to overdo, I get closing documents that are an inch and a half thick, and I used to get closing documents that were 20 pages. I don't know why that is. The other part, though, of the cap in investor is there may be investors for whom they say, "Oh, okay, I can't see that they're going to hit that cap, so I'm going to invest assuming it will be less, so I'll be saving money after that." I don't tend to look at it that way, and a lot of people, I don't ... it's partly, do your investors really believe that you're going to be very successful or not?

On the other hand, most of us who do angel investing can't really, it's hard to stand in the way of this tide, particularly if the company has raised money through one of the startup incubators. You end up just saying, "Okay, I'll go that way." In many cases as I said, I have walked away from investments because of that, and I know other people as well who have.

Sal Daher: One pesky detail of a note is that I invested in a company that became worthless this year. There's a provision called, I think it's Chapter 1244 [Section 1244] that allows you to discount the loss of a ... the long-term capital loss of investing in a startup against ordinary income. That's 39.6% tax rate that you get a break on instead of the long-term capital gains rate which is 20%, the highest rate. Just because the fact that this company did not convert to equity. It just shut down as a note. Because it's designated as a note, it does not get treatment for that. If it had been equity, it's a loss anyway. They might have done the favor of just converting to equity and then liquidated the company, because you get twice the tax benefit. It's another reason why notes are undesirable.

Ed Belove: Also tied into that is if you're successful, there are various provisions under which if you have qualified investment and it's gone for five years, there are three different ... there are various ways of having that either go ranging from zero capital gains to discounts on them. That clock starts when the equity is issued. If I do a convertible note today and two years later they raise the round, the clock starts then. Three years later, they sell out or go public or do something.

Sal Daher: You don't trigger the five year.

Ed Belove: I don't get that five-year… There are a lot of things that are worth triggering earlier for a capital gains. Again, those are the investor's interest, not the companies. The more you can align those interests, the better off you are.

Sal Daher: I agree entirely. I agree. This is tremendous. Ed, I'm most grateful to you for participating and helping make this a really great podcast. I'd like to invite our listeners who enjoyed this podcast to review it on iTunes. Thanks again, Ed. It's tremendous that you could be here and sit down and tell us such interesting things.

Ed Belove: Thank you Sal, this has been fun.

Sal Daher: And a great radio voice.

Ed Belove: I think there are friends of mine from college who would argue with that. They have better ones.

Sal Daher: Oh, even better. I'm Sal Daher, this is Angel Invest Boston, conversations with Boston's most interesting angels and founders. I'm glad you're able to join us. Our engineer is James Willetts. Our theme was composed by John McKusick. Our graphic design is Maywood Art. This is Angel Invest Boston. I'm Sal Daher.