kathryn roy

Michael Mark & Kathryn Roy, "Ask an Angel Investor," Ep. 23


Super angel Michael Mark and marketing wiz Kathryn Roy take questions on the topic of angel investing. This was recorded before a live audience at gorgeous Babson College, a university dedicated to teaching entrepreneurship. Sal, as usual, finds it hard to keep his opinions to himself!

Click here to read the full episode transcript




Topics covered include:

  • Recorded on the Beautiful Campus of Babson College, Thanks to Margaret Jones & Nina Block
  • Michael Mark Mini Bio
  • Kathryn Roy Mini Bio
  • Michael Mark on What Angel Investing Is Not – Not the Best Way to Make a Lot of Money
  • Kathryn’s Thoughts on Making Money in Angel Investing
  • Question from Mark T.: What’s the Minimum Number of Startup Investments to Get a Good ROI?
  • Audience Question: What Are the Three or Four Things You Look for In a Startup?
  • Startup Founder Davey Bakhshi Asks a Question - Fundraising Pointers
  • Davey Bakhshi: Do you Invest in Founders from Other Countries?
  • Have a Real Sales Funnel for your Fundraising – Willy Loman Beats Einstein
  • Monthly Communication with Your Investors and Constituents
  • Lisa’s Question: What Would You Do Differently Today as a Founder Given the Changes?
  • Go to an Incubator
  • What Has Not Changed in Fundraising
  •  Question from Listener Martin Aboitiz: What Startups Do You Regret Not Investing In?
  •  “Another Train Leaving Every 15 Minutes.” – Michael Mark
  • Question from Kit, a Freshman at Babson: Can You Build Business without Raising Money?
  •  Audience Question from Alan, an MBA Student at Babson: Notes vs. Priced Rounds?
  • Audience Question from Marcos, an MBA Student at Babson: How Long Does It Take to Build Trust?

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Transcript of Michael Mark & Kathryn Roy, "Ask an Angel Investor," Ep. 23

Guests: Angels Michael Mark & Kathryn Roy


SAL DAHER: Welcome to Angel Invest Boston, conversations with Boston's most interesting angel investors and founders. I am Sal Daher, an angel investor curious to learn more about how to build 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 panel members today, angel investors Michael Mark and Kathryn Roy.

Welcome to you both. I'm so grateful that you agreed to be on again. Thanks for your patience, Michael. I know you don't like to do this kind of stuff, but ... He doesn't like publicity, but for the 23rd episode of the Angel Invest Boston podcast, we are going to ask questions of our panel of angel investors. Some of the questions have come to us online. Some will be asked by members of the audience.


Recorded on the Beautiful Campus of Babson College, Thanks to Margaret Jones & Nina Block

We are recording today on the beautiful campus of Babson College, a remarkable university dedicated entirely to entrepreneurship. Our audience today includes Babson students and some other people from the Boston startup ecosystem. And I wish to thank Margaret Jones and Nina Block of Babson College for their considerable efforts, which made it possible for us to be here today. I'm very grateful to them.

Michael Mark Mini Bio

At age 21, Michael Mark joined his professor from MIT in founding a company to compete with IBM. Four years later, the company was sold, and Michael Mark knew that the startup life was for him. Over the ensuing decades, Michael Mark cofounded several other companies and invested in more than 200 startups. Today, he's one of Boston's most sought after angel investors. He is sought after by founders and also by other angels who greatly value his thoughts. I have the honor of calling him my mentor in angel investing.

Kathryn Roy Mini Bio

Kathryn Roy headed up marketing at several major technology companies, including Boston's iconic Lotus Development Corporation. In her consulting practice, she has advised companies ranging from IBM to Constant Contact. Her concentration is getting messaging right. She brings that focus to her angel investing, giving founders deeply considered advice on their approach to markets. Kathryn is a person from whom I learn every time we interact, so she's really tremendous.

So, Michael, why don't we just start by just having your version of what angel investing is?


Michael Mark on What Angel Investing Is Not – Not the Best Way to Make a Lot of Money

MICHAEL MARK: Well, first of all, let me say what I don't think it is. I mean, I don't think it's necessarily the best way to make a lot of money. I mean, I'll be blunt, because so many of the early-stage companies we look at fail. I would say that number's at least half, maybe more than half, and maybe another 40% barely get above the horizon.

So, you have to really want to do it for other reasons, and I just like working with entrepreneurs. As I said earlier, I've been involved with startups since I was 21. I love startups. I've learned a lot about how to get startups going, and I just want to help give that information to entrepreneurs. That's the reason I get involved with startups, and a lot of people I know do it for the same reason.

And by the way, as you're doing this, maybe sometime you'll luck into, it's not a unicorn, you know, a semi-unicorn.


Kathryn’s Thoughts on Making Money in Angel Investing

SAL DAHER: Kathryn, what are your thoughts on this?

KATHRYN ROY: I agree with Michael. There's a joke about how to become a millionaire, and it's start with two million, and I think to some degree, that angel investing has been a good way for me to lose money, to my husband's chagrin. But if you play the odds as much as Michael does, you could have more success.

We have another member of our angel group who, in his first outing as an angel, or his first investment, did quite well, and so he comes into this very optimistically. And I think, you know, what is the expression? It's the triumph of optimism over logic? But I agree with Michael.

What are the other reasons that you get involved in angel investing? One of the things that has always motivated me in my career is learning from other companies. One of the things that frustrates me about being one company is I feel like I become really smart about that industry and how they do things, but in my career, I've been consulting quite a while, and you realize going to another company, what you learn one place doesn't translate. And one of the wonderful things about angel investing is you get invested, not just monetarily, but personally, and you have to learn more about that market and the opportunities, and I think it makes you much sharper as a businessperson to get that framework.


Question from Mark T.: What’s the Minimum Number of Startup Investments to Get a Good ROI?

SAL DAHER: Awesome. It's funny that we started talking about what a terrible way to lose money angel investing is, because we got a question that came from the people who follow us. Mark T. asks, "How many companies is the minimum an angel investor should invest in to achieve a good ROI, return on investment?"

MICHAEL MARK: I actually have a lot of discussions with people about this. I think that even VC [venture capital] companies these days only see about one in ten of their companies being successful. By successful, I mean three to five x minimum times money, otherwise it was never worth the risk to make that investment.

So, if you're talking about a nest egg for your retirement, a one out of ten chance would probably mean you got to invest in 40 or 50 companies to sort of guarantee some sort of nest egg. So I would’nt look at it that way. I would look at it as, "What part of my nest egg could I lose? And that's the money I'll work with here."

SAL DAHER: I think that's very sound advice. Maybe the money you might have spent on the yacht you might invest into startups.

MICHAEL MARK: Yeah, definitely. Definitely. Yeah that money!

SAL DAHER: You might be ahead of the yacht.

MICHAEL MARK: That may be the reason I never bought a yacht. I spent it on 200 companies.

SAL DAHER: Yeah. I would rather, instead of buying a new car, I drive a 2004 Sienna. It allows me to invest in a couple of startups instead of buying a new car. If I bought a new car, that's two startups less, and that's the attitude I have.

Before starting to take questions from the audience, I'd like to remind people asking questions that what they're saying into our microphones will be part of the podcast and will be published so that anyone can hear it. By speaking into the microphone, you are agreeing that your voice be recorded and be disseminated, so please keep that in mind.

If someone wants to step up to the microphone and ask the first question here ...


Audience Question: What Are the Three or Four Things You Look for In a Startup?

AUDIENCE MEMBER A: A question more for those of us potentially seeking funding, for each of you, what are the three or four most important things that you look for in a startup that's seeking funding, and how do you determine whether the startup passes?

KATHRYN ROY: Well, the first part is getting into the pool to present, and there has to be something interesting to the facilitator who's, or of his team that's evaluating you, so you should have a presentation that's put together, and it's good to have something new, I think.

Sometimes we have the fourth person doing a dating app, and it just doesn't get a lot of excitement. Novel things, things that people have expertise in, that you could build a story about there being a large potential at some point, that's to get started for getting put on, and then you go through the next round, and that's presenting, and so you should present coherently. You should have paid attention to his rules for putting together a presentation. You should present well, being able to answer the questions that come up.

And then really to get investment, Michael always talks about how important the people are. Sometimes we aren't totally convinced about the execution plan, and we know that a lot of startups are going to change, but having a lot of faith in the person, and what they've done, and what they're able to do, I would say those are some of the things we look at.

MICHAEL MARK: Yeah, I would reiterate that. I always look first at the person and whether I think this person will, by force of will, be successful. During my career, I have invested in companies that had ideas that could not fail, you know, fantastic ideas. I have invested in great people, and somehow, the fantastic ideas often failed, always because of execution problems. But investing in great people has worked really well for me.

I sort of take the business plan that's given to me as the entrepreneur's best guess at what they're going to do today, and I assume it's going to change over time. None of the companies that I've invested in that have been successful were successful executing that original business plan. They all morphed over time.

But it is important that the entrepreneur is working in a market space where you can build a significant company. If the market's just not large enough, then no matter what you do and how successful you are in that market, it won't be really an investible company. So I look for first, the person, second, they're in an interesting market.

And I, I have had situations where someone has had a not very good idea. I've invested, because I've been very impressed with the person, and maybe five ideas later, that person really hits on something. For me, that's been the method that works.

SAL DAHER: I also wanted to add here that we have to differentiate a little bit and just sort of put into context what we do. Angels invest significantly earlier than venture capitalists, though sometimes that gets a little mixed up. When Michael was saying earlier on that even venture capitalists get one in 10 right, venture capitalists are investing later. They know a whole lot more about what the potential business might be at that point. There probably is some kind of a track record in terms of selling the product somewhere, maybe not a lot of verticals, but at least one vertical. There's some sign of traction and so forth.

So, the venture capitalists are analyzing financial statements. They're analyzing a real record, whereas when, the stage that Kathryn, Michael, and I are investing in, we're really looking at the team, so it's really guessing what that team is capable of doing, and of course, if the space warrants it, it's a very different kind of analysis that's conducted.

MICHAEL MARK: And I've invested in companies on the day they graduate from Babson, actually, so it's very early.

KATHRYN ROY: But I do think that it helps tremendously, even at angel investing, to have some revenue. I think that that helps, or at least you could show pipeline and process.

SAL DAHER: You bring up a very important point. I've often heard you say this, Michael, perhaps two or three years ago. If a company had very fast growth, they could find funding just with that fast growth. They didn't really need to have a plan on how they're going to make money with that fast growth. But more recently, it's become pretty obvious that that strategy is not one that works, and that from the get-go, you really should have a very clear understanding of how you're going to make money. You should be able to get traction and also to understand how you're going to make money from the start.

MICHAEL MARK: Yeah, if I could add to that, I-

SAL DAHER: Sure, please.

MICHAEL MARK: I do think there are business plans where getting fast growth quickly is one of the most important components, and I don't think, necessarily, you have to get revenue on day 1.


MICHAEL MARK: But I think you have to have some ideas in your head as to how you'll be able to monetize this application, this market, a year from now, because sometimes you get involved with applications markets that are not monetizable, and that's obviously going to be a problem.

KATHRYN ROY: Yeah, it's like the minimum viable product. You're looking to see have you thought through how little you can get out there that will start getting traction? Sometimes you see people put together things that, you know, "I'm going to get a little bit here and a little bit there," and they all require different capabilities.

And we're always thinking about everything always takes longer than the entrepreneur believes, it always takes more money, and so that point of when you're going to need more money, and we could bring more people in, are you showing enough progress that we're going to be able to have some confidence that you won't close down early?

SAL DAHER: Very good. I'd like to invite to see if there are other questions, if someone wants to approach the microphone.


Startup Founder Davey Bakhshi Asks a Question - Fundraising Pointers

DAVEY BAKHSHI: Hi, I'm Davey Bakhshi, and a co-founder of a startup out of Tampere, Finland.

SAL DAHER: Welcome.

DAVEY BAKHSHI: And ... Thank you. And my question is, here in America, I see a very fine, thin line, I should say, between angels, Y [Incubator] (Y Combinator), and some of the VCs that are prepared to invest in pre-revenue, pre-product. What it needs is this competition to try and get startups like us on board, but what should we be looking for, particularly in angels such as you versus a Y [Incubator] (Y Combinator), which is now so overstretched with so many companies coming to play with them, on top of the dollar amount that we get from you, what else are we getting, which is more important to us? It's like your expertise.

How much involvement do you give a startup from the very onset is my question.

MICHAEL MARK: I could address that. You mentioned three complexes. You mentioned angels, you mentioned early-stage VCs, and incubators. First of all, let's start with angels. Most angels in this area, high-tech angels, have grouped into associations where the three of us happen to be members. There's something called Walnut, but there are probably ten angel groups locally. They all function approximately the same way, where they look at deals together, but then they don't necessarily all make the same decision.

It used to be that angel deals were really separate from VC deals, then a new class of VCs evolved, of which there are at least a half a dozen, maybe more locally, that like to participate in angel deals and write checks that are maybe $250,000, where an angel might write a check for $25,000 to $50,000.

So, I view those two groups as very synergistic, and most of the deals I see these days involve both of those groups. I think that you have to look at the incubators in a different dimension. For the most part, you don't get involved with an incubator because they're going to fund you. Sometimes they write small checks, but that's typically not their function.

Today, I always advise companies to try and get into an incubator program if possible, because every day they're surrounded by mentors. When I got started, to see a VC was difficult. I mean, you'd have to make appointments weeks ahead of time, and the incubators just have the VCs walking through, saying, "What are you doing? What are you doing?" That kind of thing.

So I highly encourage it today, and I do think it's independent of angel and VC money, and I also think angel and VC money are really close to the same money these days, because most deals, early-stage deals, have both.

KATHRYN ROY: And I would just point out that, as angel investors, we actually work ... I mean, Michael does a lot of work with Techstars. I've been helping out a Techstar company. I've been working with MassChallenge companies. We don't do much in Y Combinator stuff.

And the other thing is that there are angel investors. We tend to have a network on the East Coast, and there are ... So one company that, I think you invested in, Concrete Sensors, they ended up getting significant investments from the West Coast, because Bechtel, because it was a new builder, and-

SAL DAHER: Yeah, so you mentioned them, this is another source of money are strategic investors that you might look at, or dedicated strategic funds in a particular industry. Concrete Sensors is in the business of sensors for concrete, and so they've got some early money from some forward-thinking people in that industry, along with a fund that was dedicated, this is the Bechtel family, a fund dedicated to technology in the construction industry.

And by the way, they're doing very well.

KATHRYN ROY: Yeah. They're getting ready for another round.

And there are other angel investors who don't participate in angel in group.

MICHAEL MARK: We encourage you to join a group, though. I mean, they're welcome to join.

KATHRYN ROY: Yes, they are. But I think if you have experience, and you've got a network, there are oftentimes people that have worked in companies with you that will put money in too.


Davey Bakhshi: Do you Invest in Founders from Other Countries?

DAVEY BAKHSHI: I just have a second question, if you don't mind, is how receptive are American angels or VCs to, say, European or foreign startups, because we don't have that kind of spirit of entrepreneurship from the angel bodies in Europe, so how receptive are Americans to companies from overseas and such?

MICHAEL MARK: I would say a large percentage of the companies I see these days are run by non-native Americans, but they have a local presence, and certainly that's important for me, and I think it's important for a lot of angels.

This case for Concrete Sensors, Bechtel is a construction company, and they have a fund on the West Coast. That made sense, but for the most part, people doing early-stage investing like to invest locally, for reasons I've talked about. We like to get involved. We have a network. We like to put our network to use helping these companies. It doesn't work if the company's in Baltimore.

So, companies with foreign founders who have moved here, who maybe keep their engineering in Finland or Paris, you know, we see that every day. We're happy to invest in those situations.

DAVEY BAKHSHI: Thank you very much.

SAL DAHER: I just wanted to sort of follow up a little bit on that, just to emphasize the very wide variety of funding sources that exist beyond what you described. As Michael mentioned, there are, and Kathryn as well, many different types of angels, some that work alone, some that work in groups. There are groups who invest in companies that are not based in New England. I mean, there's angel groups that do that as well. We and several of the other groups that I know as well tend to like, to invest in people who we can see them, we run into them, you know, within two-hours’ drive from Boston, let's say.

And so, a foreign company that comes here, has a presence here, that's a great thing. We understand. I mean, some of the most interesting companies we're invested in, one has operations in Portugal, because they can get a lot of software done in Portugal.

MICHAEL MARK: We're in a special situation where we have more startups here than anywhere else except the Silicon Valley area, so there's no way we can see all of them getting started here. However, if you go to ... Like, I come from Indiana. If you go anywhere in Indiana, there's still a lack of startups.

So, some of those investors are going on angel lists and making investments in companies out of state, but for the most part, people around here want to invest in companies around here.


Have a Real Sales Funnel for your Fundraising – Willy Loman Beats Einstein

SAL DAHER: I also want to just give a little bit of advice for fundraising. I'm invested in about 40 companies, and I've tried to help the companies on their raise. The advice I would give is first, become really good at networking. Take networking very seriously. Do it methodically. Doing it methodically has two advantages, at least two that I can think of right now. The first one is that you're smart about who you're talking to. You need to have a sales funnel.

Guess what. When you're raising money, you're doing a sales job, so you have to establish a sales funnel. You have to have leads coming in the top, and prospects, and then opportunities, and so forth, and qualifying them all the way down. And having a process is really, really helpful for someone raising money, because it is a very strong tool to help you emotionally to get over all the rejection, because most people who are raising money, this is particularly true in biotech, and I see this a lot in biotech.

When they're raising money, these are people who are accustomed to getting the approbation of all their peers. They get published in the top papers and so forth, and so for them, it is brutally hard to have someone who doesn't even know much about their field tell them, "This is not going to work."

So, you need to have number. You need to have a process, so the process is your friend. This is where the very mediocre salesman from The Death of a Salesman can teach Albert Einstein a little bit about how to do business. I encourage you to have a process, to really network very seriously. Get a CRM, there are lots of free CRMs, to keep track of your leads, to keep track of your prospects, and so forth, so approach it as a business.

KATHRYN ROY: If you have a CRM, I mean, you write down everyone you meet, where you met them, when you met them, and whenever you meet with people, if they don't seem like they want to invest, then you ask them in the follow-up question, which is, "Who else do you know that would interesting for me to talk to?" And those are some of the key things.

 And then also-

SAL DAHER: Classic networking.

KATHRYN ROY: And then also, whoever you meet, no matter how it turns out, follow up with a note. Tell them what you appreciated about the session. I mean, it really helps.


Monthly Communication with Your Investors and Constituents

SAL DAHER: Another thing I also like to say is that, if you ask someone for money, and they say no, that means no at that time. It doesn't mean no in six months. What your company is doing in six months might have changed, so that person should remain in your list of contacts. You should not get write them off. Keep them in play. Keep them informed. They are a constituency that you have to keep informed.

MICHAEL MARK: Just a minor addition to that, I always tell startups, on a monthly basis, write a couple of paragraphs, send it out to your investors, but also send it out to everybody else who you ever talked to.

SAL DAHER: I am waving my hand. My thumbs, both thumbs up, Michael. I cannot endorse that enough.

MICHAEL MARK: It is amazing how often they don't do that, actually.

SAL DAHER: Some very successful companies, a few successful companies, mostly companies that are not doing well, because they're embarrassed to talk about it. Guess what. Bad news is better broken a little bit of the time than, "Oh, jeez. We ran out of money," and you haven't talked to your investor in six months.

MICHAEL MARK: Right. That's not a good conversation. If you only talk to investors when you're out of money, it's not going to go well.

SAL DAHER: Any other questions?


Lisa’s Question: What Would You Do Differently Today as a Founder Given the Changes?

LISA: Good afternoon. My name is Lisa, and my question is, since you started 40-odd-years ago, and the environment has changed significantly, what would you do differently today with technology, with the speed, everyone everything swiftly, there's no kind of something done in a handshake, there's a lot of fake people that are out there? How would you approach it today if you were doing this over again as a young lad?

MICHAEL MARK: A couple things. One, I had a conversation earlier this morning about a venture capitalist who's looking at a local company that hooks laboratory equipment into a computer system for, you know, pharmaceutical companies, they have lots of laboratory equipment, and it just so happens that 50 years ago, that was a company I was involved in starting. So not everything changes, but almost everything else has changed. They're solving the same problem, but almost everything else has changed.

There was no infrastructure 50 years ago on how to start a company. There were no programs at school. There were no incubators. When we figured out that there were these groups called venture capitalists, we also learned that the few there were, for the most part, were in New York. We had to go down to New York to get money.

So that's changed drastically, first, by Babson coming out with a fantastic entrepreneurship program, then only lately, the other schools, who used to not be able to even spell entrepreneurship, they've all gotten into the game now, and now you can't have a university without an entrepreneurship program.

I do think if you want to start a company today, there are more opportunities open to you through these programs, through the incubators. I'm a mentor at the EIT program here at Babson, which is a fantastic program for people who already know, as soon as they get out of school, or sometimes earlier, they're going to start a company.


Go to an Incubator

So, all these opportunities take advantage of it. That's why I said earlier go into an incubator. Don't go out to, well, we used to it 128, to 95 and put your company there, because you'll see a 10th of the people, or fewer, that you would see at an incubator. Take advantage of these places where there are like-minded people who can help you every day.

KATHRYN ROY: And I think that that's important, even if you're not in an incubator. If you are in close contact with a good group of angels, you can get similar advice. And you have to be careful, because I think, as angel investors, we throw generalities across. "Well, you need more marketing talent, and you need better sales." And beneath that layer, you got to figure out, "Well, what kind of marketing talent do you need at a company like yours, and what kind of sales talent do you need over here?" Because if you're doing product market fit, and you're just establishing that, you need more of a business development person. You don't need someone who's been signing enterprise contracts.

And it's very interesting. A friend of who works at a VC-funded startup, one of the first things he did when he came in as chief marketing officer is he said, "Why are we doing enterprise sales? Why are we trying to sell these big contracts to big business? It doesn't make sense, given what we're selling." And they changed completely.

And a lot of companies doing marketing, they'll think, "Oh, I've got this formula, this checklist I've got to do about getting awareness and all this other stuff." But there are some companies that I work with where people are actively looking to buy a solution, and what they need to focus on is being able to tell ... What [inaudible 00:27:23] tell the people in marketing courses all the time is the wrong thing to do. It's to be out there with your feeds and speeds.

But there are circumstances when you're selling something where people are actively shopping. They want to know those things first, and stop telling me about what it's going to do for me. But if you're trying to work with someone who's got latent pain, and they're not actively shopping, then you've got to sell them on the promise of what's going to happen if they buy this solution.

So, angel investors can help you get that layer beneath about what you really need, and I think incubators, in a large part, do a good job with that too.


What Has Not Changed in Fundraising

SAL DAHER: If I could just add something here, things have changed tremendously. For example, some of the businesses that used to get funded by venture capitalists, they would never even consider funding. The whole industry has matured a lot, and all these things have changed.

But there are some things that have not changed, the importance of trust and importance of integrity, and how is it that you know about people's integrity? You have to get to know them. What's the best way to get to know them? You have to connect with people via your network, people who can vouch for them and say, "Yes, I've known this person six years. We worked in a previous company," and so forth.

That's why whenever you're raising money, you have to start with your own network and go out from there. You cannot have synthetic trust accorded to someone that you just met, because it's a very difficult thing to do. You're going to be giving money to somebody who's going to be running the company on their own with very minimal supervision. There's some supervision, but the idea of a startup is that they'd really be able to experiment, so I say start with your network, and that hasn't changed. A lot of other things, there are a lot of tools that make things easier, but that doesn't change.

So, coming up next, I will ask Michael Mark and Kathryn Roy an important question that comes from a eager listener. His name is Martin Aboitiz, and he wants to know, from Michael Mark and from Kathryn, what deals they wish they'd invested in that they did not. However, first, I wish to thank listen Bego36. I'm giving them both time to think about what deal they wish they'd invested in.

First, I wish to thank listener Bego36 for the review. Quote, "It is fascinating as a non-business person to be introduced to the world of startups. The successes of these enterprises depend entirely on the human experiences and qualities of their founders. What holds my attention and makes me want to listen to more episodes is learning about their unique personalities." Thanks, Bego36.

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So anyway.

MICHAEL MARK: What was the question?

MICHAEL MARK: [crosstalk 00:30:30].


Question from Listener Martin Aboitiz: What Startups Do You Regret Not Investing In?

SAL DAHER: The question comes from listener Martin Aboitiz.

MICHAEL MARK: I remember [crosstalk 00:30:32].

KATHRYN ROY: [crosstalk 00:30:33]

MICHAEL MARK: I rarely look back, and I never look back at things I missed. "If I had only done this, I would have gotten in this deal." I don't see the value of it. I do look back occasionally at things I shouldn't have invested in, and often see warning signs that I ignored.

KATHRYN ROY: Like what?

SAL DAHER: Excuse me?

KATHRYN ROY: Like what?

MICHAEL MARK: Well, it's almost always about the entrepreneur. It's almost always a character kind of thing. Is this entrepreneur trying to be nice to me because I haven't written him a check yet, or will we have a relationship [inaudible 00:31:20]? So I think I learned something doing that, but wishful thinking of, "If I had only gotten into this deal ..."

It's never interested me, really, because there's always another deal I could get into, which might be a great deal, and my time is better spent thinking about should I get into that deal than what I could have done a year ago.

KATHRYN ROY: Well, I'm the opposite of Michael, because I think it's really interesting to look back. I think that it's like machine learning, right? If you don't look at examples where you succeed and where you didn't succeed, then how do you get these factors that you should be applying going forward?

 I always find it interesting. There was that one technology company you invested in that was sold to Good Technology, and it looked like it was headed to a great exit, and then Good Technology got sold for a fraction, and nobody got much money out of that one.

MICHAEL MARK: Well, yeah. The problem there wasn't necessarily the company that I invested in, which was a company called Copium.

KATHRYN ROY: Oh, yeah. That's right.

MICHAEL MARK: It was that they got sold for equity, and a decent chunk of equity, but then by the time the company ... It was a non-liquid equity. By the time that company was actually able to cash out by being sold, it was just a fraction of the value that it had been valued.

KATHRYN ROY: But I bring that example-

MICHAEL MARK: So that's an example of-

KATHRYN ROY: You did everything right.

MICHAEL MARK: If I had been a director, which I wasn't, I would have strongly pushed against selling for equity instead of selling for cash or something that I had some faith in, but a lot of those things are out of the control of angel investors once a large VC comes in, so ...

KATHRYN ROY: But I think that that's an example of the kind of advice that you can get from angel investors by having them on your board. If you were on the board of that one, you could have guided them better.

MICHAEL MARK: Yeah. Unfortunately, in the world we live in, once a large venture capitalist comes in, they almost always get rid of the angel investors.


MICHAEL MARK: So, you help them while they're young, help them when they need checks that are of the size of $50,000, $100,000. When they need checks that are a couple of million dollars, they don't want to talk to you anymore. They want to talk to somebody who writes bigger checks.

SAL DAHER: [crosstalk 00:33:56].

KATHRYN ROY: But I just bring that example up, because that's one where you look at it, and as an angel investor, it looked like it was headed on a good trajectory, and it would be profitable for you. And I think that there's this element of chance in everything that we do, all the startups, so you're going to have situations where ... I've seen people that look like they're going to crater, and something just magical happens in the market, and buoys them up. So I think that's why persistence and sometimes having a plan B to fall back on in difficult times is a good thing.

SAL DAHER: It's funny that this question came up right at this point, because just walking into the room, my business partner for 30 years, Robert P. Smith, happens to be here, and this is a point ... He was always saying, "Sal, do you remember that deal in 1985 that we lost because of so-and-so? And we should have done this. We should have done that." Part of his success, the success of Bob Smith, my partner, was that he thought about business all the time. His deals were, you know, three o'clock in the morning, he'd be thinking about business and going back over it and over it.

Now I had a little bit of an aversion to that process, because I had heard so many of those stories, but I think there is a little bit of value in some introspection, Martin Aboitiz, this is coming back to you. I don't think we should be thinking about regretting passing deals, but there are deals that I wish I had had more time to look at them, and I didn't pass on them consciously. I just didn't have a chance to come back on time, and so forth, and for that, I regret. However, I don't cry too much, because guess what. These deals always come around, because there's always another funding around. There's always another startup that comes up, and so forth.

So, I think there is some value to looking back, but as Michael always says, there's always another startup around the corner.

KATHRYN ROY: And they do come back.


“Another Train Leaving Every 15 Minutes.” – Michael Mark

MICHAEL MARK: Another train leaving every 15 minutes.

SAL DAHER: Another train leaving every 15 minutes, yeah.

KATHRYN ROY: I think Concrete Sensor's coming back up. I remember we looked at a company that did some sort of construction, you know, pre-construction. They've been doing very well. They're coming back up for funding.

SAL DAHER: That's right.

KATHRYN ROY: So, there's a lot of companies that we pass initially that we have a second chance at.

MICHAEL MARK: But that's different than feeling sorry for yourself ...

KATHRYN ROY: Well, he didn't ask that.

MICHAEL MARK: ... That you didn't invest.

SAL DAHER: No. No, no, no. Martin, this listener, I've had a conversation with him about a startup that I invested in, and he did not, and so he feels this very strongly. So I think that's really an excellent question, and so I'd like to come back to the audience again, and if you could please step up, we have another question coming up.


Question from Kit, a Freshman at Babson: Can You Build Business without Raising Money?

KIT: Hi, my name's Kit. I'm a freshman at Babson College. First off, I would just like to thank all of you for coming here to share your time and experience with all of us. My question is about the necessity of funding, because if a startup has traction, has revenue, if it goes into fundraising, it takes a lot of valuable time from actually working on the business, and just to add onto that, have you, in your experience, seen companies successfully grow and scale without receiving external funding?

Thank you.

SAL DAHER: I mean, I know directly, my father-in-law's business did that, but that's out of necessity, because it was in Argentina, and so forth. I know that there are lots of businesses that succeed without outside investors, and sometimes the best businesses are those that don't have investors at all. There are some businesses that are just amazing. Someone has developed a market to sell some particular thing that he has clientele that just keeps coming, and they can get financing from their suppliers and so forth, and why trouble with investors?

Investor money, in my view, is money that is there to help you do stuff that you can't do on your own. The money is there to help you get more reach, to buy equipment, and so forth. So if you have a business that's cashflow-positive from the start, don't bother raising money. It doesn't make sense.

MICHAEL MARK: I know lots of people who have one to five million-dollar companies that they've sort of built on their own, and they're quite satisfied with where they are. But we as investors have to look for larger opportunities than that, because we have to, at some point in time, cash out. We can't be in a hurry. It might be five years. It might be 10 years. I'm on the board of a company that I invested in in 1982, so sometimes it's even longer than that.

And to get to that kind of scale usually takes outside funding, so you have to ask yourself, "Where do I want to get to?" Right? And if, say, that company, we got 10 people, and you're building websites for somebody, that's a happy vision for you, you should be able to get there with no funding. But if you want to do, you know, the next Uber, well, it's going to take big bucks. So it's part of your personal equation.

KATHRYN ROY: Well, Uber has double network effects, right? Because they have double network of drivers, they have a network of consumers, and anything that has network effects, then typically, it's going to require VC funding to succeed.

I did think of one company that was enormously successful and never took investment, and it's one of my best friends. His brother was a very creative game designer, and they did a big game company and sold it to EA, so-

MICHAEL MARK: Well, Microsoft only took money once, and they actually didn't need the money. They took it because they thought it was important to have ties into the venture community. But that was then. This is now, and it's different today in the software space.

SAL DAHER: We have another question coming up.


Audience Question from Alan, an MBA Student at Babson: Notes vs. Priced Rounds?

ALAN: Hi, my name's [Alan 00:39:49]. I'm a MBA student here at Babson, wrapping up my MBA, so thank you guys for being here. This is awesome.

SAL DAHER: Welcome, Alan.

Alan: I've asked this question, and we were just debating in our class last night, probably a 50-50 split between entrepreneurs and investors on where they fall on early investments with convertible versus pricing around early on. What's your take on, or preference as investors, being that early in a company?

KATHRYN ROY: Go ahead.

MICHAEL MARK: I'm strongly for price rounds although ... I have to say, I usually lose this argument these days, and there are a couple of reasons. One is you're just pushing off the question of what's the value of this company to some point in the future, and I feel, as an investor, that's not particularly fair, and I also feel that it demotivates investors at times. And I've seen this, because if the investors who are already in work too hard to help you get a good deal for the priced round, their equity is going to reflect that good deal. By good deal, I'm talking about a good deal for the company and the entrepreneur, not necessarily for the investor.

So that's one issue, but a bigger issue, to me, is that there are a lot of things that get negotiated when you do a price round which are important for a company and are overlooked when you do a convertible. For example, it's important for a startup to have a board of directors, and on that board of directors, to have somebody who represents ...

SAL DAHER: Hear, hear, hear.

MICHAEL MARK: ... The investment community, because that board of directors is going to be a lot of help to you when you go out and put together your next financing, and they're going to be a lot of help to you when you have to hire a CTO, and you want somebody to take another look.

And far too many times, I see young people today, particularly, who say, "Well, this convertible note doesn't require that we have a board of directors. Maybe legally in Massachusetts, you know, I and my husband can be the directors, but there are no rules about having other people on the board, so we're not going to do that." And I usually walk away from those, because I think the board of directors is great help to you, and you're showing not very good judgment in wanting to have one, because it's free help

KATHRYN ROY: One of our angel investment members was talking about that he's spending 20 hours a week right now with one of his investments, so it-

SAL DAHER: 20 hours a month.

KATHRYN ROY: 20 hours a month.


KATHRYN ROY: Sorry. It's a lot of work.

SAL DAHER: It is a lot of work for a position where you're not paid in money. You might be paid in equity, but you're not paid in money.

Let's have one more question, because we're getting close here with time. Is there another Babson student who wants to ask a question?


Audience Question from Marcos, an MBA Student at Babson: How Long Does It Take to Build Trust?

MARCOS: Hi, my name is Marcos, another MBA student here, just graduating. Thank you very much for taking the time here. It's been a pleasure. And going back to the trust issue, how much of the trust is built during the negotiation of the term sheet, and how long does it take between the start of due diligence until the rights have been checked?

KATHRYN ROY: Well, I can answer the question about the start of due diligence to the end. I mean, we're doing that right now with a company, and it's probably taken three weeks. Sometimes it's taken months. In this case, what I'm thinking of, trust is built because every time I learn something, it was an omission of saying it, but I always get a straight story about what I've uncovered. I think trust is damaged when you withhold something or try and present too rosy a picture.

One of the mistakes that I'm seeing with the company that I'm doing diligence on right now is that they don't recognize the things that are valuable to share. So at one point, we asked for the pipeline of deals, and then we shared it, and Michael said, "They should have shared this upfront. It makes them look so much better." So there's that part of due diligence, and if you're a first-time entrepreneur, you need somebody to help you pull together the case to make yourself as attractive as you can, and part of that is showing the downside. I mean, if you don't have this kind of executive, and you know you need it, then you would state. Nobody's expecting that you're going to have the perfect team from the start.

SAL DAHER: I would like to sort of change the angle a little bit on that question and emphasize, instead of trust, openness on the part of the entrepreneur to talking about her idea to as many people as possible, as widely as possible, and exposing her ideas to everyone who will listen, because people have this fear that people are going to steal your ideas. So if an investor comes along, and you're hiding your deal pipeline from the investor because, what? What's an investor going to steal your deal pipeline? I mean, it's crazy.

People are too secretive, too closed, and they assume that there is more interest in their company than there actually is. I mean, the classic thing is, "I don't want to talk about it, because then Google is going to steal the idea." And as one of our colleagues in Walnut likes to say, "You should be so lucky to have Google steal your idea, because it means you've got something that's going to go somewhere, and it's reached scale, because they're not going to touch anything unless it really makes a lot of money." So it means that you probably are running into tens of millions of dollars of revenue if not more before Google will even consider looking at what you're doing.

So, the way you gain trust is by being open, and by also showing that you tell people you're going to do something, and then you do it. Part of a shortcut of this is also getting introductions, people saying, "Oh, I worked with this guy for three years. I worked for this woman for five years, and they're really, really good." And so when the friend tells you that, that really helps.

MICHAEL MARK: I would like to add something.


MICHAEL MARK: Thinking back of entrepreneurs that I've worked with who have been very successful, they almost always told you as much bad stuff about the company as good stuff, and that's really refreshing, because now you know when they say something, it's true, right?

SAL DAHER: You're getting the whole story.

MICHAEL MARK: You're getting the whole story. Similarly, I've worked with companies where the entrepreneur is a sales person, really. I mean, I don't mean that that's their title, but they're always selling, and that's problematic, because to the outside world, you have to sell, but you have to know when the people you're partnered with, you have to be totally upfront, and they can't always turn it on and off.

KATHRYN ROY: I want to add one thing. One of the comments that I frequently hear when we go through due diligence is that, when people decide they don't want to invest, is they say, "The entrepreneur wasn't listening to me." When you get advice, and you're going to get conflicting advice, you're going to get many angel investors, and they're going to tell you to do A, and they're going to tell you to not do A, and it's just basic behavior, right? You say, "Okay, I understand. You're asking me to do this because of this. I get it." And then say, "I'm dealing with other investors, and they're pushing me not to do it for these reasons, and we're going to have to wrestle with it." That's being upfront.

But if you shorten the process, and you say, "Well, I've already decided this guy's going to give me more money, and going to not do A, even you're telling me to do A, so let's not talk about it," you're shutting off a conversation, and that's also destroying trust.

SAL DAHER: Tremendous. Tremendous.

Well, we're running out of time, so I have to wrap things up. Kathryn Roy, Michael Mark, I thank both of you effusively for putting up with us another time. You've already been interviewed on this podcast, and you've come again here, for participating, to make this a really great podcast, and also thanks for the audience here.

I'd like to invite our listeners who enjoyed this podcast to review it on iTunes. I'm Sal Daher. This is Angel Invest Boston, conversations with Boston's most interesting angels and founders.

I'm glad you were able to join us. Our engineer is Raul Rosa. Our theme was composed by John McCusick. Our graphic design is by Katharine Woodman-Maynard. Our host is coached by Grace Daher.