Ty Danco, "Fintech + Olympics," Ep. 28

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Ty Danco is an outlier in a population of outliers. His interests are varied and pursued passionately. He’s founded two fintech companies, he’s invested in a gazillion startups and he’s been a hugely generous advisor to companies, in fact the chief advisor at Techstars. Oh, I forgot to mention he’s an Olympian and also deeply involved with crypto-currencies. In this really meaty interview, Ty and I covered a wide range of topics. He explained his ideas in his affably quirky way. This was a super fun conversation.

Click here to read full episode transcript.

Quotes:

"Danco, why are you here? You're a marketing guy." And I said that I was here to see Lever Brothers and he goes, "You idiot, you signed up for Lehman Brothers."
“So, I took a leave of absence from school, and Wharton let me make up my remaining credits over the summer, and so I tried doing all three things at the same time. It was a success on paper, I did make the 84 [Olympic] team, I did complete the MBA, I did work at Lehman Brothers, but in truth I was overwhelmed, I did everything badly.
I ended up breaking my heel and didn't compete in Sarajevo. I learned nothing in my last classes at school and I was just lost and floundering my first year on Wall Street. So, there's a pretty obvious lesson there about the need to focus and my inability to multi-task. That's maybe why they say focus on one metric that matters, don't try to do five balls in the air at once.”

Topics covered include:

  • Ty Danco’s Bio
  • How Ty Danco Stated His Career – Lehman Brothers vs. Lever Brothers – Olympic Team
  • "Danco, why are you here? You're a marketing guy." And I said that I was here to see Lever Brothers and he goes, "You idiot, you signed up for Lehman Brothers."
  • Ty Danco Doing Too Much
  •  Ty Danco and the Importance of Focus
  • Ty Danco on the Cover of Sports Illustrated
  • Ty Danco Moves from New York City to Burlington, Vermont
  • Ty Danco Discovers that, Thanks to Michael Bloomberg, It Was Possible to Do Investing in Vermont
  • Ty Danco Founds His First Startup - eSecLending
  • Ty Danco Recalls Wall Street Misogyny of the Past – Women Found a Haven in Hugely Complex CMO Deals
  • Ty Danco’s Company is Hit by the Crash of 2008
  • Sal Daher Asks for you to Review the Podcast on iTunes – It Really Helps!
  • Why Ty Danco’s Second Startup Failed
  • Ty Danco’s Angel Investments
  • Ty Danco Thinks Crypto-currencies Are Worthy Alternative Investments
  • Ty Danco Believes One Can Eliminate Many Losers - But at a Cost
  • Ty Danco’s Philosophy of Angel Investing
  • Why Mass Medical Angels Is the Only Angel Group Ty Danco Attends
  • Why Ty Danco Does Not Invest Based on Cold Calls
  • Ty Danco Reveals the Secret of Getting into Techstars
  • Ty Danco Likes VCs Involved in Every Deal, Why?
  • “Virtually all of my deals, 99% of the deals come not from me directly stumbling over something, but from a lead from my network.”
  • Boston Angel Pantheon: Michael Mark, Joe Caruso and Jean Hammond
  • What Are ICOs and Why should VCs be Scared of Them?
  • Some of Ty Danco’s Favorite Startups
  • Ty Danco’s Categorization of Mentoring Styles
  • What Sets Accelerators Apart in Ty Danco’s Estimation
  • Ty Danco Takes a Page from Manu Kumar in Starting His Next Venture

Transcript of “Fintech + Olympics,” Ep. 28

Guest: Ty Danco, Fintech Founder, Maverick Angel & Crypto-currency Maven

SAL DAHER: Welcome to Angel Invest Boston. Conversations with Boston's most interesting Angel investors and founders. I'm Sal Daher and my goal for this podcast is to learn more about building successful new companies. The best way I can think of doing this is by talking to people who have done it. People such as my guest today. fintech founder, maverick angel and accelerator leader Ty Danco.

Ty, it's awesome that you can be here today on our 28th episode.

TY DANCO: Happy to be here and a big fan of the show.

SAL DAHER: Tremendous!

Ty Danco’s Bio

Angel investors are outliers. They are unusual in that they have managed to accumulate some capital, and, even more unusual, in that they are willing to put that hard earned capital at risk. In this population of outliers, Ty Danco stands out.

Ty went to Wharton and started his career as a bond trader in Wall Street while still an Olympic athlete. After this anomaly, his resume seems to become conventional. Eight years trading bonds on Wall Street, eight years at an outpost of Wall Street in Burlington, Vermont. Then it gets atypical again. Ty founds eSecLending in Burlington, Vermont. Eventually it becomes a 100 person firm based in Boston dedicated to helping big financial institutions, borrow and lend securities, which helps participants get funding and manage risk. After selling eSecLending, which at the time had done about three trillion dollars, near to three trillion dollars in transactions, Ty was attracted to the opportunity of improving the way large institutions bought and sold currencies, or rather foreign currencies.

This interest was embodied in BuySide FX, which was not a success.

TY DANCO: That's putting it mildly Sal.

SAL DAHER: But, you know, that's a typical thing with entrepreneurs. All the successful entrepreneurs have failed at some time or another or at something.

Since 2009, Ty Danco has been investing as an angel. Being Ty Danco, he's done it in an unusual way. He's sampled angel groups, he's tried Angel List syndicates, and he's invested on his own. Along the way, Ty advised companies at various accelerators and ended up helping to run Tech Stars in Boston. All these meanderings have led him to conclude things that are at odds with what one hears from most angels. We hope to explore some of these views in this conversation.

How Ty Danco Stated His Career – Lehman Brothers vs. Lever Brothers – Olympic Team

Ty, it's a tradition in this podcast and as a service to younger listeners to ask our hugely successful guests how they got started on a career path. Please tell us about that process that took you from aspiring to be an Olympic athlete to selling bonds or trading bonds with big Wall Street clients.

TY DANCO: Thanks Sal. Well like most of the stories about the angels and founders on your podcast, it's never a straight line. I went to Middlebury College in Vermont and I hoped to be on the college ski team, but it didn't take too long to realize that if you weren't an ex US ski teamer or getting seven pairs of free skis from Rossignol like my roommate, you weren't close to being good enough.

So, I had a friend who had also been the Connecticut State Slalom Champion but he couldn't make the team either. And we found out about our rookie camp in Lake Placid for aspiring luge racers, which we thought was pretty cool.

SAL DAHER: Luge, cool!

TY DANCO: Yeah, if you like roller coasters, you'll like luge.

SAL DAHER: Uh-huh (affirmative)

TY DANCO: And we both went and that road led me to making the 1980 US luge team in Lake Placid where I came in 11th. So while I couldn't make my college ski team, I was able to make it to the US Olympic Team.

SAL DAHER: Cool.

TY DANCO: So, after that, I thought I wanted to be a sports agent, and I was advised by someone in that business that the proper background was either be a lawyer, which I wasn't, or to do a quick stint in product marketing or consumer products company saying that if you can sell cornflakes, you can sell athletes. So I went to Wharton, started on a marketing track, and had an interview lined up with Lever Brothers, which was the old name for UniLever. Which makes Lipton’s Tea and Dove for dishes and Hellmann's Mayonnaise and all that type of stuff.

SAL DAHER: Yup.

"Danco, why are you here? You're a marketing guy." And I said that I was here to see Lever Brothers and he goes, "You idiot, you signed up for Lehman Brothers."

TY DANCO: I was the first interview scheduled that morning, but the company's train was late coming down from Philadelphia and there was a backup of students waiting for the job interviews. And one of my friends, who was a finance student, said, "Danco, why are you here? You're a marketing guy." And I said that I was here to see Lever Brothers and he goes, "You idiot, you signed up for Lehman Brothers."

And I ended up getting the job offer and all I did in the job interview was talk about Eric Heiden, who was a speed skater. But I found out I loved the competitive and mathematical angles of bond trading. So that's how I got to Wall Street.

SAL DAHER: That is tremendous. So that's the Pirates of Penzance and not apprentice to a pilot, but apprentice to a pirate.

TY DANCO: Okay, I don't know the Pirates of Penzance, but I'll go with it.

SAL DAHER: Now what you say about driving with the three-iron, which is what you were doing instead of trying to be on the ski team, you decided to luge, which is more accessible. But it's still very competitive. My wife's cousin's daughter in Spain is a fantastic athlete, she could be an international tennis player. But she also wants to be an engineer, she's a really brilliant engineer. But she also wants to be a mom, she wants to have a life. So she decided to do paddle tennis, at which she's a national player in Spain. And so she gets to go to national championships in paddle tennis, she gets to do very sophisticated engineering stuff, and she's got a baby and a husband.

TY DANCO: Well, there's a lot to be said about being a big fish in a little pond.

Ty Danco Doing Too Much

SAL DAHER: Yeah, so that's a really wise solution.  Ty, there was a time that you were completing your MBA, training for the Olympics and working at Lehman Brothers, not Lever, the venerable but doomed Wall Street firm. How did that work out.

TY DANCO: So, I was 27, I was three quarters of the way finished with business school, winter was coming and the luge team was headed to Europe for the season. All of a sudden, I got this regret in the sense I wasn't ready to leave behind my identity as a wild and crazy luger and turn into a suit for the rest of my life.

SAL DAHER: You could wear Lycra to the office.

TY DANCO: Yeah, not at Lehman Brothers. So, I told Lehman Brothers where I'd worked that summer that if they would be understanding and let me try out for one more Olympics in 84, I'd not interview anywhere else and I would commit to working there and everyone agreed.

Ty Danco and the Importance of Focus

So, I took a leave of absence from school, and Wharton let me make up my remaining credits over the summer, and so I tried doing all three things at the same time. It was a success on paper, I did make the 84 [Olympic] team, I did complete the MBA, I did work at Lehman Brothers, but in truth I was overwhelmed, I did everything badly.

I ended up breaking my heel and didn't compete in Sarajevo. I learned nothing in my last classes at school and I was just lost and floundering my first year on Wall Street. So, there's a pretty obvious lesson there about the need to focus and my inability to multi-task. That's maybe why they say focus on one metric that matters, don't try to do five balls in the air at once.

SAL DAHER: Multi-tasking is actually task switching. We have like 8k working memory. We switch from task to task.

TY DANCO: I agree

SAL DAHER: It's an illusion, that if you can concentrate you produce much better. Adam Gazzaley, The Distracted Mind, little bit of a tough book, it can be repetitive, but the guy knows a lot about attention problems and so forth. The myth of multi-tasking is exactly a myth. I'd like to have him on the show someday and interview him. His technology is the basis of a company that I'm invested in called Akili Interactive, which is using video games to help people with their attention deficit problems.

TY DANCO: Well, what is this show if not to give plugs to our portfolio company.

SAL DAHER: I'm not alone, I think they've raised like 73 million dollars in venture financing, which probably dilutes me to nothing, but anyway ... but the thing you said about focus really brings to mind something that the Cajun Dostoyevsky, Walker Percy said, which is "lucky is the man who does not secretly suspect that all things are possible to him."

Ty Danco on the Cover of Sports Illustrated

It really is true, focus is important for contentment as well as for competence. Ty, would you care to share with us the responsive Lehman Brothers infamously gruff Lew Glucksman upon being shown your picture, the picture of you in a luge.

TY DANCO: Am I gonna get bleeped out on this one, I don't know.

SAL DAHER: Just the mention of Lew Glucksman is enough to bleep out.

TY DANCO: Yeah, so as it happened, in 1984, Sports Illustrated published a 2-page picture of this anonymous athlete as the opening to their pre-Olympic issue and it so happened to be me. They didn't even say it was me, it was just here's this random athlete, and the partner in charge of corporate bond trading went to Lew Glucksman to brag a bit, and he pulled out the magazine and he said "hey, look at the new kid we just signed up for the new training class training corporates."

Lew Glucksman looked at it, took the cigar out of his mouth and said, "you mean that blankety blank is risking my capital," and my boss thought it was funny but, I was mortified and so I sort of laid low and I didn't bring that up for a while.  I thought it was an advantage, but not to Lew Glucksman.

SAL DAHER: He probably grew on that. So, after nine years on Wall Street, you went to bucolic Burlington, Vermont, gorgeous place, to work for an entrepreneur. What lead you to that decision?

Ty Danco Moves from New York City to Burlington, Vermont

TY DANCO: Sure, I lived in Chappaqua and used to commute on the 6:20 every morning and it was winter and I was leaving at dark and I was coming back at dark and I just realized I needed a healthier lifestyle where I could do things like coach little league.

Ty Danco Discovers that, Thanks to Michael Bloomberg, It Was Possible to Do Investing in Vermont

So, a friend from Morgan Stanley told me about his big customer was looking for a Wall Street type to manage some bond portfolios for him in Vermont, my wife comes from Montreal, Burlington was only 90 minutes from there, so it was a natural and we made the switch then, no regrets.

SAL DAHER: People think that successful people have a lot of logic about their career. These people make lifestyle moves all the time.

TY DANCO: Well, I actually have to give credit to Bloomberg for that because ...

SAL DAHER: Michael Bloomberg or Bloomberg the screen?

TY DANCO: Well, both, but the company, in that one of my clients used to take of 3 months every summer. I started in training, but I got to bond sales, so I did both. One of my clients in sales would work out of Maine for three months every summer having this new found technology called a Bloomberg Traveler, so he could take his office with him. So if he could work in the outskirts, why couldn't I. So, we went to Burlington.

Ty Danco Founds His First Startup - eSecLending

SAL DAHER: That's tremendous. So, eight years after moving to Vermont, you were bitten by the entrepreneurial bug. Please tell the story of eSecLending. Kindly explain to our audience, which is not composed entirely of finance and treasury experts, what the company did and why it mattered.

TY DANCO: Well, the idea was a little bit like the scene from movie, The Producers where the dweeb accountant, Gene Hackman, finds a loophole where he could leverage a good idea into making gobs of money. So on Wall Street people routinely finance bond positions by doing something called reverse re-purchase agreements, repos, reversed repos, which is a fancy way of pledging collateral for more money, which you can then reinvest and leverage up.

There were various tax laws, which made it prohibitive for money managers to do the things, but I realized that I could get to the same place for my company by using securities lending agreements, which were similar to reverse repos and those were used in equities, not bonds, and they did not have the bad tax consequences.

So eSecLending is typically what's done on the equity side to allow hedge funds and market makers to short stocks, that is to sell what they don't own. But, the key realization was that we could use techniques from mortgage-backed securities, specifically CMOs [collateralized mortgage obligations], which were made famous in the movie The Big Short, to do securities lending more efficiently using auction techniques. That insight ended up totally modernizing the way securities lending is done now.

So instead of being a relationship business, the old style, lending and borrowing based on personal relationships, we were able to optimize it using math with the result that the lenders, typically a money manager or a pension fund which were our clients, at least doubled the amount of money that they were able to earn by the practice.

SAL DAHER: Lew Glucksman would say, "f-ing Danco killed the spread."

TY DANCO: Yeah, he would, if not more. He also would walk around, if you had facial hair, on that point you had to shave. Take it off, this was no liberty, this was ...

SAL DAHER: Oh, no, I remember that, I was at Citibank at that time, and I came back from my honeymoon with some foliage on the face, and I got the stare, doesn't go well in the bank.

Ty Danco Recalls Wall Street Misogyny of the Past – Women Found a Haven in Hugely Complex CMO Deals

TY DANCO: I was also told then, very seriously, that I was looking at something and saying, "man that's hard." He goes, "yeah, if it was easy, girls could do it."

SAL DAHER: That was Wall Street in those days, terrible place.

TY DANCO: Interesting, the story about women's ability to get into trading was CMOs, the most complex thing imaginable, very tough math, wasn't seen as macho enough for all these corporate bond types. Women who had only been allowed to be doing money markets, at best, or governments, they couldn't do anything hard like corporates, ah yeah you can do that CMO stuff, and that was their entry into allowing to be ... to risk capital, but that's another story.

SAL DAHER: I understand that eSecLending's first client in Burlington Vermont came in a very surprising way. Please tell us that story.

TY DANCO: Gladly, the first time we tried to do an auction, which was how we did our bond magic. We did a dry run for funds at my previous company, and the results looked spectacular and surprising and I wanted to be able to explain what happened, and although the auction indications were all done over the phone and written down on pencil and paper, I wanted to put them neatly side by side to sort of demonstrate what was there.

So, one of my associates, who was actually a college student moonlighting as a pizza delivery guy, because we weren't paying him, helped mock up a wire frame as if it were an online auction to help tell the story. So, I showed the lending consultant the story and he asked to keep the piece of paper. A week later, I got a call from CalPERS, the country's biggest pension plan, asking me if I would sell them my software for this auction analytics that he thought we'd made. I said, "well our software's not for sale, we act as an agent."

After talking about what we thought we were going to do, he invited me to come out and visit in California and said he was very serious about hiring us. So, I panicked and said, "well, I'm about to go on vacation in two weeks, do you mind if I come out in five or six." So, he agreed and I said, to myself like, holy crap, how can I create an impressive company with no money in five weeks.

So, a friend of mine who was a fellow money manager was friendly with Harry Markowitz, the Nobel Prize winner for Economics who invented Modern Portfolio Theory, and Harry is my hero. Our techniques had interesting game theory aspects to it, so I got Harry's phone number, and he agreed to join an advisory board. So, it's now me, the pizza delivery guy and the Nobel Prize winner, so I was like so who is the next most impressive guy I could conceivably dream up for the advisory board to give us some credibility. So the next person I thought of was the Chairman of the Federal Reserve Bank, so I cold-called the Fed, asked them if current governors could take a board position on a for-profit company. They said no, so I asked could former governors take such a position and they said "why yes," so I said, "just by any chance is there any recently retired Fed people who have expertise in securities lending," and the person on the other side of the phone said, "that's funny, Clyde Farnsworth from the Charlotte Fed just retired, and he's an expert in that, would you like his number."

So, I called up Clyde, who not only joined, but he recruited the vice-chairman of the European Central Banks, and a friend of mine got the former president of DTC, and so 5 weeks after the first call, I went to CalPERS, explained that we hadn't released our software yet, but just look at this killer Advisory Board that we had.

SAL DAHER: Yeah, DTC is basically the clearinghouse for stocks and bonds in the US.

TY DANCO: We're showing our age because now it's called DTCC, but it's all going to be replaced by Blockchain so ...

SAL DAHER: For those who don't know, Ty Danco is a big crypto-currency aficionado and very knowledgeable about it.

TY DANCO: So anyway, that led to us having CalPERS as a client. They helped us build out the first product, and on our very first auction, they doubled their revenue, and we were off to the races.

SAL DAHER: So, moral of the story is the only thing worse than having no clients, is actually getting a client and you don't know what to do with him.

TY DANCO: Careful what you wish for.

SAL DAHER: Careful what you wish for, okay. Circa 2008, you'd sold eSecLending, was still managing it, and what happened?

Ty Danco’s Company is Hit by the Crash of 2008

TY DANCO: Yeah, the crash. We had grown substantially. We expanded from one client, Calpers just for lending to a variety of services, and maybe like 20 mega clients, and we were managing money. So in 2008, we had a run rate of about 100 million dollars in revenue and 50 million in EBITDA [a measure of a firm’s cash flow calculated as earnings before interest, taxes, depreciation and amortization] and we were managing at that point 60 billion of assets, of which 17 billion were mortgaged-backed securities.

So, when the 2008 crash happened our MBS [mortgage-backed securities] holdings just got slaughtered and, like many of our peers, we had billions of losses in customer funds, so Lehman went down, Bear Stearns went down and many other household names like Merrill Lynch and some of the big banks were on the brink, and we were the largest independent securities lending agent that wasn't owned by a massive banker brokerage house. All of our competitors got bail out packages, and we didn't, and adding insult to injury the market demanded reinsurance for us since the government wasn't there, and like who are we going to get, you know AIG wasn't credible anymore.  So, what little we could get was not only inadequate, but it was costing us 10 million dollars a year and wasn't competitive.

So, I stuck around till 2009 trying to patch things up, but eventually, we got recapitalized and I left.

SAL DAHER: Just, it's amazing.

TY DANCO: As it ends up, the company bought us, but I'd sold half of my holdings, not all of my holdings, and so for the first couple of years I had sellers regret, and afterwards I was so happy that I'd sold half. I did that from Harry Markowitz, because I asked Harry, I said "Harry, I gotta know, you're the king of asset allocation, what's your personal asset mix," and he goes "50/50." I go, "50% stocks, 50% bonds," he goes, "yes." Well I said "50% domestic, 50% international," he said, "yes again." I go, "that's weird, is that tactical or strategic or," and he goes, "it's strategic, the one question I always get is everybody wants to know what the great Markowitz has for his asset allocation, and the great Markowitz has too much ego to ever be more than 50% wrong." So, I sold 50% of my stocks.

SAL DAHER: Yes, you can never pick the top, but if you sell at different times you can probably avoid the bottom.

TY DANCO: So true.

Sal Daher Asks for you to Review the Podcast on iTunes – It Really Helps!

SAL DAHER: Coming up next, I will ask Ty Danco, fintech founder, maverick Angel and accelerator leader about his startup that was not a success. But, first I wish to thank ABodda for this review. If you can find to listen to these podcasts, you will learn a lot, not only about angel investing, but also about related matters.

ABodda, your comment is spot on. You see, the Angel Invest Boston podcast is designed to inform while entertaining. It is professionally produced so you get great sound. It doesn't waste your time for schlocky mattresses or alarm systems or razor blades. All we ask in return is your help in getting the word out about the podcast. Review us on iTunes, or sign up to hear about in-person events coming up soon. Thanks.

So, Ty, eSecLending was a huge success, but your second start-up BuysideFX, did not do as well, what happened.

Why Ty Danco’s Second Startup Failed

TY DANCO: Well, it was a noble effort, we almost made it, but we crated in the end. eSecLending showed that the large custodian banks like State Street and Bank of New York Mellon made these massive profits by bundling high margin businesses like securities lending as part of their custody package and then getting big profits on those captive uncompetitive linked in businesses.

They subsidized the big fat earnings by giving away custody at below costs. So, we thought why can't we unbundle this, so with securities lending we're able to cut the fees in half, but yet double or triple the revenue for clients. So, that's a great business, and foreign exchange was next. It was massively profitable, it was to a large part captive business owned by these custody banking franchises, so we went to attack that. We dreamed up the ultimate trading software that money managers could install to change the power dynamics, and we snagged a massive order that would have required hiring maybe 30 people to install over 2 years and 17 different locations for one of these giants, but it didn't work.

That one order was worth about 17 million dollars a year from the clients once we got it installed, and so we put all of our eggs in that one basket, but then we dropped the basket. So, and what we had built was so complex, it was hard to sell, it had a lot of friction switching costs.

So, in retrospect we should have been less ambitious and tried to land and expand rather than trying to build the ultimate machine and getting stuck.

SAL DAHER: Sell some kind of minimal viable product.

TY DANCO: There was nothing minimal about what we were building.

SAL DAHER: Maximal non-viable product.

TY DANCO: Well MVP is a bit of a misnomer in fintech because the aim is so high.

SAL DAHER: Yeah, there are so many hurdles to meet. So Ty, give us a tour of your angel investing. I'm interested to know about groups and structures, not particular investments, but more big picture perspective.

TY DANCO: Yeah, first off, I'm surprised that you call my style maverick because, I think it is the most logical and obvious way to do it.

Ty Danco’s Angel Investments

SAL DAHER: What I find about maverick is you're saying that you don't want to belong to angel groups, because the Angel Capital Association has shown a lot of benefit in the due diligence process and so forth crowd sourcing the knowledge and so on via the angel groups.

TY DANCO: I'll be happy to get into it. So, first the bulk of my investing is just in Vanguard Index Funds and I'm just way too conservative to over allocate to an illiquid, highly speculative asset like venture.

SAL DAHER: Extremely wise, yes.

TY DANCO: But, on that amount that I do invest, it's really in three buckets. It's about 40%, and the first investments that I did are in pooled venture funds, so these are with managers I like and know who, I believe, have an edge. The two most recent funds I've committed to are both Boston based. One is The Engine, which formally announced this week, started by MIT, to take advantage of the incredibly sophisticated hard tech coming out of research going on at Cambridge.

The second one is the BioInnovation fund, which invests in life science companies who use the shared wet lab spaces they run in Boston. You may have heard of Lab Central or there's the new Pagliuca Life Science Initiative at Harvard, Research Triangle in North Carolina and elsewhere.

SAL DAHER: Some of my portfolio, at least one is in Lab Central, and some of the other ones are hoping to get some money from The Engine.

TY DANCO: Well, as an Angel, there's no way I'm smart enough to evaluate what's going on in those benches, but the BioInnovation fund, who run that, I believe are, so that's their edge. So both of those funds do really hard science at levels I couldn't begin to understand with the added benefit of being important and meaningful contributions, not just some consumer phone app or advertising scheme.

So, also in that bucket are some funds from accelerators such as Techstars and Angelpad and 500 Startups, which gives me diversification over a lot of companies, which is key and each one has their own differentiated style.

So, the second bucket are the official Angel investments such as we both make, and the ones discussed on your podcast, and that's about half of my holdings by costs.

The third bucket is in Angel List syndicates, so when I started my second company, BuysideFX, I no longer had the time or focus to be investing as an Angel. I already learned the lesson of trying to keep too many balls in the air earlier, so my concentration was all on the building the company. So, I outsourced this to Angel List syndicates, where you will back an angel and ride on their coattails. This is a great way, by the way, for any would be a VC or micro-VC to start a track record and manage money for others.

So, I encourage friends like Wayne Chang of Crashlytics, or Jennifer Lunn of Adelphic Mobile to start syndicates, and those investments are much smaller, but I've got 65 of them but that could be just a couple thousand dollars each, so most are not meaningful in size, but they also help keep me up to date on what was going on while I was missing in action.

Ty Danco Thinks Crypto-currencies Are Worthy Alternative Investments

I should also say that I consider crypto-currency as a worthy alternative investment, and for the past year I've almost exclusively focused on big coin in Ethereum. So, like you were saying before, it's good to average in, so I programmatically buy a little bit every week, and it's hard to see why I would want to go back to traditional angel investing with idiosyncratic risks when I can have a liquid uncorrelated asset like bitcoin and ether, which I believe has massive potential either as stores of value as bitcoin or as a computing platform for Ethereum.

I think Ethereum, by the way, will totally transform fintech through smart contracts, and I prefer to hedge my bets on a platform, the overall currency and the index so to speak, rather than any one company.

SAL DAHER: One comment about start-ups, I think that contrary to Harry Markowitz and the Modern Portfolio Theory, the idiosyncratic risks in start-ups can also be on the upside. As a matter of fact, that's what I look for when investing, but I think it changes the equation a little bit.

If you're Exxon, you're not gonna discover a new pipeline. If you're one of your startups, you can do a pivot and all of a sudden you discovered something remarkable marketing didn't know about. Those things happen in startups, they don't happen at Exxon.

TY DANCO: However, I can also say that no matter how skilled you are, whether you're the best VC in the world, so many of your companies will crash and burn, I love all of my angel investments, but I'm always shocked by which ones work out, and it could be for strange reasons.

SAL DAHER: The idiosyncratic risk is really hard to spot, this is ... argues for diversification. Since we both agree ...

TY DANCO: Well, it's also fun.

SAL DAHER: It is, the thing is that you're invested in 100 stocks, I'm invested in about 47, reduced to 41, six have already gone under.

TY DANCO: Only six, that's pretty good.

SAL DAHER: Only six, yeah, but it's been painful. But if you're invested in one hundred, it's hard for you to care. When you have a harem, when you have one hundred children, you care as much with your children as if you have three children.

TY DANCO: Okay, well I'll fight back on that, so maybe I'll be a maverick. I've invested in ninety some companies directly, and I've got 65 of the syndicates and one of my funds, 500 Startups has 500 companies in itself, so that's more of an index bet.

Of all the best companies, the ones that did best are not the ones which seemed good. The ones that did best are the ones that got acquired for stock by ... so I've had companies sold to Amazon. Amazon paid cash so I made a 3X, I sold something to Air BNB for stock, it's way, way up there, or Crashlytics got bought by Twitter. Crashlytics was a wonderful company, but that went 3X, go to 20+X by the time Twitter takes off.

So, there's no way to call that, that's only a law of numbers.

SAL DAHER: So, once again you're saying you need to have a very large number of companies in your portfolio to have the chance of hitting that idiosyncratic upside risk.

TY DANCO: Furthermore, you can do the math and say that the more companies that you do invest in, the better your odds of catching lightning in a bottle.

Ty Danco Believes One Can Eliminate Many Losers - But at a Cost

SAL DAHER: Exactly, do you believe that you can eliminate the obvious losers, like the team that's gonna fight like crazy, you know they're all smart and capable but they can't get along.

TY DANCO: That's right, I don't think you can predict the winner, but you can sure sniff out a loser. Having said that, I've done some major poor sniffing. I passed on PillPack for obvious reasons which were not justified.

 Ty Danco’s Philosophy of Angel Investing

SAL DAHER: So, what is your philosophy of angel investing, and how does it depart from conventional wisdom?

TY DANCO: Sure, well as we said, I believe in the spray and pray model with strength in numbers. Just increases your chance of getting lucky. So, I've got, as I said, 90 some direct investments, and while I'd like to say I've gotten better at it, in fact my two best returns happened in my first 20 investments. So, go figure, maybe I'm getting dumber, I just think it's far more luck than we want to give credit for, and it's always as we know, better to be lucky than smart.  So ...

SAL DAHER: There's also vintage in these markets as you know.

TY DANCO: Absolutely, and while diversification is a conventional wisdom, I just want to take it to the logical extreme. So maybe that's the hidden engineer in me wanting to optimize. The downside, however, it's really hard organizationally to keep track.

I think, didn't you have Ham and Christopher on talking about their software. I really like the idea, I found some hard UX on that because there's so many things to actually use it correctly, but I am very confident that that will be refined, and as soon as you can start crowd sourcing information where I don't have to put in Pixability, which is got 80 other angels, then it'll be great.

SAL DAHER: Rah, rah, Pixability. We're all counting on Bettina Hein, who's been interviewed on this podcast.

TY DANCO: Yeah, so spray and pray, invest early and often, but the big one is don't limit yourself to investing in what you know. In fact, I'd argue that I'm a bad angel investor in fintech because I know too much of the problems and difficulties, and have been corrupted in the establishment view.

For instance, I missed out on investing in Bitcoin when it was under 5 dollars. I'd heard about it, but I was sure the Fed or SEC would shut it down. So, being familiar with a topic can close your mind. So, rather than do the normal due diligence of examining what can go wrong, though I'll give you an exception for team dynamics. Think instead of what would happen if this goes right as your first filter.

If it's not massive, it can't be huge, don't go there unless you're just into it as social investing or charity.

Why Mass Medical Angels Is the Only Angel Group Ty Danco Attends

SAL DAHER: It makes a lot of sense. Why did you choose Mass Medical Angels to be the only angel group that you attend?

TY DANCO: I first met them back in 2010, my wife had a medical device company and she was a typical college professor, inventor, doctor who shouldn't be running a company. I went there to try to find a CEO to run her company. So, I was familiar with them, I made some investments, and lo and behold they worked, but, then I dropped out.

I should say by the way that I am a big general fan of angel groups and they are essential to learning the craft and I don't take anything away from that. I'll also give Walnut a shout out where you belong, that it's my favorite of the ones in the Boston area as with a special shout out to Michael Mark, who ...

SAL DAHER: Yeah, he's my mentor in angel investing, and he is such a guru.

TY DANCO: He was a terrific instructor to me about the niceties of angel Investing, but also he was a terrific help to my company. He invested in the 2nd company and helped introduce to the CTO and that kind of stuff.

But, generally I've been able to get deal flow and hence from my connections and co-investors and many of these angel groups going along. So, I've got the flow, and if they go do your due diligence, I've got confidence in that and I can use that as a hint.

SAL DAHER: Right

TY DANCO: But I just can't take the slowness of angel groups, and I think many of the best companies avoid angel groups for that reason. So, those same angels maybe investing in companies, but they don't get a chance to have them go to the industry because they're slow.

SAL DAHER: They do, they do because they are out of the cycle and that happens.

TY DANCO: Mass Medical Angels though is different. After I had cancer for a couple years ago, I was determined not to invest any more in trivial companies, the ones with the mission as well. While I may not be able to see deal flow and analyze deals without being in standard software tech angel group, I have no such input on life science deals without them. It's not my field, but not only are they looking at those kinds of meaningful problems, they have an incredible membership, you know with a variety of expertise from surgeons to pharma R&D people, to reimbursement specialists. They do due diligence incredibly thoroughly, but unlike software groups, where that good deal goes away, in life science these take a long time to happen.

SAL DAHER: Always another round.

TY DANCO: So, they can translate the terms into something I can understand, and I'm just happy to ride on their coat tails. So, I still go to them because they give me what no one else can.

SAL DAHER: Why would you not invest in a cold email?

Why Ty Danco Does Not Invest Based on Cold Calls

TY DANCO: That's really easy and I think most VCs who get thousands of letters coming in would agree with me. The most important ability for any company, any CEO, is the ability to sell. So, they need to be able to sell not just to customers and potential employees, but also to investors. I've got a website that shows most of my investments at tydanco.com, I'm easy to track down, and I'm old enough to have a fairly big network. If anyone is trying to send me a cold email, being too lazy to do some homework on me and get a warm intro, I've got zero confidence that they have the basic skills to sell.

I'll admit to some exceptions to my no cold email policy, but in both cases, the letters very quickly showing familiarity with my investments, reference respective co-investors and showed me why I specifically had value, it wasn't just a Dear John anonymous investment letter.

SAL DAHER: So, get your posterior in gear and do some homework on connecting.

TY DANCO: Rifles not shotguns.

SAL DAHER: Exactly, I had a conversation on LinkedIn exactly like that just yesterday. You were director at Tech Stars, one of Boston's and the countries most respected accelerators. What's the secret of getting in, and it kind of ties in here.

Ty Danco Reveals the Secret of Getting into Techstars

TY DANCO: Oh, yeah, so it's that referral that warm intro, so getting alumni and mentors to recommend you is key. Normally only one or two out of the 12 or 13 we take come in cold over the transom, so to speak. But, once we have that intro, the biggest thing is to make us just fall in love with you. The short videos we ask for are a perfect way to get us excited about the whole team. We see hundreds, sometimes over a thousand applications, so make yours stand out with personality.

That, by the way, is how Lovepop got in, they sent a video of, we asked the question, show us something you're proud of. They showed a video of themselves making a raft that was going, they're both naval architects, it was a time lapse video from the top, they showed over three days making this gigantic raft boat in three pieces so they could put it into a pickup truck and then they explained the story how they scouted when the big ships were coming in. They looked at when the Coast Guard was doing patrols, they snuck their boat in there, when the Coast Guard came up, they pleaded the fourth, not the fifth, it was the Fourth of July. Then they showed them the detailed engineering plans and the Coast Guard let them in.

That is what an entrepreneur does all day long, be creative, be imaginative, do your homework, maybe skim a little bit on the side of the naughty and they made it happen. That's how they got in.

SAL DAHER: That is tremendous, it's not cronyism, it is networking. Sometimes people don't understand the difference. You're not going to refer somebody that you think is a dud. It's a filtering mechanism. So your network acts as a filter and provides information, because you, somebody refers duds to you, you know that guy is or that woman is, half the time they're referring duds to me. You already know how to deal with that, so there is information there.

TY DANCO: In that case, Julia Austin, who was a part-time professor at Harvard at that point said, "I've got these students, you've gotta take a look at them." I said, "Julia, the applications are closed." She goes, "take a look at them," and Julia is one of our most respected mentors and she made all the difference.

Ty Danco Likes VCs Involved in Every Deal, Why?

SAL DAHER: Awesome, why do you like VCs involved in every deal and is that realistic?

TY DANCO: Well, there's only so far a company can go on Angel money, and most companies will need to raise several rounds of financing if they're going to go big. Generally speaking, it's pretty rare that angels even follow on once, much less do several rounds.

SAL DAHER: I plead guilty to that.

TY DANCO: I'm only maybe 50% at best. So, a company needs to have the ability to track institutional money to have a real chance. Having said that, not many VCs add real value, but then again the same can be said for accelerators or angels or business schools and most things in life. But they've got to be able to sell institutionally.

SAL DAHER: So really, eventually they need to be able to get the VCs, but not necessarily at the same time you're funding them, like your first round, a VC is not going to do a seed round.

TY DANCO: Oftentimes not, and they don't need to be the first time around, but VCs are not the enemy, they're our friends.

SAL DAHER: Ça va sans dire. How did Manu Kumar of K9 Ventures influence your investing?

TY DANCO: Sure, well Manu is a one man shop in Palo Alto who's got ... had tremendous success, not only being the first to check in, but actually incubating a company. So many of you know sShares or CardMunch and two of the companies where he had the original idea, then eventually found the right person to run it. So, he helps these entrepreneurs tremendously in raising the initial capital, like you said, just team members, he makes intros, but he also understands that essentially the CEO is the one who has to make the decisions.

So, he's always helpful, but he's never dominant. He's taught me the need to always be cultivating relationships with smart hungry people.

SAL DAHER: I cannot disagree with any of that. So, we've touched on this a little bit. Please address the importance of cultivating a broad network of angels, entrepreneurs and VCs. Why shouldn't you be talking just to entrepreneurs?

TY DANCO: Well, whether you are talking from the start-ups point of view or the investors point of view, all of venture comes down to eventually three things. There's money, there's knowledge and there's network. Having a network can get you to both money and knowledge, but it's not the other way around.

“Virtually all of my deals, 99% of the deals come not from me directly stumbling over something, but from a lead from my network.”

Virtually all of my deals, 99% of the deals come not from me directly stumbling over something, but from a lead from my network. So, Michael Mark, for instance, introduced me not just to people that I used in my company, but some of my best deals.

That was invaluable.

Boston Angel Pantheon: Michael Mark, Joe Caruso and Jean Hammond

SAL DAHER: Like Joe Caruso?

TY DANCO: Joe Caruso was named the New England Venture Capital Association Angel of the Year because he is everywhere. He is the universal donor of time and attention and when he sees somebody, he makes the introductions.

SAL DAHER: Or Jean Hammond.

TY DANCO: All of them, she was also nominated several times for Angel of the Year. She gets around and she gives first.

One story about Joe, when I first met him was some big event and he asked me my name and he scrunched up his eyes and he said "I know you, you were in the Pixability deal," and he actually read and remembered the cap table, which had dozens of angels. He pulled his chair beside mine and he created a friendship that has lead us to sharing many deals with each other.

SAL DAHER: Ty Danco is a distinctive name. If you were Ed Williams ...

TY DANCO: I wouldn't forget Caruso either.

SAL DAHER: No, no, Caruso no, Caruso no. You will not forget the name, but once you meet the guy you really won't forget him.

TY DANCO: Well, I get confused with Joe all the time, just two short gray-haired guys with glasses that wear button down shirts.

What Are ICOs and Why should VCs be Scared of Them?

SAL DAHER: But you don't have a mustache. People must have poor eyesight. So what are ICOs and why should VCs be scared witless of them?

TY DANCO: ICO stands for initial coin offering, which is describing a new funding technique that avoids the normal SEC blessed traditional financing and goes straight to a crowd sourced global funding arrangement selling tokens, that is crypto currency, to finance the company instead of the usual ...

SAL DAHER: So, tokens entitle you to use of the company's products, right?

TY DANCO: Well, it's quite complicated and the SEC has come down ...

SAL DAHER: Well, they can make it look like it's the company's product, but you want it to be sort of like ownership in the company so it's like a security. So it's like skating between getting product and getting ownership.

TY DANCO: I will say right now that 90% of these things are scams and ill thought out, and there is a distinction to be made between security tokens and between utility tokens, and there are accredited investor things that depend on where you fall along that line.

But ICOs over the past quarter have dwarfed the amount of funding for seed tech companies. Several companies have raised 200 millions at a crack, first time out through this vehicle. So the genie's out of the bottle, and what I like about ICOs is they offer investors general liquidity, which you can't find in current private investments.

So, if a company can access multiple stages of capital at once, relatively easy at oftentimes high valuations, why would they ever need a VC? So instead VCs have to offer more than money, which is where most of them fall short. So, if you think about the two biggest threats in venture capitalists, it's been accelerators, like Y Combinator and Angel List. Guess what, Angel List now has a joint venture called Kline List to distribute ICOs, and yesterday Sam Altman of Y Combinator said that they were investigating using the blockchain to help crowd fund start-ups in lieu of having a fund in LPs.

SAL DAHER: Let's do some lightning responses. I'll mention some of your favorite startups and you say why you like them.

TY DANCO: Let's do it.

Some of Ty Danco’s Favorite Startups

SAL DAHER: Net Capital.

TY DANCO: Okay, innovative use of new laws to modernize fund raising without needing an ICO, but more importantly, they allow for legal secondary liquidity for venture holdings without requiring expensive company permissions. Liquidity, what we all want.

SAL DAHER: Liquidity, okay. TellusLabs.

TY DANCO: Super cool tech, I mean satellite imagery for everything from carbon emissions to crop yields. Great applications in commodity markets.

SAL DAHER: Rate Gravity.

TY DANCO: A team that just executes, nothing fancy, just solid blocking and tackling and taking out the big mortgage broker profits that increase the cost of buying a home. It's a noble mission, taking the money out of the big banks and back to the consumer.

SAL DAHER: Awesome, AirFox.

TY DANCO: You've got a CEO who's a real survivor. Classic immigrant story going from selling illegal cigarettes on the street to support a family, to getting an engineering degree at Berkeley becoming a Googler.

So, AirFox helps 50% of the world's poor use their cell phone to gain access to more affordable phone data and being able to trade those credits, to effectively give them a currency that substitutes for banking.

SAL DAHER: Lovepop.

TY DANCO: Yeah, the most talented, imaginative and fun team I've met. They combine art, style and super technical business chops to revolutionize a non-tech field, greeting cards, and put a smile on the face of everyone who gets them.

My mom by the way has memory problems, and I have left a few Lovepop cards around and it brings her a big smile a dozen times a day.

Ty Danco’s Categorization of Mentoring Styles

SAL DAHER: God bless her. Now, you've done a lot of mentoring Ty. Compare and contrast the different styles you've encountered.

TY DANCO: Sure, they're many styles. They're the connectors who make lots of intros, they're the professor types who lecture you, and those are the worst. But, they're also the true teachers who work through problems with you, digging down in the nitty gritty, they're invaluable. There's the Socratic types who merely ...

SAL DAHER: Kathryn Roy, asks great questions.

TY DANCO: Right, and she gets down to the nitty gritty and helps teams.

SAL DAHER: She's not afraid to roll up her sleeves.

TY DANCO: Then there are the pesky provocateurs who sort of challenge every assumption. Any style can work, but the ones who are golden are the ones who don't just assume they know more than the company, but they're willing to volunteer their networks and their time and sometimes even some money.

SAL DAHER: Yeah, that's where I try to be. So, in your mind, what sets accelerators apart?

What Sets Accelerators Apart in Ty Danco’s Estimation

TY DANCO: It's one of the best business innovations of all time. Done right, they're a terrific way to get access to networks, raise money and advance your business at a much faster rate, hence the word acceleration. I've written pretty extensively about this one on tydanco.com, but my general thoughts are don't bother going to one that's not highly rated.

SAL DAHER: Umm-hmm [affirmative] same thing for business schools.

TY DANCO: Yes, I feel pretty unbiased, both my kids worked for Y Combinator companies, I'm obviously involved with Techstars. My wife's company went online with her Mass challenge, I've mentored six of them and I've invested in the graduates of dozens of them.

But, it's not so much the accelerator, it's having the company have the mindset of how to suck up all the value and all the connections they can out of it, but not forgetting they've got a business to run. So, it's not a panacea, but it can be a launching pad.

SAL DAHER: Tremendous, in wrapping up, please tell us about your new company.

Ty Danco Takes a Page from Manu Kumar in Starting His Next Venture

TY DANCO: Sure, well taking a page from the Manu Kumar example, the new company, which is called Future Engine isn't being run by me, but it did start with my idea. Two brothers, one a data scientist and the other a PM from Facebook and Instagram respectively are building what we hope will be the definitive private ...

SAL DAHER: Product Manager?

TY DANCO: Product Manager, yes, I'm sorry. Will be the definitive private company data tool. So just as Mint put all of your consumers financial interests in one place, Future Engine will relatively painlessly, we hope, connect all of the companies’ metrics from APIs, they'll encrypt them for confidentiality and store them on a blockchain. Then connect those companies to quantitatively oriented influential investors that allow us in the future more programmatic access to capital.

So, a worthy company in Terre Haute, Indiana or Bangalore cannot only better manage their business with the tools, but then they can be connected to the right investor at the right stage. So, it's bringing democracy and meritocracy to private investing. Truth in numbers.

SAL DAHER: That is very, very intriguing. I'm gonna take a closer look at that. Ty Danco, I'm most grateful to you for participating in helping make this really a great podcast.

TY DANCO: It obviously is much more to the credit to the host than the guests.

SAL DAHER: Not at all, the guests ... I'm like maybe the canvas, you're the paint. Whoever enthuses about canvas.

TY DANCO: Well, you're the setter putting that ball just above the net in the right place.

SAL DAHER: I thank our listeners for tuning in and invite them to leave a review on iTunes. If you want to experience this content in a different way, you can read a transcript of this interview. It's been annotated with headings, so please go to the relevant episode page at Angelinvestboston.com.

This is Angel Invest Boston conversation with Boston’s most interesting angels and founders.  I am Sal Daher.

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.