Tuesday, August 23, 2022

Lessons From 500 Angel Investments

From shutting down his first business to investing $20-$25 million a year - this is Peter Livingston.

Peter Livingston

Founder & General Partner at Unpopular Ventures

Hey hey!

Here’s a contrarian take from a VC with over 500 investments…

Here it is - If there is an established name for what a business does and a similar bucket exists for other VC investors to lump you into, it is already too late.

I wouldn’t blame you even if you initially rejected it. And it's not an absolute statement, but I think it's a healthy lens to look through as you invest.

Let’s get after it! 

 

In Today's Expert Session: 

  • Peter Livingston, Founder & GP at Unpopular Ventures: From shutting down his first business to investing $20-$25 million a year - this is Peter Livingston.
  • Exploiting VC inefficiencies: Learn how the structure of current VC funding excludes incredible opportunities and how to leverage them. 
  • 5 Startup Investment Principles: Five key investment principles that produced top decile investment returns of over 8x. 
  • Investing 90% of your assets into startups: Understand why most angel investors buck back at the general wisdom from the typical financial advisor. Peter invests 90% of his holdings in startups. In this section, we explain why.

Guest: Peter Livingston, Founder/GP at Unpopular Ventures

Video Length: 50 minutes

2007 to 2010 - First Engineer at a $5 BIllion Company: Peter started as an operator. The first venture he was involved with, iRhythm Technologies, Inc., sells devices for diagnosing cardiac arrhythmias. He was the first non-founder in the door, and the company IPO’d in 2016 with a current valuation of around $5 Billion. 

iRhythm IPO

This set him up for taking big risks. He started his own company Lifesquare and crashed spectacularly. The lessons learned were invaluable. He transitioned into venture capital.

2011 to 2012 - Startups May Fail, But Founders Don't: 

Lifesquare CBS 

In 2011, Peter founded Lifesquare - a digital health company that helped medical personnel get immediate access to a patient's medical records. 

The idea was backed by Kleiner Perkins Caufield & Byers, one of the most successful venture capital firms in Silicon Valley. The company leveraged mobile and cloud technologies to make health information more portable and interconnected. 

Despite great enthusiasm for what the team was building, they couldn’t find a sustainable business model and ultimately shut the business down in 2012.

2012 to 2020 - Building An Angel Portfol Of Over 500 Startups: After shutting down Lifesquare, peter became a professional angel investor. 

His early win from iRhythm and catching bitcoin early (2015!) allowed him to double down on his new passion - angel investing.

For the next ten years, Peter invested in over 500 startups and produced investment returns well within the top decile of VC industry performance. His angel fund (2012 to 2017) has a Total value to paid in (TVPI) ratio of over 8x. This means the fund's current value is 8 times his original investment. 

He made some serious returns and had a new problem. What to do next? It was time to take the VC reins for himself.

2019 to Today - Building Unpopular Ventures: 

Unpopular Ventures

In 2019 he decided to take all of these lessons from being an operator to his venture capital experience and started his syndicate, Unpopular Ventures. 

It started with 20 followers and has over 3,000 members with over 240 investments since its inception. They have invested over $48M with an average check size of ~$250k. 

Operator Toolkit

How To Hunt For Outliers:

Put simply. Unpopular Ventures is a syndicate. Instead of investing in a fund that invests in a series of companies on your behalf, Peter and his team provide opportunities on a deal-by-deal basis. It's standard stuff in the investment world.

What is not standard is his syndicate's approach on what (and how many) start-ups to pick for deal flow. A casual observer might label his approach as looking for diamonds in the rough. 

On the surface, this explanation seems correct. Once you drill down, however, you will see it's more akin to having the vision to look where others are afraid to go.

Let’s frame the game and then get to drillin’.

The Problem: Inefficiency In The Venture Capital System

Most GPs are given the same advice when they are starting. Namely, focus on one area or vertical.

Why?

First, it emotionally decreases the risks for LPs (Limited Partners - those that invest in the fund). Think about it for a moment, and you will understand why it appears this way. Put yourselves in the shoes of an LP. You have the capital to invest, and chances are you have preconceived notions of the area you want to invest in.

Maybe you read an article at the airport that convinced you of the next big thing or you just did a case study on the last unicorn to come out of silicon valley. You are going to look for a VC fund that is in alignment with your current views.

The second way niching down makes a fund more attractive to investment is because of implied expertise. It is assumed you must have a high level of knowledge in an area because you “specialize” in it. Although this may be true in some respect, familiarity does not necessarily increase your ability to pick winners.

This is a systems approach. It tries to decrease risk by identifying trends in the ecosphere and then riding them like a porcupine cowboy. It is a metrics-driven data approach.

And most of the time it fails.

Why?

Because all successful start-ups are outliers, they address a problem right before the rest of the world knows it is a problem. Like Henry Ford said: “If I had asked people what they wanted, they would have said faster horses.” When there is a way to describe a problem and an ecosystem springs up around it, the best time to invest has passed.

The biggest and baddest returns occur when you invest in visionary companies that don’t fit in any box. Think Bitcoin before crypto and Facebook before social. They solved problems before anybody had a name for what they did. Find companies that do the same.

Easy to say but hard to do.

Especially if you are following the same path as everyone else to make people feel safer, what is the solution then? It’s pretty obvious, but you must have the stones to do it.

 

The Solution: Be Willing To Be Unpopular

I will say it again. Every successful start-up is an outlier. This means that the best opportunities are found where no one else is willing to go. Peter believes this so strongly that he signals it in the very name he picked for his syndicate.

You have to be able to swim upstream despite what others are saying about you. It has worked for Unpopular Ventures to the tune of attracting aggregate investments of $20-$25 million dollars a year. Here are the unpopular (but successful) principles Peter lives by: 

 

5 Investment Principles To Live By: 

1) Successful start-ups are built from finding the right person, not systems.

It is a trope that genius ideas are everywhere. This is undoubtedly true. What is not everywhere are gifted founders who also have a vision. They must have a personal stake in and believe in the company. It must be personal. Like someone calling out your mama personal.

Before you look at product-market fit or the core problem that is being solved, find a true believer. Why? Because a really smart person who is executing someone else’s idea is less likely to put everything on the line when the storm comes.

And the storm always comes. Storms don’t bother crusaders. They fight, rain or shine.

2) There is no “diligence framework.”

Diligence is extremely case specific. How you do it even changes for the same start-up over time. For example, in the beginning stages, where there is no MVP or traction, the verification process is key. References become extremely important. Even with platinum-level references, past experience is better than no experience. 

I don’t care that you wrote a paper at Stanford and turned it into a book. Have you run a start-up dealing with live bullets? It is the difference between range time and a firefight. It has to be a very unusual circumstance to get backing on your first rodeo. That said, there are no hard and fast rules excluding first-timers.

Simple timing can change the equation as well. If the exact same start-up has traction with previous funding then Peter is more likely to rely upon the diligence of previous players in the game and place less emphasis on references or similar soft data.

There is no one approach, especially since unpopular ventures try to find start-ups that are, well, unpopular.   

3) Start-up arbitrage

While most VCs and syndicates are combing through known verticals and market segments, Unpopular Ventures looks outside the established VC system to exploit market inefficiencies.

The very factors that disqualify start-ups for funding make them winners in Peter’s eyes. Have an innovative solution that is amazing but hard to describe? You get branded as
Fringe or are brushed off as too early for the market.

The need to allay LP fear creates downward pressure to pass on such enterprises. Being willing to go outside the norm opens up innovative investment solutions and removes competition. If you can walk your way, you can find massive opportunities simply because no one has figured out what category to put them in.

When you realize this, a whole new market of funding possibilities open up to you. Find these start-ups and beg them to take your money.  

4) Craft a story and sell a winner

There is an added level of complexity with this approach. There have been times in the VC world where you could get investors using a pitch napkin, two post-its, and a joke if it was in the right vertical.

Those times are gone and although they may return for traditional offerings, that will never be the case for off-the-beaten-path start-ups. You solve this problem by getting your investors caught up in the vision.

You do that by learning to tell a compelling story. It may sound woo, but it's not. Storytelling is a hard skill that can be developed over time. People buy emotionally and justify their decisions later logically. Always.

Persuading them to invest is no different. If you find a company you believe in, channel that belief into an emotional journey for all involved.

Also, don’t forget to pour that belief into your founders with your capital. Stories can pull people in and push people along. Telltales (just not tall ones). Relentlessly.

5) Find a person's problem not an entity's problem

By definition, systems have inertia and friction. This makes it difficult to sell to them. As organizations begin to scale, so does the decision-making bureaucracy. This creates a ton of inefficiencies that need to be solved.

It also creates incredibly long sales cycles.

Speed is the lifeblood of a start-up because money is attracted to velocity.  It is difficult to gain traction if your customer is a large entity. Peter learned this lesson the hard way as the founder of his early company Lifesquare. 

Lifesquare was a great idea. It was a digital version of people's medical alert bracelet on their wrists. The start-up solved a big-time problem. Namely, those medical institutions do not efficiently share information across tech platforms or verticals. A simple QR code solved this problem by making basic medical information available about those who used it to medical providers. In a crisis, it could save lives by altering medical treatment to avoid individual risk factors such as allergies.

Everyone agreed this was a problem, including hospitals and doctors. The problem was getting organizations to adopt it.  Even when they decided 100 percent, the lag between “yes” and adoption killed the momentum.

If you want to build a successful start-up, find a “person,” not an “entity” problem. There are plenty of systemic issues to solve, but no one person feels the pain enough to solve it. 

6) Don’t get blinded by Silicon Valley’s shine

We are in the middle of the globalization of start-ups. The gold standard has always been Silicon Valley; for many investors, it still is. While Peter does not geographically discriminate if California is your home base, he is willing to cast his search far afield to developing markets.

The reason?

The U.S. is a mature market where start-ups face many competitors and viable substitutes. The exact opposite situation occurs in developing countries. The problems to be solved are more individual (see above), and the market is still huge. If the world is your market, there are billions of customers.

Look at Jeeves as an example (not AskJeeves, the failed search engine, come on, man, realize it's not 1996). Jeeves started as a credit card company for international start-ups, quickly developing into a global banking infrastructure.       

It solved the cross-border banking problem. If a market is small in a country, a business will strategically expand to its neighbors and beyond. This instantly creates a wealth of problems due to currency issues and differing finance regulations across borders.

Jeeves filled that gigantic underserved market. Peter used his framework and invested early. The company exploded from $10 million to $2 billion-plus in 2 years with the requisite returns for early investors.

Personal Finance Section:

Personal Rule 1: Ignore traditional financial advisors - The gold standard of most wealth managers is a 60/40 split of your portfolio across publicly traded equities and safe bonds. When approached by their clients with an Angel opportunity most advisors will advise against it. The reason? It takes capital out of the portfolio with the relevant advisor fees!


As the saying goes, “show me your incentives, and I'll tell you the outcome.” Make sure you understand the motives behind the financial advice and do your research. 

Personal Rule 2: Ignore common wisdom on allocation into Angel investing: Seeing a pattern here? The powers that be have deemed that somewhere between 1%-10% is the amount your portfolio should be invested in Angel and VC opportunities. The main reason for this is that most start-ups fail, some do OK, and every once in a while, you get a unicorn that pays for all the failures. The problem with this analysis is not that it’s not true. It is correct. However, what Peter has done to deal with this reality is to go in the complete opposite direction. He’s very “risk-on” and maxes out his portfolio (~90%)! He takes every opportunity to catch a potential unicorn and ride it to massive profits. 

It's very important to point out a few things here - First, Peter has enough dry powder (aka money) to use this strategy. Startups are illiquid. Once you invest, consider that money locked up for 7-10 years. Second, Peter has exceptional access to some of the country's best startup investments. An 8x TVPI is very high and is possible due to his unique access to top-tier opportunities. 

Personal Rule 3: The remaining 10%: Have cash on hand and short-term bonds. Make sure you have enough safe liquidity to manage your expenses and keep enough capital on hand to keep investing in start-ups you are excited about.

Personal Rule 4: Diversify: Not just across start-ups but across time. Most beginner Angel investors make a huge mistake and get very excited about the first few startups they meet and sink all available capital. Think on a 5 to 10-year timeline aiming to have a portfolio of at least 50 investments (Unpopular Ventures has 240 in three years).

Quickfire:

  1. Do you reserve follow-up capital for the winners? Not often. If you do the math on subsequent rounds, the biggest return you can lock in is an extra 24% percent. Some people would rather have the $1.24 million versus the $1 million. I’d rather take the follow-up money, invest in more start-ups, and take more swings for another unicorn.
  2. What important truth do you believe that many people disagree with? That LPs and VCs have to focus. The truth is the best investments are located in the spaces between the accepted buckets. Diversify and expand your portfolio across verticals.
  3. Pivotal skill that has changed the game for you? Storytelling is incredibly important. It flows as a function of “storytelling” and not “story showing.” Pitch decks and powerpoints are tremendous but building a business is about how compelling the story is. How do you get employees to start in the beginning with you for less pay? How do you get people to invest in your vision? Every day I work on how to become a great storyteller so I can pass the founder’s truth to our investors. To distill a vision into a compact story that begs for action.

Collaboration Opportunities:

As an investor - You can invest in Unpopular Ventures at unpopularventures.vc. 

I hope this got you thinking. See you next week! ✌️