Avoiding Undue Diligence: My Strange Approach To Angel Investing

By Dharmesh Shah on February 4, 2013

In a few weeks, I'm going to write a $25,000 check to invest in a company that currently does not exist.  There is no company.  There's no team.  And I have no idea what the company will do or hopes to do.  I'm investing almost completely blind.  More on this craziness a little later in this article.

To understand why I would do something so crazy, let me first catch you up a bit on my angel investment history and “strategy” (and I use the word strategy very loosely).  It's not your typical story.money bag

I first started angel investing while I was a graduate student at MIT.  I had recently sold my last company, made some money and went back to graduate school to figure out what I wanted to do next.  I had promised my wife it wouldn't be another startup (startups are hard) so my plan was to do angel investing.  It was a way for me to scratch my entrepreneurial itch by vicariously living through other entrepreneurs.  Lots of fun, and almost no pain.  Seemed like a great idea.  And it was. 

The first entrepreneur I invested in (not counting myself) was Brian Shin — his company was Visible Measures.  He was a classmate of mine in “New Enterprises” at MIT.  Brian was literally one of the smartest people I met during my time at MIT.  And, he could hustle like nobody's business. So, I invested $50,000 despite not really knowing Brian and not really liking the original idea (they have since pivoted).  And, not really knowing what the heck I was doing   It turns out, to be an angel investor there is only one requirement:  You have to have to be accredited (i.e. have the money to be able to afford the risk).  You don't have to go to angel investment school, take any tests or otherwise prove your mette.  You just need cash and be willing to write checks.

I continued making investments all through graduate school and then post-graduation, as I was building my own startup, HubSpot.  I've now made 35+ investments.  You can see most of my AngelList profile. What makes my approach unconventional is that I have a few “rules”:

All of the rules are based on one simple constraint:  I have no time.  I have no time to spend on/with startups because I'm maniacally committed and focused on my own company (HubSpot), which is doing very well.  That's where all available time goes.  If I didn't have these rules in place, I wouldn't be able to angel invest at all.

So here are my rules:

1. No due diligence.  Seriously, almost none.  In over half the deals I've done, I've never met the entrepreneurs or talked to them on the phone.  Generally just exchanged an email or two.  My rationale here is two-fold:  I'm optimizing for my time (my biggest constraint) not magnitude of outcome.  Also, I think at the very early stages, most diligence that typical investors spend time on is “undue”.  There's just not that much that's knowable.  Either you like the people, or you don't.  You like the idea, or you don't (which is irrelevant, because the idea's likely going to change anyways). 

2. No follow-on investments.  This one's controversial.  Many would argue that it's economically stupid for me not to “double down” on the deals that I have a right to maintain my pro-rata investment.  They might be right (but I don't think they are).  The reason I don't do follow-ons is that it requires spending time (which I don't have) and for the deals that I don't invest in, I might create a signaling problem for the entrepreneur.  By unilaterally not doing any follow-on investments, all signaling issues go away.  This has worked brilliantly for me so far.  I take the money that I would have invested in deals I'm already in, and just channel it to new startups.  In the grand scheme of things, I think this works out well for everyone.

3. No advisory board positions or official involvement.    Once again, this goes back to the lack of time.  I don't have time to commit, so I don't commit it.  Occasionally, I'll make an email introduction, or see entrepreneurs in my portfolio for a nice dinner — but other than that, they almost never see me or hear from me.

Overall, my unconventional approach seems to be working OK.  I'd put my angel investment portfolio up against any early-stage investor (angel or VC).  After all is done, I'm going to make a fair amount of money.  If you don't think so, just check out my portfolio.

And, to those that might criticize my unconventional approach and classify me as "part of the problem" (the problem being, the "Series A Crunch"), I have a simple response/position:  There's no such thing as too many companies starting up.  But, there is such a thing as not enough companies shutting down...but that's a different problem.  

Important Note:  If you are seeking angel investment, just about all of my investments these days are through AngelList (Disclosure: I'm not just a member of AngelList, I'm also an investor).  And, I focus exclusively on Internet/software companies.  


launch festival

So, back to my crazy $25,000 investment.  A few weeks ago, I heard about the upcoming LAUNCH Festival hosted by Jason Calacanis.  Jason sent an email out announcing that as part of LAUNCH, he was putting together the best hackathon in history.  Jason was going to angel invest $25,000 into the winning team.  When I saw that email, I thouht “that's a pretty good idea, and I've done stupider things”.  So, I volunteered to match Jason's $25k with $25k of my own. Secretly, I'm a major, major believer in hackepreneurs.  If I can buy into someone that manages to get in to the LAUNCH hackathon and then wins -- I think it's a pretty good bet.  

Hope you get a chance to attend LAUNCH.  It promises to be an amazing event.  And, if you're the hackepreneur type, hope you'll participate in the hackathon and take my money.  



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The 4 Personality Types Every Startup Needs

By Dharmesh Shah on February 1, 2013

Anyone can have a killer startup idea, but in order to make that idea succeed you’ll need an unbeatable team. Crafting the perfect team is an art -- one we're constantly trying to refine at my startup, Boundless.

We’ve found that a structured process yields the best new hires. This starts with first understanding the skills we need to fill. But we don’t just try to fit anyone with the right experience into a role - we go further and search for the right personality for the position as well. Throughout the entire hiring process, we’re constantly looking for signs of the four most important startup personalities: The Beast, Lara Croft, The Architect, and The Most Interesting Man in the World.xmen small

Our initial process is probably quite similar to many other startups. First, Boundless job candidates need to have a presence online. If we can’t find you online, you don’t exist, which means we’re not going to start the interview process. Next, candidates go through a phone screen to determine basic experience and qualifications. Those that survive the phone call visit with multiple team members on-site, where they’re assessed on skill and personality.

However, the final step is a little different. Before securing a job at Boundless everyone gives a 20 minute presentation on your personal or professional passion. We like to give the entire team a chance to see the candidate, and give the candidate an opportunity to impress the team with anything they want. We’ve seen people present on Tai Chi, cupcakes, coffee, how to build an art collection on a budget - all kinds of interesting, quirky and funny topics. And, of course, by this point in the process we have a strong idea of the type of a person the candidate is.

The Four Critical Startup Personality Types

The Beast, Lara Croft, The Architect, and The Most Interesting Man in the World. When filling a role at your startup, you need to find a candidate that embodies characteristics from each of these personalities if you are going to create a culture that changes the world. I firmly believe that a large part of my company’s success is driven by employees with characteristics strongly matching these personalities.

Here’s how to identify these four startup personalities:

The Beast

The startup Beast, modeled after the X-men character, possesses a “get shit done” mentality. A Beast’s raw animal output ensures they get more done in a day than even the most caffeinated worker bee. These people strive to be the very best in their profession, and doing more than seems humanly possible helps them get there. Look for people with high levels of productivity at their last positions and ridiculous amounts of drive and energy.

Lara Croft

When hiring, look for adventurers with an entrepreneurial spirit. These Lara Croft types create goals and projects for themselves to enhance the company values or goals. People who are self starters, self motivated, who have built things on their own time to scratch their own itch are Croft. Their adventurous minds dream big to help inspire the team.

The Architect

The Architect, inspired by the character from The Matrix, understands the big picture and can still focus on the details. These are the people who have a productivity hack for nearly all aspects of their life. Being productive and organized with the details helps The Architect keep the big picture in mind. You can spot Architects as people who have taken pride in a craft or know the intricate details of their previous position plus can clearly articulate the high-level strategy.

The Most Interesting Man in the World

At any fast-growing startup, you’ll spend a lot of time collaborating and hanging out with your colleagues. To make your office lunches or happy hours more enjoyable for all involved, hire people with character and charm for your team. The Most Interesting Man in the World, seen in the Dos Equis commercials, adds depth to your company culture. And in tough times, the Interesting Man (or woman) is the person you want fighting on your team and who help keep you going during the tough time. Don’t just look for goofballs - find people who have overcome difficult challenges and kept a positive attitude.

By hiring based on these four personalities, Boundless has built a team that not only has the capacity to build the best learning platform possible, but a team that continues to attract other top-notch people to share the journey with us.

We recently had the pleasure of welcoming Healy Jones to Boundless as our new Vice President of Marketing. The Beast in Healy helped our open textbooks initiative get written up in TechCrunch, and his wine tasting team presentation won him a nod in the Most Interesting Man in the World category. He joins Boundless from OfficeDrop where he was VP of Marketing, where he helped grow the user base 120 times in two years.

Whether you’re hiring a new team member as a VP or entry-level, remember that killer personalities help make the journey from idea to strong startup possible.

This is a guest post from Ariel Diaz. Ariel is the CEO and co-founder of Boundless, which creates free textbooks for college students.  

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