… by someone who is not a billionaire yet
Welcome, aspiring billionaires. Below, you will find the information helpful to fulfill your dreams. Or to realize it likely will not happen.
I am writing this, having been inspired by the book by Jason Calacanis, “Angel: How to Invest in Technology Startups—Timeless Advice from an Angel Investor Who Turned $100,000 Into $100,000,000.” The title of this article, as above, could also be the title of Mr. Calacanis’ book.
Who is Jason Calacanis?
He is well-known in the angel investors community, but less so by the broad public. According to Google, he is not a billionaire yet, but he might be worth much more than Google knows. Many of his holdings are in successful businesses that are not publicly traded yet. Doubtlessly, he is much closer to becoming a billionaire than most of us. To his credit, he earned his wealth, in big part, as an angel investor. He may claim that everyone with a humble upbringing can learn from his experience and repeat his success.
This book is for everyone
Calacanis addresses his book primarily to those interested in angel investing, which theoretically applies to individuals worth more than $10 million. But, in the United States, beginning in 2017, on crowdfunding platforms, everyone can invest in startups for as little as $100.
In 2021, Americans spent $105 billion on lottery tickets. With a population of adults of about 200 million, it means an average grown-up in the United States spends yearly about $500 on the lottery. In his book, Calacanis claims angel investment is like buying lottery tickets, but – he explains – “unlike the normal schmucks on the street, I get to buy tickets that are in the top 1 percent of the winning pool.” People who try to get rich by buying lottery tickets can benefit from the Calacanis book. Those who get illusions of a good life by purchasing gadgets or falling into unhealthy addictions can find more fun, satisfaction, and money by spending a few hundred dollars on startups. It is unlikely they will become billionaires soon, but following Calacanis’s advice, they can fare much better.
Founders will find this book priceless
Calacanis writes in great detail about how he makes his investment decisions. Further, I will point out some weaknesses of his approach, but his candidness provides an irreplaceable value for every startup founder seeking an angel investment.
The book narration is juicy, spiced with words our moms told us not to use. It does not arouse repulsion because it reflects high tension, as we saw in “The Wolf of Wall Street” movie, where the risks are huge, but the opportunities to profit are even greater. Every business faces uncertainty, but starting a new one is perilous. Financing those startups is terrifying.
In angel investing, one should expect more troubles than anticipated. When they come, for a founder, it might look like a disaster; for an angel investor, it is a part of the course. A healthy relationship between an investor and a founder requires the personal integrity of both parties. An investor needs to be the first one, not the last one, informed about unforeseen problems.
Is angel investing upside down?
This was a title of a review of another book about angel investing, which I wrote a few years ago. The author of that book focused on helping founders present their cases to angel investors. I found it odd because most founders start one or maybe a few businesses during their lifetime. Angel investors make their livings out of financing startups. Weekly, they review dozens, if not hundreds, of investment proposals. If they want to succeed, they should develop methods to spot those rough diamonds that, for others, might look like a piece of broken glass.
Most angel investors have formalized the submission process, shielding themselves from worthless investment offers. Ironically, the biggest money-making opportunities are in ideas that no one believes make sense. Unfortunately, it is hard to figure out which of those crazy ones will catch on.
From what Calacanis writes, he is an outcast in the crowd of angel investors. He actively seeks and then reviews even the most bizarre investment proposals. His objective is to find in an early stage an opportunity that, within a few years, turns into a multibillion-dollar venture, making him a billionaire. He has made his email address and cell phone public, so he seems serious about becoming a billionaire by diligently looking for the next big thing. So, why is he not a billionaire yet?
To make it easier, angel investors form groups called syndicates. In theory, it is good for everyone. Affluent individuals who have no time or desire to go through the hassle of screening investment opportunities can participate in startups selected by angels like Jason Calacanis. This way, more money goes to angel investing.
It is common knowledge that individuals can be brave, but committees are risk-averse. Angel syndicates tend to invest in mediocre ventures because collective decisions aim at avoiding losses. Calacanis wonders why there are so few new “unicorns” or “decacorns,” startups that grow to be worth $1 billion or $10 billion respectively. I blame the reluctance of syndicates to invest in ambitious ideas, where the chances of success are small but the rewards are great.
I elaborated on this issue in my review of another book mentioned earlier. A friendly operator of an angel investors’ group disagreed with me. He emailed me: “As a fund, our commitment to investors is not to find the ‘unicorn’ or ‘next Facebook’ as you suggest. (…) Our fund product is designed to de-risk early stage investment through diligence and diversification. This way, investors don’t have to pick the next Facebook to get an ROI. We suggest that our investors choose at least 20 companies that we place on our platform to gain the ROI this asset class is capable of returning. We’re not looking for the next Steve Jobs — why would we? Once-in-a-lifetime entrepreneurs are just that.”
In his book, Jason Calacanis repeatedly claims he is different and vigorously seeks the next big thing. He almost convinced me, but he lost me when stating that he invests in ventures with some traction.
Would we have smartphones if cancer had killed Steve Jobs six years earlier?
Apple released the iPhone in 2007. Steve Jobs died in 2011. The concept was not new when Apple started working on iPhone development in 2005. Engineers at other major cellphone manufacturers had tinkered with similar designs, but marketing people convinced their management that the idea of a bulky cellphone with an inconveniently small touch screen would fail.
For the sake of discussion, let us speculate what could have happened if cancer had taken Steve Jobs before he got the idea for an iPhone. In 2009, some folks who lost their jobs at a major cellphone maker might have approached Jason Calacanis with a rosy vision of bulky phones with inconveniently small touch screens. They would have asked for some significant cash that was needed to develop the prototype. Jason would have asked them for traction, in other words, to prove they already had many potential users. From his book and from what I hear from other angel investors, I doubt that any of them would have invested in the smartphone idea.
Does one need to be in Silicon Valley?
Jason Calacanis writes that, yes, they need to be there because this is where the action is. As a Polish saying goes, he is right, two percent, to be precise. He is right because it is true that Silicon Valley offers a concentration of wealth and resources. He is wrong in not asking why the same entrepreneurial spirit is not everywhere in the United States. In Chicago, I attended many events with founders pitching to angel investors. It struck me that none of the startups was of the caliber of a future unicorn. It stuck in my mind what one angel investor advised a founder having an idea for a social media venture. After praising the concept, the angel investor suggested going to the West Coast because they finance all sorts of crazy endeavors, which none of the conservative investors in the Midwest would consider.
Again, the question arises: Are people outside of Silicon Valley less entrepreneurial or plainly stupid, or is there something else?
What is wrong with Silicon Valley?
I spoke later with that founder, who was advised to go to Silicon Valley. He checked it out. Many silly ideas receive money there, but most are within the inner circles. As Calacanis confirms in his book, in these dubious cases, angel investors fund less the project but more a person they know. For good or bad reasons, they feel more comfortable taking risks with individuals they know. As someone explained to me, in Silicon Valley, there is such an abundance of easily made money that insiders can readily find the money for almost any project.
Again, the question remains: Why do so few of them become unicorns?
The silliness of Silicon Valley is part of the ongoing political turmoil and the deepening divisions that the United States faces today. At the peak of American growth, by the end of the 19th century, technological advancements ruled. In our time, politics rule. Without even realizing it, investors do not even target the most important problems that America is facing. They might make charitable or political donations, though. Their investments go to politically safe, often petty ventures, promising quick returns. They wrongly believe that investment in the application of new technologies cannot fix our dysfunctional politics.
Uber is a good example
Calacanis mentions Uber in his book because he made a small early investment there and received an impressive return. Calacanis also claims that the original name was Uber Taxi, but he suggested shortening it to Uber.
Uber has had lightning success because it skillfully used new technology to break the dominance of highly regulated and regionally monopolized taxi services. It started during the recession when many people lost their jobs. Part-time driving was a perfect way to make an extra few hundred bucks to cover the bills. After the economy improved, Uber drivers started calculating the costs and risks of driving passengers, finding out that it is a relatively low-skilled occupation offering meager earnings.
Uber made passenger riding services better for consumers, at the cost or benefit (depending on one’s political beliefs) of breaking the old taxi system. Its initial success triggered an overvaluation by lemming-like investors. But those later problems do not nullify Uber’s success in providing value to the populace by changing the political rules in one market segment.
Twitter is a bad example
Calacanis writes in the book that Ev Williams offered him an early investment in Twitter, but he refused, seeing no value in tweeting.
I recall that during the early months of Twitter, I attended a conference about social media. Twitter highly promoted itself there. Big screens across the room displayed tweets from that conference. I found it ridiculous and distracting. I resisted joining Twitter for years but eventually signed up. Whenever I spend time on Twitter, it confirms my initial impression of its uselessness.
So, why did Twitter make it big? For the same reason that Facebook did. The public distrusts the major media outfits in the United States. Easy-to-use social media outlets give that joy of freedom of expression, which disappeared from the mainstream media. Americans cannot take any more partisan conventions and manipulations in major news outlets. Short tweets allow for bark, which might resonate. No one would waste time on Facebook or Twitter if the mainstream media were credible. If they earnestly discussed our major problems in public view, the public attention would be there.
It means that Calacanis was not wrong in rejecting Williams’ offer. He was wrong in not connecting it with the mainstream media not doing their job as the Fourth Estate.
Where is the next greatest investment opportunity?
As always, the biggest money comes from resolving something that poses a problem for the most people. In the United States, it is the aforementioned mistrust of the media. The book does not indicate Jason Calacanis sees it that way. I checked some of his recent activity on Twitter. I did not find any indication he sees an angel investment in the media as his best shot at becoming a billionaire. It is a little surprising as he has experience in journalism. As old sages used to say, sometimes the darkest spot is just under the lantern.