It is a truth universally acknowledged, that a former entrepreneur in possession of a good fortune, must be in want of investments.
Or to put it another way: If you’re a 30-year-old startup founder who’s cashed out of your first company and you suddenly find yourself with a life-altering amount of money (and a lot of time) on your hands, it’s de rigueur to start spreading the wealth by becoming an angel investor. Before you know it, you’ve spent a couple of years and a couple million dollars, dropping $50,000 here and $100,000 there on the companies your friends are starting.
There’s nothing inherently wrong with that. Indeed, it’s one of the engines that drives new startup creation and keeps Silicon Valley and other regions innovating.
But not everyone is cut out to be an investor. And if you’re not careful about it, you’re apt to lose your shirt (or at least your investments)—and in the process contribute to the feeding frenzies that have been driving startup valuations to unsustainable levels.
Or so say Josh Felser and Dave Samuel. Former entrepreneurs themselves—they sold their first company, the music service Spinner, to AOL Time Warner for $320 million, and their second, video network Grouper, to Sony for $65 million—they’re now the founders of Freestyle Capital, a seed-stage venture firm in San Francisco. Their own transition from operating startup guys to part-time angels to full-time venture partners was not without its difficulties, and when I visited right before the holidays they were in a mood to share some of what they’ve learned with other entrepreneurs considering making the leap.
The upshot, as you’ll see from the Q&A below, is that investing is no game. It takes both discipline and detachment; the ability to cultivate a specialty and build a brand; a willingness to answer to your own investors (the LPs); and the ability to say no. A lot.
But perhaps more than anything, venture investing takes commitment. Maybe not quite as much as being a startup founder—Felser and Samuel say they’re investors in part because they couldn’t figure out how to make startup life mesh with family life—but enough to keep you busy full-time, and then some. “If you are a lifestyle investor and you are dabbling in it, or if you are just doing it to make money, you are not likely to be successful,” Felser says.
Felser and Samuel, who are both in their 40s, have invested in some big winners like co-browsing startup GoInstant (acquired by Salesforce.com last summer for $76 million), some hot up-and-comers like meme-sharing site 9Gag, and some still-struggling startups like Q&A site Formspring. They raised $26 million for their first fund in 2011 and said they intended it to last for two years, so it would be reasonable to conclude that they’re back on the fundraising trail—and therefore interested in talking with reporters and raising Freestyle’s profile. Regardless of their motivations, it was a fun conversation that should be enlightening for anyone thinking about getting serious about tech investing, or about working with Freestyle.
Xconomy: Why do so many entrepreneurs who have had a wealth-creating event in their careers suddenly become angel investors or venture capitalists?
Dave Samuel: I can definitely answer why Josh and I chose to do it, and this may also be why other people choose to do it. One reason is diversification. If you’re a little ADD, you get the ability to not just focus on one company but be involved with numerous companies. There’s the advantage of simulation from all the different ideas going forward.
Second, being an investor I’m not managing anybody directly. So, honestly, it’s less stressful. Josh and I work just as hard as when we were running our companies, but we work with more freedom because we don’t have anyone reporting directly to us.
And I think probably the third reason is that we like to start new things. Josh and I had done both Spinner and Crackle [fka Grouper] and we said, let’s try something new. It’s refreshing being on the other side of the table.
Josh Felser: If I could figure out the right life balance, I would probably be starting another company. It’s only because I can’t figure it out that I have chosen the next best thing, which is to work with entrepreneurs, help them find success, and also help them have a financial gain from that.
X: How did you decide to make the switch from angel investing to venture investing?
JF: If you go back, there were three phases to our investing lives. There was the dabbling phase—and I think we were terrible investors then. Then there was the full-time angel phase, when we started to show some success. Early on, we were undisciplined. We didn’t take it seriously enough. We didn’t have enough deal flow to be finicky. We knew nothing about investing. And we didn’t care as much about generating a superior financial return.
Our due diligence typically consisted of meeting with the entrepreneur, and going on instinct. And investing is much more than instinct. We didn’t have any filters written down. We didn’t put entrepreneurs through
