the gauntlet, our network of experts. We didn’t even have a network of experts that was formalized. We just invested in things that looked fun. It wasn’t a business.
At the time, Dave and I were not investing together, we were investing separately. We realized that to be successful, we needed to work together. We were successful as entrepreneurs together, even though we are quite different, and we felt like our two ways of looking at the world combined would increase the odds of being successful.
We also realized that if we were really going to try and prove whether we were good at this or not, it needed to be full-time. So we decided to work together full-time and build up a codified network of partners and peers who would help us evaluate companies, and we started collaborating on investments with other angels and form syndicates. Eventually we felt like we became the drivers and leaders instead of the followers, and I think that allowed us to help shape the rounds that companies were raising.
X: What are some of the prerequisites to being an investor—things you should really figure out first if you want to do it well?
DS: If you are going to do angel investing, I think the most successful ones have a thesis, and they have a filter and a process for how they invest. And you need to create a track record. There are also some things you want to test.
One of the things that Josh and I were concerned about was, could we invest in a company and give them advice and then have them not listen to the advice? Would that frustrate us? And it turns out we are okay with it. We want to invest in entrepreneurs who will listen to our advice, but they don’t necessarily have to agree or follow it. We have been comfortable with that.
Another big test is, do you have good deal flow? Since Josh and I have been in the industry for the past 15 years, we have a great network of people that we have worked with in the past. Friends in the industry. That is basically where our deal flow comes from.
X: What kinds of entrepreneurs make good investors, and which ones make bad investors?
DS: I think having a unique background is beneficial. The Freestyle “brand” is two for one—meaning you have the Dave-Josh team who have been working together for 15 years and we are recent startup founders turned investors. Other angel investors have unique backgrounds that they can leverage within the community. An example is Gary Vaynerchuk, who is kind of a social media expert. I don’t know if you have met Manu Kumar at K9 Ventures. He just raised a $40 million fund. His filter is definitely more of a technical one, where he wants to confirm that the team is solving a tough technical problem. That is the brand and the area he has focused on. Then you have Kirsten Green at Forerunner Ventures. She is an e-commerce specialist. Entrepreneurs are seeing the press you have going on, and hearing people talk about VCs here and elsewhere, so brand is important.
JF: You really have to know why you are doing it [investing]. 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. If you are doing it to stay connected to entrepreneurs and trends, that is not a bad reason to do it, if you invest small amounts. I think anyone who invests as a part-time job is likely not to make money.
X: What were your biggest challenges as early investors?
JF: The whole process of raising capital felt hard. We set out to raise as much capital as we could in seven months. We ended up raising a little over $26 million. The process of raising capital from LPs was not fun. We met with 20 institutional funds and three invested. We had hoped that we were over that whole experience of pitching, but you are never really over it. There is always another level. But it was probably good for us. Now that we have LPs, we have someone to answer to. It also helps us remember what it’s like for entrepreneurs who are raising money.
The other challenge was that we had to get used to advising, not directing. That was hard at times. There were moments when I knew the entrepreneur was making a mistake, and I just had to advise and hope that eventually they would turn it around. I couldn’t force it; it’s not my company. That was more of a challenge for me than for Dave.
So there are tradeoffs. There is nothing more stimulating than being an entrepreneur, when you have control. But now we are in control of our lives, rather than any one company. Our hours are long but we don’t have to work in an office. I can go home at 6 and have dinner with my family and not worry about setting the tone for someone else.
DS: I think one of the biggest lessons that you learn going from being an entrepreneur to being a VC is it’s difficult saying no, and you’ve got to say no a lot. Josh and I, as entrepreneurs, talked to easily 50 VCs raising capital for both of our companies, and 90 percent of them were nos. Now that I’m on this side of the table, we listen to 100 pitches and we say yes to only one of them. I think that will always be difficult, and it is honestly the biggest downer to what we do.
X: Have you gotten any better at saying no?
JF: It’s not any easier, but we have gotten better at it. We never just say no—we say no and explain why. Typically, it’s not enough and the entrepreneurs will rebut. And I always respond one more time.
DS: We try to say, “We have been in your shoes, that’s just how it works.” And we try to give feedback in most instances. But sometimes we have so much deal flow that we just have to decline, and sometimes we are not able to really give a reason, which I feel bad about, but I just don’t have enough time in the day.
X: You mentioned that good investors should have “filters,” meaning, I guess, rules they use to sift out the companies they will and won’t invest in. What filters do you use? What do you want to see in a company’s pitch, and what would automatically disqualify them?
JF: Our filters continue to change over time, and like Google’s, they are unpublished. But I don’t think it would necessarily be a bad thing if the world found out. There are a few surprises in there. I’ll share one of them: We don’t invest in startups founded by anyone who is
