Driving Alpha: Seed Stage Investing and the Importance of Pro Rata Rights with Jason Calacanis

by

Jason CalacanisJason Calacanis is the Founder and CEO of early-stage investment firm LAUNCH and real-time business news app Inside.com. A serial entrepreneur, angel investor, and former Sequoia Capital scout, Jason has invested in hundreds of startups, including Uber and Calm, a meditation app now valued at $1 billion. He previously launched Venture Reporter — formerly known as Silicon Alley Reporter — and Weblogs, Inc., which he exited before venturing into angel investing.

Jason continues to shape and influence the tech and investment spheres, sharing invaluable insights through his acclaimed book Angel and podcasts This Week in Startups and All-In. His platform Founder University helps founders get funding and launch their products.

Here’s a glimpse of what you’ll learn:

  • [1:24] Jason Calacanis shares his experiences as a prolific seed investor
  • [5:54] How Jason’s Silicon Alley Reporter grew to $12 million in revenue during the dot-com boom
  • [9:15] The importance of asking insightful questions to uncover a founder’s potential
  • [12:51] Jason reflects on past investments, including Uber and Open Angel Forum
  • [14:46] What are the “three Ds” of identifying winners?
  • [25:24] What are the criteria for identifying successful founder-led companies?
  • [48:33] Jason explains at-scale seed investing strategy, signaling issues, and beta
  • [55:44] Jason’s journey to starting LAUNCH Festival after breaking away from Sequoia Capital
  • [1:10:30] AI adoption in startups, investment climate, and mobile technology

In this episode…

Investing in startups at the seed stage offers immense potential for growth and innovation, but it comes with hurdles and complexities. From portfolio construction to day-to-day management, navigating this terrain requires a keen understanding of the market, a discerning eye for talent, and a strategic approach to decision-making. What can you learn from a technology entrepreneur whose early-stage investments have achieved billion-dollar valuations?

Angel investor Jason Calacanis navigates the complexities of early-stage startups with his 21-person team, serving as a catalyst for hundreds of thriving companies. Drawing from his extensive experience, he delves into the nuances of seed-stage investing, highlighting key factors essential for a successful venture capital firm and the critical importance of identifying exceptional talent and groundbreaking ideas. Additionally, investors must understand potential warning signs that could signal a startup’s failure and seek mentorship from experienced investors. Jason also highlights the value of a world-class design and a product outlier in driving sustained growth and market dominance.

In this episode of the Driving Alpha podcast, Steve Brotman sits down with Jason Calacanis, the CEO and Founder of LAUNCH and Inside.com, to explore the intricacies of seed-stage investing. Jason shares his experience as an angel investor, insights regarding venture capital and startups, and highlights the crucial role of mentorship from experienced investors.

Resources mentioned in this episode

Sponsor for this episode

This episode is brought to you by Alpha Partners, an NYC-based growth equity firm.

Alpha co-invests in top-tier growth equity companies led by the world’s best investors. We focus on scaling and late-stage tech investment opportunities primarily in the essential technology sector, including e-commerce, enterprise software, fintech, edtech, and health IT.

To learn how we can help you with your funding goals, visit www.alphapartners.com, or email us at vc@alphapartners.com.

Episode Transcript

Intro 0:06 

Welcome to Driving Alpha, where we feature our friends, the outperforming investors who demonstrate their paths to driving alpha or outsized investment returns. We’re Alpha Partners, where we partner with 1,000 early-stage venture firms as their opportunity capital to invest in their best companies.

Steve Brotman 0:26 

Thanks so much for joining. Um, you know, I, you know, obviously, frankly, I’ve been watching your pod, and you’ve inspired me and, you know, I have a lot of, you know, as you know, we partner with 850 VCs. And so it’s the perfect platform to spotlight our partners that we work with. Yeah. And, you know, frankly, when we hosted that dinner, you’re like, oh, yeah, I’ll definitely come to that with 12. LPS. Yeah, and, um, you know, it’s all incremental. But I was just thinking, Geez, why don’t I just, if I could just use the power to promote my partners, to all the LPs that I talked to on a pretty frequent basis, right, and spotlight and especially you, like, I feel like you have an outsized personality is, you know, we’re friends I’ve been told and taught, you know. But, I think what gets lost in translation is that you’re an investor.

Jason Calacanis 1:24 

People forget that I invest in 100 companies per year, and I’ve got a 21-person team, excuse me. Yeah. And we did. I think we did 70-60 or 70 introductory meetings last week. And so we are one of the highest volume, most prolific seed investors in the United States today. You have Y Combinator doing I think 250 startups per class twice a year, that’s 500. And then TechStars, I’m not sure where they’re at right now. I know that it had some leadership changes, and they operate in many different cities, you have 500, global, previously 500 startups. And so, there’s not many people who, you know, do 100 A year, let’s say, it’s probably five or six of us. And you know, it just takes a different process. So people don’t understand what pre-seed and seed-stage investing at scale requires. Because there’s only like maybe five people who’ve ever done it. Ron Conway, Y Combinator, Paul Graham, Jessica, and the team over there. Dave McClure, Courtney, and the team of over 500 startups now global, and then David’s at TechStars. I’m not sure if anybody else has ever done that kind of Oh, Ron Conway. Yeah. Also, hit those numbers. So it’s just a different portfolio construction. It’s a different day-to-day life. It’s much different than venture capital. I feel in a way, we’re not a venture capital firm, even though we have venture capital funds that we do. And we have the same compensation. But we’re really a startup factory and an index in a way. Yeah, well, I feel like we’ve started right, we’re recording, started recording here. We’re on a podcast right now. There we go. I guess I was the first question.

Steve Brotman 3:14 

Yeah. So um, I want it. Let me just say a few words about the pod. And I just wanted to thank you. Hello, Jason. Thank you for joining us on driving Alpha. Driving Alpha was inspired by a day of driving 12 Super exotic cars that I hosted a few years back with about a dozen VCs. And what happened was we swapped the cars every hour, and each VC got to meet another VC and ride with them for about an hour. And what we found at the end of the day was, it was cool driving in the cars. But the best part of the day was meeting the VC spending that hour of time learning about each other and each other’s edges and what they’re looking for, and how they added value. And there are a lot of relevant realizations that came out of that. And so this podcast is sort of a virtual exotic car tour in a way in a quest to find out what drives alpha with some of the best known and even lesser known VCs, and how they view creating outside investment success. And we’re just getting into it with you. But every great VC and investor has at least one superpower, sometimes a few. And we wanted to use the pod to kind of shine a light on that superpower in that car ride. So you could share a little bit more about how you view investing. This is our second episode. And, obviously, you know, you’re well known as the world’s greatest moderator for the online podcast. I’ve listened from the near beginning of the on podcast, I’m a lawyer, well, weekly listener. You actually inspired me to create this effort. And it’s clearly One of your superpowers. I’d love to hear more about how that impacts your investing. And you know, if you want to hear a weekly, a great weekly podcast on tech and world affairs, I recommend any listener to tune into the on podcast. Jason and I met over 25 years ago when he was the publisher and editor at Silicon Alley Reporter. You might have had a predecessor vehicle before that, right?

Jason Calacanis 5:27 

Yeah, I had. It’s really interesting. I had a magazine called Cyber surfer that I did five episodes of before right before the internet became commercialized. And there was a web browser in the early 90s. CD ROMs had multimedia and online services prodigy AOL CompuServe. The Well, these were like the precursors to the Internet revolution. And so I had cyber surfer, which was kind of cyberpunk coverage of this new technology. And then when Silicon Valley startups started happening, I created the Silicon Alley Reporter as a newsletter, which I kind of cribbed the format of release one point out Esther Dyson’s newsletter, and it was a 16 page photocopy. But I kind of loved Spy Magazine, Paper Magazine, Esquire, Rolling Stone, the whole New York cohort, Vanity Fair. And I went with a magazine style, which was very strange at the time for a business publication to be like a flashy magazine, and I threw parties that were quite well known. And it was quite a fun time.

Steve Brotman 6:33 

The circulation was 500. Because that’s how many entrepreneurs there were in Silicon Valley at the time, or, like, how big did he get it up to?

Jason Calacanis 6:44 

Yeah, so it was, I think, at the peak, maybe 30 or 40,000 printed copies? Yeah, so it got pretty big. And the online newsletters were bigger, obviously, email newsletters at that time, and the events were a big part of the business. But to your point, in the first year, we decided to do the Silicon Valley 100 concept. And it was originally, we tried to find 100 people working in the internet industry. And when we made the complete list, there were 40. So we asked 40 people, do you know anybody else who has a website isn’t 90-95, whereas building anything on the internet, and they’re like, Wow, these are my attorneys, like there’s internet attorneys. And there were like two of those. And these are my accountants, and there’s a headhunter, and there’s a PR person. So we literally just get the list to 100 added, like 20 service providers, because I was desperate to get to 100. And then we ranked them. And it was quite fun as an exercise. And lo and behold, you know, the.com boom happened and the magazine grew to about $12 million in revenue. And that was quite an achievement from a cold start. And I did a publishing business after that called weblog zinc, which was notable for Autoblog joystick and Engadget, which was Steve Jobs favorite blog. And it was the number one blog in the world for a couple years actually, in terms of traffic, it was literally number one. And so that’s AOL made a little bit of money, and then eventually wound up at Sequoia Capital as a their first Scout, and in the scout portfolio, rule off and Doug Leone and Mike Moritz asked me to be the first scout in that first scout class was also a quiet, awkward young founder named Sam Altman, he had done an app called loop. But he was super impressive to me even at that time. And he did these weird payments, investment in a company called stripe and the seed round. And then I did Uber in the seed round. And that fund at Sequoia is I, I was told their highest performing on a percentage basis fund ever, because there’s only a three or $4 million fund and I think I returned maybe 200 billion or something crazy. So maybe not cash on cash, but on a multiple basis. But being a scout for Sequoia and getting to hang out with Mike Moritz Taglioni. Alfred Lin, Jim gets just the whole team over there. It’s extraordinary. And of course rule of both. You know, I got some really good mentorship being friends with Bill Gurley and other folks in the industry. You know, I just got a lot of great lessons on how to spot talent and great ideas and to be a good investor. And I realized it’s the same job as being a journalist. You ask questions, you listen deeply to the answers, try to figure out if the person is full of it or they’re brilliant or somewhere in between or both who knows. And you tried to place a bet you know the output of being a journalist as a story. You make a bet on you know, that story being interesting to the readers and you know, to the test of time and being interesting in the world and prescient will just and then in venture you write a Deal Memo after asking all those questions, and then you place a bet And then you hope for the best and 10 years later you find out if you’re an idiot or not. But I find the work of being an investor, just intellectually, spiritually, emotionally, cognitively, just absolutely suits my style. I love doing it. I love hanging out with young founders, even older founders, just young at heart, want to change the world, want to create something from nothing? I think it’s one of the most fascinating careers in the world being an investor. In early-stage startups. I don’t think being an investor in late stage startups is very particularly interesting. Because it’s just a calculation, no offense to people who do it. You’re not really taking too much risk. You’re kind of studying a spreadsheet and then just outbidding everybody else. Whether it’s less rights at a higher price. And so it’s particularly interesting to me, and I have 21 people now, we make 100 investments a year. We are just completing the raise of our fourth fund. And yeah, I just — I feel very privileged to be able to do this work every day.

Steve Brotman 11:15 

How did you go from Sequoia Scout? Yeah. Is that when you launched the LAUNCH? Yeah.

Jason Calacanis 11:23 

So I was a scout. Yeah. I started a conference called LAUNCH Festival. I had originally been partners with Garrington Little bit of a story to tell. And we did something called TechCrunch 50. Because he didn’t know how to do events and had done events. And he said, Hey, will you please do this event with me? So we did an event called TechCrunch, 40, then TechCrunch 50, where we had 50 companies launch was, he had a great brand and TechCrunch. And I had this great idea. And I was a great, you know, emcee on stage, he wasn’t very natural on stage. And in fact, quite the opposite. He was a little bit curmudgeonly, which was why he was a great writer, but terrible at being on stage, or interfacing with the public. And so, but we broke up was the best thing that ever happened to me, started LAUNCH Festival, and, you know, had 15,000 People with the largest one. And then we friend, what year was that? Gosh, I can’t remember 2010 Maybe. And my friend David Sachs, who had won TechCrunch 50, with Yammer, which he sold to Microsoft said, “you know, Jacob, and we’re friends. You spotted our company, you picked us as the winner.” And you didn’t have any stock and I feel terrible. I said, “Okay, well give me, can you give me some shares?” And we sold the company already. But how about you start your own venture fund? And I said, you know, it’s interesting Duvall, from Venture Hacks. And angel has told me I should start a fund. How do you do and he’s like, Well, just ask your friends for money, and then just keep doing what you’re doing as a Sequoia scout. So I kind of graduated from scouts, and raised a little bit of money. 10 million around the poker table for my friends, rest in peace, Tony Shea, rest in peace, Dave Goldberg, two of my poker buddies, who passed away. Jeff Skoll, Billy Chamath. David Sachs, of course, just a bunch of my friends. We passed the hat. And then I deployed that 10 million in 109. Startups, I believe and hit for unicorns. Calm Robin Hood, density and superhuman in their first fund. And I learned a lot because what year was that? Was 2010 11 12 14. It took like five years to deploy that 10 million I was doing it part time. It was like this concept of a solo GP Park time. What they called a Super Angel at the time was a very new concept. Chris Sacca had just done it with his fund. And we had both co-invested in Uber together, obviously. And I was kind of watching what Chris was doing. I think he had an $8 million-dollar fund was his first fund. And I think maybe Ron Conway, Chris Sacca had copied Ron Conway, maybe to a certain extent, and Ron Conway had done like a $10 or $20 million fund.

Steve Brotman 14:04 

And so it started out that way to Israel. Yeah,

Jason Calacanis 14:07 

I guess so. Yeah. First round out, right. Yeah. And I actually I introduced first round to Uber. Famously, I had introduced three people to Uber, I introduced 21 people to Uber, three of us made the investment Sian Bannister, myself, and first round, Chris, had done it independently. So I get no credit for that intro.

Steve Brotman 14:25 

And you never email those people, those old emails saying —

Jason Calacanis 14:29 

Ah, well, you know, interestingly, I’m good friends with Mark Schuster and Winchester and I on some boards together, and we’re good friends, and we’ve done some podcasts together. And he always brings up that he was in the room when I had, I had started something called Open Angel Forum, and I had found out who the 10 or 20 Angels were in each city. Sometimes there were only five and I just would bring seven companies together to pitch to, you know, five to 20 Angel investors. And Uber was one of those companies. And you know, Travis was always very thankful for me to help him raise that first fund. But to be clear, they would have been successful without me. But, you know, he always defends me and says, you know, Jason was supportive of me and my previous two companies. And, you know, I really, when I needed help with Uber, Jason was always there for me. And again, I take zero credit for, you know, their success. But it wasn’t nice to be along for the ride, and to be supportive where I could be. And I think, you know, I look back on that first fund, which you know, is still, you know, you know, very active and has some great names in it. And, you know, as you get to your second, third and fourth fund, and I have LP and other funds, as my personal wealth has grown, I’ve tried to dedicate time to being an LP and other funds, and I’m in 24 funds, four of my own and 20 other ones. And one of the portfolio construction items I really looked at was spray and pray, which is what Ron Conway or soccer to a lesser extent, I think, and just anybody who was doing seed investing, thought about the space, it was one and done was the concept early on. And then some people started to figure out, oh, you could do SPVs? Or you could buy shares from employees. And Chris did that with Twitter a whole bunch and created a bit of a marketplace there and secondaries. But nobody really thought about follow on funding. In fact, angel investors never asked for pro rata, nor did they take it, they were frequently asked to waive it, or bullied into waiving it, and I look back on that first fund. And I asked myself, did we know who the winners were, and it really has impacted my portfolio construction going forward? I think portfolio construction, after you deal with the three Ds is really the most critical part of being a venture capitalist.

Steve Brotman 16:53 

Oh, that’s, that’s actually I get shit every day, because we invest out of our fund. And then people look at our SPVs. And they’re like, Steve, you’re crushing it on the follow on these companies and picking out the winners? And I’m like, yeah, that’s, you know, it’s the winners head of IT. Yeah. How do you pick the winners? So how do you see can you Hermoza? Like, I follow smart guys like you, Jason. Oh, that’s number one. Number one lesson is, is social proof. But also, we have other we have seven other heuristics, when you use, like category leadership, it’s going to be, is it a big category? Is it growing? In a top quartile fashion? 100% loss? Is it in a recession resilient type of field? Is it? You know, is the business actually working? Are the unit economics of the company actually working? Or are they wildly off? You don’t always win? And but um, you know, this is I really wanted to hear more about what in terms of you I mean, it sounds you know, you said, spray and pray. But there’s got to be some intelligence on the front end. But it sounds like there’s also some intelligence and some perspective on how you pick your follow on Canada.

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