Monday, May 9, 2011

David S. Rose – Father of Angel Investing in New York

David S RoseI recently had the privilege of interviewing David S. Rose, who has been described as "the Father of Angel Investing in New York" by Crain's New York Business, and a "world conquering entrepreneur" by BusinessWeek. He chairs New York Angels, one of the most active angel investment groups in the country, which has invested over $60 million into nearly 70 companies.

Marty: Welcome to Startup Professionals interviews. It sounds like you could be a full-time Angel investor, but I know you have other activities as well. Tell us a bit about these.

David: I’m also a serial entrepreneur who has founded half a dozen companies, including Angelsoft, which provides the underlying Internet infrastructure for most of the world’s organized angel investing ecosystem. I also spend close to half my time teaching, and in addition to serving on the entrepreneurship advisory boards at Columbia, Yale and NYU, I am Chair of the Finance, Entrepreneurship and Economics program at Singularity University in Silicon Valley.

Marty: Were your own first investment ventures a positive and learning experience?

David: Absolutely. Because one rushes in all flush with the enthusiasm of giant exits, and soon begins to realize just how challenging it is to actually get to a positive exit! My first angel investment in the 90’s was into a video hardware company run by a good friend with great connections to the industry.

After that evaporated, I didn’t invest again until just after the dotcom crash (when my long-suffering spouse grounded me from any further entrepreneurial ventures :-)). The second company in which I invested, back in 2001, was a novel concept from the serial entrepreneur who invented social networking.

It had a great idea, great team, and great angels…but was ahead of its time. The third company is still alive. Its indefatigable founder, however, has since raised an additional $25 million from other angels, never made a penny of profit, and the value of my original six-figure investment is now about zero.

My fourth investment, and the first one I led, was into a mobile applications company, which was also ahead of its time and never truly understood its market. It, too, went down the tubes. The fifth one was a high-buzz, high-tech play with lots of big-name angels, and we eventually brought in a rock star CEO and a major VC followed us in with many millions. But that one fell victim to rapidly developing technologies, the recession, and the collapse of the consumer electronics market, and is unlikely to return a significant profit.

But while they certainly weren’t positive exits, the optimistic side of me continues to believe that they were all positive learning experiences, and I’ve tried to never repeat the same mistake twice. Luckily for me (and regardless of what anyone else says, there is a lot of luck involved in angel investing), I have since had significant positive exits to companies like Kodak, CBS and Facebook, and the current value of my portfolio is approaching the 30% IRR that rational angels target.

But my experiences are probably living proof of what the academics have been pointing out over the past few years: angel investing can be very lucrative, but it is a challenging path. It requires a mindset that can accept an enormous risk of failure, an ability to stick to at least a ten-year plan, and a willingness to continue executing on your plan despite losses early in the J-curve. According to most studies, getting into angel investing without being prepared to make a total of between 20 and 80 investments is a good way to lose ALL your invested capital.

Marty: How has the business world changed since you first started?

David: The exponential development of technology has begun to cause deep and fundamental changes to the world of early stage finance. It used to be that without millions in funding you couldn’t easily start a high growth company, and that funding could only come from venture capital firms that were hard to find.

My first Internet venture in the early 1990s took about $20 million in venture capital to get to our product launch. My second, six years later, took only $2 million in VC funding. When I started investing, my first angel deal took $200,000 to get to Internet product launch, and one of New York Angels’ recent investments only took $20,000. That’s a three order of magnitude difference!

Combine this with half a dozen books by investors like Bill Payne, Jeff Bussgang and Dermot Berkery explaining everything in painstaking detail, and there is enormously more information to help entrepreneurs achieve their funding goals. This is quite literally the best time in history for an entrepreneur to take a shot at creating a new venture.

Today, with facilitators like Angelsoft connecting over 35,000 accredited investors and bringing best practice tools to over 600 groups, with national and international organizations such as the Angel Capital Association, and with myriad VCs, angels and experts such as yourself blogging exhaustively about the field, this is also the best time in history for people with available assets to get into angel investing.

Marty: What is a key personal attribute you see in successful entrepreneurs?

David: Without question, the single most important attribute of a successful entrepreneur is integrity. And that’s not some philosophical or theoretical malarkey; it’s hard-nosed fact. When we invest in a startup, we’re NOT investing in cash flow or assets. Instead, we’re investing 100% in the person, because that’s all we’ve got.

So if we get even the slightest whiff of anything that doesn’t feel right, we’ll just move on. That means your entire life must be an open book, 100% of the reference checks we do on you (including ones we find on our own) must come back positive, and we need to see that you’ve treated former investors, employees, partners and customers with impeccable fairness.

Marty: Any advice you would like to give to someone contemplating a startup?

David: Being an entrepreneur is tough. Really, really tough. The entrepreneurial life is one of challenge, work, dedication, perseverance, exhilaration, agony, accomplishment, failure, sacrifice, control, powerlessness…but ultimately, extraordinary satisfaction.

It will be without question the hardest thing you will do in your life, and it is absolutely critical that you find personal joy and fulfillment in the process of entrepreneurship, in which case the economic success of your venture will be simply the icing on the cake.

Marty: David, it’s obvious that you personify that advice, and your path has not been an easy one. Thank you very much for your insights and your continuing role-model leadership for all of us, and best of luck in all your ventures! For more, you can contact David directly via his personal website.

Marty Zwilling


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