By the end of the screening, I had agreed to invest in two of the presenting companies; and for one of them, a company with an easier way to install Christmas lights on a house, another judge had decided to coinvest. Later I sent him an e-mail to discuss how we’d follow up with the presenter, but I never got a response. I guess he was just acting, while I was actually interested in investing.
All in all, it was a fun experience, and I never seriously expected I had a shot at the job. Fantasizing about it, though, made me realize I had a bit of a penchant for fame that I hadn’t realized before. Whenever our PR department at Simply Audiobooks had gotten us into the news, I deliberately stayed out of the spotlight and avoided photographs if I could. I preferred to focus on the operational side of the business, while Justin eagerly took the role of poster boy for the company.
As expected, I didn’t get the role. It went to Bruce Coxon, the founder of Lava Life, Canada’s leading online dating site. But over the following few months, I was careful to let slip to a few people that I’d secretly been screened to be on the show. As it was for me, everyone’s reaction was, “Why would you want to present on Dragon’s Den. Don’t you already have money?” And I would have the pleasure of saying, “Not as a presenter. As a Dragon!”
---
As we left the studio on screening day, I said to Ajay that we should get together for lunch sometime. He said to just let him know when I was downtown one day, and we could set something up. I considered my comment to be a friendly invitation to an equal, but Ajay’s response took me slightly aback, along the lines of “Why is he assuming I’ll come to him?”
I still thought it was a good idea to get together outside a direct business context and get to know a fellow South Asian entrepreneur a little better, so a week later I suggested a couple of dates for lunch, and I got another surprise—Ajay suggested I drop by at 11:30 a.m. for a thirty-minute meeting, rather than the friendly lunch I’d anticipated. When I showed up for the meeting, he gave me a quick tour of his office space, then instead of inviting me to his own office to chat, he sat me in a small conference room where he sat down, steepled his fingers, and said, “So, what can I do for you?”
Now I was pissed off. Ajay had clearly taken my outreach to be some sort of attempt to curry favor or otherwise get something out of him, despite my stating clearly twice that I just wanted to get together for a friendly lunch to get to know each other. What followed was an awkward conversation about what my company and his company did, trying to find some common ground to work together, rather than just socializing. I decided at that moment that a) Ajay was a jerk, and b) he had taken my reaching as a sign of weakness. I didn’t like the experience, and I started having my assistant set up meetings instead of doing them myself. I’ve found that having an assistant seems to be a clear delineation in the business world of having “made it.”
Having had my own experience with karma, I knew that Ajay would eventually get his. Clearly he wasn’t going to be a successful businessman.
(Update: two years later Ajay and his partners sold their business for $65 million dollars).
PLEASE HELP ME
“Help me, Papa! Help me!” I heard my daughter Nikhita yelling, and she was clearly in trouble. I yelled back, “I’m coming!” even though I wasn’t sure exactly where she was. Her shrieks were getting louder, and I was growing more frantic. I asked repeatedly, “Where are you? Where are you?” but she only responded, “Here! Over here!” I finally got frustrated, peeked my head over the top of my laptop, and said to her, “Would you please just calm down and tell me where your character went?” Her face fell as she closed the lid of her own laptop. “Doesn’t matter. She’s dead now.”
It was a regular Friday night activity for Nikhita and me—questing together in World of Warcraft with her Hunter and my Priest in the online multiplayer adventure game. My wife, Rishika, came over from the kitchen with sandwiches for us and asked, “What was all that yelling about? I heard Nikki yelling ‘Where are you?’ and I could see that you two were sitting across from each other on your laptops.”
I laughed and pointed at Nikki. “Sorry, babe, she got too far away from me in the forest, and the Orcs got her.” Rishika rolled her eyes and wandered away as Nikki grinned at me and opened up her laptop again, saying, “Are you going to help me this time?”
---
I liked helping people. As an angel investor, I had already helped Justin and Ryan start successful businesses, and even with the wreckage of P3 behind me, I still wanted to help entrepreneurs start businesses. Plus, I still needed to invest somewhere. For the past few years, every penny I had was invested in my own company, but now it was time to diversify.
I already had a small amount of money in an RRSP account that I had started through a company investment-matching plan years earlier when I was with Nortel, and to which I still contributed a small amount annually. My investment advisor was a pretty redhead, and I put the money wherever she told me to, which increasingly seemed to be in a constantly changing series of mutual funds. Each change resulted in additional fees to her brokerage, and one day I asked her, “Why are there so many different mutual funds?”
“So you can diversify,” she replied.
“I thought a mutual fund was already diversified?”
She gave me a quizzical look and said, “Well, it lets you diversify more.” That was the last year I put money into mutual funds or my RRSP.
I already knew I couldn’t invest profitably in the stock market directly—I had read several stories in newspapers about trained monkeys outperforming professional investment brokers 80 percent of the time, so what chance did I have? And training monkeys seemed like hard work.
I could invest in real estate, but my very first purchase, a downtown Toronto condominium I’d bought in the fall of 1988, fell in value from $325,000 to $240,000 in the Toronto housing crash of 1989. It left me with a serious scar over any fondness I might ever develop for real estate, despite my father being a property developer himself.
Having already made money in angel investing, I resolved to just keep investing in more entrepreneurs and more startups. The question was, where to find them? There had at one time been a downtown Toronto group called the Toronto Venture Group, which included the Toronto Angel Group. I had attended some meetings a few years earlier and was surprised to find out that both organizations had folded.
Asking around my network, I was told that there might be a new angel group forming in Toronto’s western suburbs, which happened to be where I lived and worked. I was eventually given the name of Karen Grant, who had worked previously with the Toronto Venture Group and knew a lot about the startup investment scene in Toronto. I called Karen, and after initial pleasantries, I asked, “So I hear that there’s some talk of setting up a suburban angel group for West Toronto. Do you know anything about it?”
“Not only do I know about it,” Karen replied. “I’m the one setting it up! Can you tell me a bit about your background?” I proceeded to describe my litany of a dozen failed investments over the prior two years via P3 and the occasional independent deal, and then asked her, “So do you think I’d be able to join this new investment group if you put it together?”
Karen immediately said, “It’s definitely going to get going, and soon. We’re going to be calling it ‘Angel One.’ How would you like to be on the board of directors?”
I was surprised at the request. I just wanted to qualify as an actual angel investor. Why was she asking me to be on the board? I said, “Karen, that’s very nice of you to ask, but I’m completely unqualified. Sure, I had some successes a while ago, but I’m really not good at this investing thing. I’m just trying to learn more. I mean, you heard how many failures I had—I’d be a horrible board member.”
“That’s exactly why you’d be a great board member” Karen replied. “You’ve made more investments than most people, and you have more experience than you think.”
“Okay, then count me
in.”
Since my last foray into the angel world, raising $450,000 for Simply Audiobooks from two wealthy individuals, angel investing had become syndicated, and any given company could raise $500,000 from many angels in small chunks of $10,000 to $50,000 per investor. It allowed many more novices to become angels and served to create a much better financing ecosystem for startups.
My first formal investment was alongside fifteen other angel investors, throwing in $10,000 each to a company called Quant Interpretive, which mapped demographic and other identifying data onto user-selected geographic areas. The technology could be used to find the ideal neighborhood for a new donut shop or target areas for certain direct mail advertising campaigns. I liked it and didn’t do much due diligence since so many other people were investing. A couple of months after writing my check, I got a visit from a consultant working with the company, who told me that the initial investment was already spent and that much of it had gone to resolving a dispute between the partners. Now the company needed more funds.
I mentally wrote off the $10,000 and said, “Okay, thanks for letting me know. But you could have told me that in an e-mail.”
“Yes, but I was hoping you could help with the next round of fundraising,” he replied. “If you put in another $20,000, it would signal positive things for the company, and I’m pretty sure all the other investors will pony up too.”
I said no, but he was persistent, and I eventually said, “Look, I won’t lead it for you, but if another investor leads it, I’ll put up the $20,000.” I didn’t think anything further was going to happen, but to my surprise, a few days later I got a call from a fellow investor who had put in another round of funds and who asked me to put in a second round as well. With great misgivings, I agreed.
Over the next two years, the company didn’t grow at all, and I eventually sold my stock back to the owners for one dollar, effectively losing the entire investment. I had invested because others were investing, not because I thought it was a good idea, and I resolved to do my own decision making in the future.
I particularly liked a company with an application for creating gifts via a short video greeting on your phone and an accompanying digital gift certificate. I fell in love with the product during the demo, but during the conversation I asked the entrepreneur what might go wrong with her business, and she replied, “Nothing.”
I laughed and said, “Seriously? Nothing? What if you get sued by Twitter for using Vine technology, or you get hit by a bus or something?”
She smiled and said, “But neither of those are going to happen.”
I thought to myself, “She’s not paranoid enough,” but I wrote a small check anyway, setting up a set of milestones that would trigger release of a larger sum.
As it happened, the company took longer to get its product released than any of us expected and as a result missed many of its milestones. After discussing it with the founder, I released the next round of funds anyway, feeling that the misses weren’t really their fault. But as I signed the paperwork, I found myself wishing that someone else would step up and fund this round. I felt the risk associated with the company had grown substantially, but I also felt responsible for them and didn’t want to pull the plug. Unfortunately, this company didn’t do well, either, and it was shut down a year later.
My lesson? If you wish someone else would invest in a company instead of you, that’s a really bad sign. Listen to your gut. Not because your gut is always right, but because you feel like such an idiot when it was right and you ignored it.
With my best investments, there was always a point in the deal where I was afraid the other person would pull out. With Simply Audiobooks it was when Justin asked if I’d sell the company instead of buying it. With Fusenet, there was a point when I asked for some protective covenants on my investment that dramatically reduced my risk exposure, and looking at the contract, Ryan paused and said, “You’re getting a really good deal on this, aren’t you?” I felt a flutter in my chest but simply responded, “Yes, and so are you.”
---
As I started to invest in more small startups and also became a limited partner in the Silicon Valley-based 500 Startups seed fund, my father made the comment, “Son, you really should save up some money instead of constantly reinvesting it.”
“Dad, you’re getting 2 percent on your GICs, but my return on angel investing to date has been a kazillion percent!”
“Son, trust me,” he replied. “When you have $3 million sitting in a savings account, it will make you feel great.”
I put my hand on my father’s shoulder and said, “Dad, if I ever see $3 million of my money sitting in a savings account, it will make me sick to my stomach.”
As usual with my father’s comments, after the initial conversation I stopped to think about what he was saying—whether all my high-risk investing really had been successful. After all, it had been a long series of failed investments since my last success with Fusenet. Maybe my return wasn’t a kazillion percent? It was a troubling thought.
A few months later, I was attending the wedding of a friend of mine, Gaurav Jain, in Half-Moon Bay, south of San Francisco. I had been a mentor to Gaurav as he’d rapidly gone from Waterloo University to starting his own company to selling his share and attending Harvard Business School. Now he had just joined a venture capital firm in Boston as an associate and was getting married. Given his associations, there were a number of VCs in attendance, and I found myself at a rehearsal dinner bracketed by VCs on either side.
Of course we started discussing investing in private companies, and I mentioned to the venture partner on my left that I’d had a long string of losses, but it wasn’t out of line with the typical success rates I’d seen for angels. He replied, “Sanjay, startup investing is a game of outliers. It’s not the 3x or 5x exits that make you; it’s the 50x to 100x exits on billion dollar companies like Uber or AirBnB.”
I was skeptical. “Seriously? Who even gets in on investments like that?”
He smiled and said, “We were in the first round on Uber.” I was surprised and showed it. He laughed and added, “It’s all about who you know and getting the right deal flow.”
I was still dubious. “So, in other words, you got lucky.”
“You just need one,” he responded. “The key is to keep investing and to have enough companies in your portfolio that you eventually stumble across the one.” He also said, “No offense, but angel investing is a fool’s game for 80 percent of angels. It’s no better than the stock market. Most angels don’t play to win; they play for the love of the game. It’s good for us because it lets us come in at a point in a company’s development when a lot of the early risk has been taken out, but the valuation hasn’t gone up a lot.”
“So are we a good thing or a bad thing, from your perspective?” I asked.
He paused, and then the VC on my right cut in. “You’re cannon fodder.”
I laughed, but it was only on the outside.
When I returned to my office in Toronto, I decided to get more serious about tracking my investments, and the next morning I was standing in front of a whiteboard shaking my head when Emily, my assistant, came in and asked what I was doing. “It’s a list of all the investments I’ve lost money on,” I confessed. Emily pursed her lips and whistled disapprovingly. In front of me were sixteen losses in one column and two successes, Simply Audiobooks and Fusenet, in the other column. That was similar to the one-in-ten success statistic I’d heard venture capitalists get on their investments, but there was zero margin of error. I couldn’t help but think that if Simply Audiobooks had failed, I never would have had the money for Fusenet. Did it really all come down to just one company?
Out loud I said, “It looks like my first two investments were just dumb luck. I’m not sure I’m any good at this.”
Trying to be supportive of my self-disparaging conclusion, she pointed to the two successes and said, “Even these weren’t actually angel investments were
they? You started both of these companies.”
I shook my head. “No, they really were just angel investments. I put in my money, and it wasn’t until a year later in both cases that they were doing well enough for me to join as an employee.”
Emily pointed to the other column. “You lost money on all of these?”
I underlined a few company names and said stoically, “Actually, these four haven’t been shut down yet, so I might actually make money on them.”
Emily said, “What about those earlier companies that you told me about once—VideoDrive and Nikean? Why aren’t they on here?”
“Well those really were companies I founded. I wasn’t an angel.”
I turned away from the whiteboard and said to Emily, “Can you take all this down, look up return-on-investment formulas in Excel, and see what my rate of return is?”
The next day she showed me a nice, color-coded page of investments, losses, returns, and terminal values, with the bottom-line figure of a compounded annual rate of return of 68 percent over ten years. Staring at the sheet, I mumbled to myself, “Just a little better than you, Dad.” I hadn’t actually sold either Simply Audiobooks or Fusenet, but based on past and expected future cash flows, Fusenet was almost a 20x return on my investment, and Simply Audiobooks was considerably higher than that. I already had my outliers. And I had no doubt that more would come if I just kept playing the game intelligently and learned from my mistakes.
In discussions among angels and VCs, I have now adopted the attitude that a large number of bad investments are just part of a game that savvy investors play. I need to fail more, not less, so that’s my plan now—to keep investing and failing, and every once in a while, hitting it out of the park.
AUDIOBOOKS.COM
“I’ll give you one word to explain why CD audiobooks are going to be around for a long, long time to come,” said Chris Anderson, an editor at Wired magazine, at the annual meeting of the Audio Publishers Association in 2006. “That word is ‘Buick.’” There was a moment of silence as people digested the meaning of this, then Anderson explained. “CDs are the default medium for listening to anything in the car, and people aren’t going to buy Buicks that don’t have CD players in them. For a long, long time.”
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