Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Amos Ben-Meir is an active venture & angel investor and a Board Director at Sand Hill Angels group, based in the San Francisco Bay Area. Prior to entering the investment world, Amos was involved in six startups, either as a founder or as an early employee; four of them have had successful outcomes, and two failed. Currently, he takes different board observer and advisor roles in some of the companies he invests in and offers mentorship for entrepreneurs. Amos is passionate about the intersection of technology, business, and innovation; as of 2021, his portfolio includes over 300 companies.
How it all started? How did you decide to enter the venture investment business?
I had a long career in the high-tech industry, most of it here, in the SF Bay Area, California. Most of my career was spent at startups. I was either an early employee or a founder in six startups; four of them had successful outcomes, two of them failed. Being involved in early-stage startup companies and being part of the fundraising process in some of them, I had an interest not only in product development, which is what I’ve worked on, but also in the financing itself, because my financial incentive was directly linked to the number of rounds, the dollars raised, and the dilution. I got interested in the financing side and during my operating career, I started angel investing here and there, I would say, dabbling in angel investing, but I didn’t have enough time to spend on it and learn the details of what’s involved as an investor. In 2014, I left my last operating role at my sixth startup. It had been acquired in 2012 by a public company, we had a milestone earnout which was achieved in early 2014, so I decided to leave and pursue my next adventure. I’ve been thinking of doing one more company, but ended up joining an angel group called Sand Hill Angels and became really active, joining the board of directors. I’d say within about a year I’ve decided “Oh, I like this, it’s interesting, it’s exciting”. During my career, I’ve tended to be attracted to risky opportunities, so it had that element in it, and I decided to do it full-time. Since 2014, I’ve made quite a number of investments, many of them through Sand Hill Angels. Also, I’ve done quite a few on my own, either directly through my own network of investors and founders that I know as well as through syndication platforms like AngelList and OurCrowd. That’s the context and the background. I’ve built a portfolio of over 300 companies in various sectors and at various stages and had a good number of exits, a couple of which have been very good, and I have taken those returns and recycled them back into the asset class in new startups. In general, I really enjoy the intersection of technology, innovation, and business. If I just broke even as an investor, I’d still be happy because I really enjoy the intellectual stimulation and the interaction with founders and investors, and the whole ecosystem. It’s pretty exciting.
What surprised you or impressed you the most when you just entered this business?
Well, I had a lot to learn. Understanding the mechanics of financing, cap tables, dilution, and all the details of doing multiple rounds and how that affects investors. It actually requires a good amount of work. Maybe “surprised” isn’t the right word, but it was interesting that as an investor, to do this properly you need to learn about all these issues related to putting rounds together. And also, the amount of work that it takes to help companies to make progress and get from the early seed stage to the next stage, whether it’s product-market fit or scaling. Compared to founders, investors have an easy job, but if you’re an active investor and you are trying to help your portfolio companies, it’s a lot of work. And obviously, as an investor in over 300 companies, I am only involved in a handful at any point in time. You can’t be involved with too many at one point, so the rest are more passive investments.
What is the most unusual, or even exotic startup you have ever supported?
I would say the space sector investments I have done are on the more exotic side. One is a company (OrbitFab) that is building gas stations in space to refuel satellites or other spacecraft that have plenty of life left in them but are running out of fuel. Another is Axiom Space which is building the next International Space Station. As a new commercial frontier, space is exciting and fascinating.
How do startup teams usually find you? Do you wait for inflow, or do you scout actively for them?
We are active in finding opportunities. We have really strong relationships with a bunch of accelerators in the Bay Area, many of our members attend those, I also do. We also have some partnerships with VCs, either early-stage VCs or later stage, and so we get deals from them. And then, of course, the group Sand Hill Angels has about 150 members, and each member brings their own network and sources deals from their network which can be either investors or founders. It’s a combination of being plugged into the venture ecosystem, having strong partnerships with VCs and other groups, and using our own network and all the relationships that we’ve built over the years with founders in the Bay Area and in the rest of the US because we don’t focus just on the Bay Area.
Usually, how many startups per year do you fund?
As for the group, it’s growing from year to year. Not sure if I have the correct number for this year, probably 60 to 70, but we invest across stages, so we do early stage as well as mid-stage and late stage. Personally, I probably invest in the same number myself. This is the way the group works: you don’t invest in every deal, it’s an opportunity by opportunity, so each member can choose and select which deals they want to do. This year, I’ve probably been doing close to 60 or 70 deals.
We’ve already talked about technology and innovation. Which verticals or industries are you interested in the most?
As a group, we’re generalists, because we’re such a large group and the interests are very diversified. I can’t say that there’s one specific sector. Personally, I also consider myself a generalist; I like businesses that involve technology and businesses that I personally find interesting. Areas that I particularly like are sustainability, whether that’s in agriculture or the food supply chain, such as plant-based food. Also, I’m interested in SaaS, targeted at businesses. In general, I invested across all sectors, anywhere from cannabis to robotics and space. Actually, space has been an interesting category. I started investing in space in 2016, and some of those deals have become very interesting.
Are there certain industries you like, yet will never invest in?
I don’t tend to invest in many gambling industries, but there are many gambling opportunities, so I have invested in a number. I’d say there’s nothing that’s completely off-limits, although there are industries that we rarely see in the venture ecosystem. And other categories are Life Sciences and Biotech. It’s been very popular with our group, but myself specifically, I’ve done quite a number of investments and there’s a ton of innovation going on in that space.
How long does it take for you to exit?
What I tell people starting out in angel investing is that you need to build a large portfolio over time, so think of it as a five to ten-year horizon. I believe you need to build a portfolio with at least 50 companies and invest or diversify across stages as well as sectors. I invest anywhere from early seed, late seed, all the way through pre-IPO. In this asset class, it’s all about getting access to good deals for the seed stage as well as the later stage. One thing that’s happened in angel and venture investing over the last ten to twelve years is that it’s become a lot more democratized, so if you are an accredited investor and you develop the right relationships, you can get access to really good quality deals that maybe 15 years ago you had absolutely no chance to get into. Platforms like AngelList and OurCrowd bring good quality deals to their investors, so there’s a lot of opportunities now to invest in the asset class whereas 12 years ago there weren’t.
What is the geography of your investments, except the Bay Area?
Primarily, the West and East Coast of the US. We do some investments in Canada. When we invest outside the US, it’s usually through one of our partners. We’ll invest through a special purpose vehicle (SPV), where they’re involved in the deal and they are putting together an SPV to invest directly in a foreign company. They take care of reviewing legal requirements as well as tax considerations. We have invested in companies that’ve been in Europe and Israel, and a couple in South East Asia.
What is your due diligence procedure and how long does it usually take?
That really depends. Personally, I usually can make a decision within a week, depending on what stage the company is at and what information I have access to. At Sand Hill Angels, we have a structured process that can take six-eight weeks, that’s for companies that go through our normal process. Every month we start a new funding cycle, evaluate our funnel of inflow of deals, and select 6 to 8 companies that go through the process of doing an initial pitch. If we like a company, then we’ll start diligence and they’ll do the second pitch. And then, usually, there’s a small team that gets created and does some additional diligence on the company, maybe talking to some other investors of the company or to one or two of its customers. That can take six to eight weeks, but many companies either don’t want to go through that process or don’t have time. If a company comes to us when they’ve got someone leading the deal and that lead may be taking half of the round, but they have to fill up the rest, there’s another half available, then we’ll fast track them. We have a fast-track process that bypasses the six to eight weeks; we’ll work with their schedule, basically. We’ve done deals as quickly as four days. Typically, when we do a fast track, it will take us a couple of weeks to make a decision, and then it really depends on the company’s schedule, when are they closing, so we’ll work with them as far as their schedule. But not every company that we see is eligible for that type of process. In this financing environment, we have to be flexible in terms of our process and how fast we can get finance deals
What is the check size you usually issue?
For seed-stage deals it ranges between $125,000 and $250,000. For the later stage, it can grow anywhere from three to four hundred thousand to millions. I think the biggest deal we’ve ever done has been 3.5 million dollars. Even at the seed stage, depending on the opportunity, we might go up higher than 250,000. One important thing is that we come in as one entry on the cap table, we pool our funds together and invest, so we only appear as one entry on the cap table, even though there may be multiple investors investing in the deal as part of Sand Hill Angels.
How do you usually select startups to support? What are your criteria?
I think different members within our group will probably have their own specific criteria. For me, it’s the team, number one, and then the product and the market opportunity. Also things like potential product-market fit and founder-market fit, but I would say the two things I look out for are the team, the market opportunity, and if it’s a sector I can relate to. Although I’m a generalist, I’ve invested in almost all sectors, but there are those that I like more than others.
What are your red flags?
If the founders and the team aren’t transparent, if they misrepresent the situation in a very significant way, that’s a red flag. There’s always a bit of exaggeration when a team presents, and so you take some of those things with a grain of salt, but I always tell founders to be direct and to tell the investors exactly where things are at because while they want to see the traction, of course, and that you’re making progress, they’re really investing in the future, in the story of a company, and the market, and the team. It’s always better to be transparent and honest, so misrepresenting is a red flag. Having a broken cap table is also a red flag because that can cause problems later on. Not having your legal documents set up correctly, that’s something you should always fix promptly.
What are the common mistakes startups usually make?
Too many to describe. Miscalculating how long it’ll take them to do things and sometimes, when they’re doing a raise, focusing too much on valuation versus making the deal more attractive to close the investment much quicker. Almost in every phase of the startup there are mistakes, there are go-to-market mistakes, product-market fit mistakes. Founders will tell you that they’re making mistakes all the time, and the difference is that the great teams will learn quickly, and pivot, and adjust. There’s plenty of examples of very successful big companies that have done that, started out, had to pivot, and just learned along the way. If a team can’t adjust quickly and correct, that is typically the biggest problem, not having the adaptability. This goes back to why the team is so important: having the persistence, the adaptability, the resilience, and the commitment to be in the company or in the mission for the long term. If all they’re doing is looking to make a quick buck, it’s usually not a good recipe for success, because they will get frustrated and walk away from the project.
Are there any other qualities for teams to have, some necessary ones?
That one is hard to gauge at the initial investment stage, but teams that work well together, that have a good fit; if there are multiple founders, that they have a good founder fit with each other. Just real energy, real hustle, and flexibility. If you have a great market but a mediocre team, and I can say from experience where I’ve had some hesitancy about the team and made an investment, all of those situations have basically been losses. I’ve had my share of losses and definitely learned from them. Although I still make mistakes, I’m sure. You really don’t know if you’re good at this until you’ve done it for ten years maybe, and then you can look back and say “Oh yeah, I made some good choices”. Also, it’s having good relationships with other investors, with the founder community, and getting access, and then having a good amount of luck. Being in the right place at the right time helps.
What is your process of working with startups once you invest in them?
That depends on the stage. If there’s an early stage, sometimes we’ll take a Board Observer position or Board Director. We’ll attend board meetings and ask them how we can help. If they’re looking to recruit, we’ll help them there. If they’re looking to raise another round and they’d like introductions to VCs, within our membership we have a good amount of connections to VCs across the US and we will make introductions when possible. In any other way, if they need to strategize about the market or scaling, we’ll try to find people with relevant experience within the group that can help out. Other times, it’s those investors that have invested in the company from the group, but many times it can be other members in the group that didn’t invest. We leverage the size of the group to see if we can help; sometimes we can help and sometimes we can’t. We have had situations when members or investors have filled operating roles within a company for a while, that also happens, although not that often.
How much runway should a startup have to feel safe?
We’d like to see 18 months of the runway when at the seed stage, because if it’s much shorter than that, 12 months or less, that usually means that by the time they’re done raising the round, they have to start working on raising the next one. So we do like to see 18 months, although we all invest in specific situations where there’s less runway, it’s clear that the team is about to hit milestones that will enable them to raise another round. It’s not a hard rule, but usually, we’d like to see 18 months of runway.
What is your target multiplication on exit?
We’d like to see 10x or above, nobody would complain if every exit was that. If it’s 10x or below, or even zero, that’s probably where most of the startups fall. I would consider multiples of ten, like 20 to 60x, to be more the outliers, and then there are super outliers: 1,000x to 2,000x to 3,000x, or if you were an early purchaser of Bitcoin when it first came out, you’ll be in the millions of multiples. The first holders of Bitcoin are probably sitting on 3,000,000x now. The goal for me personally is to see in the tens, like 10x or above. Of course, many times you have to settle for either a loss or single digit multiples.
What percentage of the company is fair to take for investment?
We’re angel investors and an angel group. We don’t really have target ownership because our check sizes are small, so we’re not going to get a big piece. When we do invest a sizable amount, it’s probably in the single-digit percent of ownership. At the end of the day for investors what matters is at what share price you got in, and when there was an exit, what was the share price at that time. Of course, if you had split along the way that affected it, that also comes into play, but it’s all about the amount you paid for the shares when you invested in and the amount you’re getting back per share when an exit happens.
Have you ever rejected a startup and then regret it?
Oh yeah. I know that Carta, which was originally eShares, came to our group before I joined, very early on. The group passed on them, and Carta is now worth about 7 billion dollars based on recent financing, but fortunately, we got into it at a later stage. Every investor in this asset class will have their misses for various reasons, and obviously, there are opportunities we never got access to, although I wish we had.
Has your fund’s approach changed after COVID-19 started?
We’re not really a fund, rather our individual funds put together. We were used to meeting startups in person and have a lot of in-person meetings; it’s all done virtually now. Everybody seems to have gotten comfortable with doing investments over Zoom, that’s one change. There’s one major change that after a couple of months into COVID was very obvious: that the investment pace hadn’t slowed down at all. It accelerated, and the amount of work was larger all of a sudden. My conclusion was that everybody was working all the time and making more investments, and that’s creating more work for everybody else. I think that the pace of investment actually accelerated, everybody got comfortable with doing it over Zoom, which is more efficient and less time-consuming. Also, a really significant increase in Life Science deals because the focus on COVID and all the technology involved in developing the vaccine has created interest in the Life Sciences.
So do you see COVID more like a threat, or an opportunity for the VC world?
Not really a threat at all, although it’s the health crisis, a really sad chapter in human history. Aside from the human suffering and those negative consequences, as far as the investment is concerned, it didn’t have a negative effect, it had an accelerating effect on money pouring into innovation and technology. Also, you have to look at certain monetary policies by the US government with money being pumped into industries and stimuli. Considering where to invest your money, in what opportunities, there’s a lot of liquidity in the system and money looking for good opportunities to invest in. That worked well for the venture world, including IPOs, SPACs.
Where do you get your daily information from?
Subscribe to a bunch of newsletters, podcasts, and that’s pretty much it. Newsletters, certain online sites that are focused on the venture, all mostly through email. I have a few paid and free newsletter subscriptions, from those I glean whatever I can.
Is there anything you can recommend to startup founders, like blogs, movies, emails, events?
Well, focus, focus, focus. There’s a ton of information out there on all the various topics that startups deal with. Just explore, read, and get yourself a good set of advisers that can help, either direct you to the information or can help you directly with specific needs you have. If you’re at a point where you can afford legal counsel, definitely get that, a company counsel that has experience in the startup world. There’s a tonne of books out there that would be good reading for founders. They’ve got so much on their plate and they need to learn all the time about financing; there’s a good book by Brad Feld called “Venture Deals”, it’s a good reference book for founders and for investors. I highly recommend reading that and just using whatever resources you can get.
What qualities, you think, are important for a good VC?
Always treating founders respectfully, whether you think they have a chance of success or not. Be mindful of their time, because obviously, you’ve got your time constraints. And then, VCs and investors, in general, need to be aware of opportunities that seem crazy or may not make complete sense to them. It’s usually those that are not obvious that can turn into breakout companies. If the opportunity is obvious, if it makes total sense, it may be so competitive that it’s hard to succeed. Generally speaking, keep an open mind about the opportunities and try to ignore what I call your personal biases, because you may be at a point in your life that you say “Oh, I would never use that”, but you’re not necessarily a representative of the next generation. Be open-minded and sensitive to valuations, although I would say that’s (valuations) been thrown out. If I look at the VC industry today, that particular quality has been thrown out the window; valuations are totally nonsensical in some cases, but it’s a matter of supply and demand, like any market. A bit of a valuation bubble.
What is the most important thing you’ve learned from startup founders?
Be willing to be challenged and question whether you’re on the right path and doing the right thing. I’ve been a founder and operator in startups myself, so I understand what it takes to go the distance. Resilience and persistence and adaptability are the key things that I’ve learned along the way. The successful founders I see over and over again are reinforcing that lesson.
And the same question for fellow investors. Is there anything you learned from them?
Oh yeah, a ton. Learning about the investing process and how to become a good investor requires a lot of work. There’s a good amount you can do on your own, but there’s no substitute for the experience of others. Having joined a group like Sand Hill Angels that exposed me to investors that have had a good amount of experience has been a real plus and it helped me learn a lot. I like to learn both from self-reading as well as interaction with others. Maybe not one specific thing, but listening to what others have been through and understanding the whole mechanics of how things work, that’s been great.
To your mind, is VC business chess, checkers, go, card games?
If I were to think of it as a game, of those you mentioned, maybe checkers. It’s more like gambling, at least the perception that you have, some sort of knowledge about what you’re doing. You at least think the odds are not in the favor of the house, and that you have a good chance of winning.
Finally, your three pieces of advice to startup founders?
Be honest and direct with investors, build a quality team. The worst thing you can do is to hire wrong people, but if you do, be decisive and correct. And be flexible and adapt.