In light of the importance of governance on countries’ economic success I wholeheartedly agree. Bad governance has repeatedly destroyed countries or slowed their growth. We have had many dramatic examples from Mugabe’s destruction of Zimbabwe over the last 15 years to Argentina’s decline from one of the richest countries on a GDP per capita basis to a poor country over the course of the 20th century due to the populist policies of Peron and his successors. The extent to which bad policies and politicians can impact economic outcomes is disheartening and I hope that current American politicians ponder the lessons of history!
While the specifics of his idea don’t feel right – I loved the example of Henry the Lion who created a merchant’s Mecca out of Lübeck and transformed it from a backwards city in a failed region with a “bad-governance equilibrium” into a resounding success through light taxation and regulation:
“Onerous taxes and trade restrictions were ruled out; merchants who settled in Lübeck would be exempt from duties and customs throughout Henry the Lion’s lands, which stretched south as far as Bavaria. The residents of Lübeck were promised fair treatment before the law and an independent mint that would shelter them from confiscatory inflation. With this bill of rights in place, Henry dispatched messengers to Russia, Denmark, Norway, and Sweden. Merchants who liked the sound of his charter were invited to migrate to Lübeck.
The plan worked. Immigrants soon began arriving in force, and Lübeck became the leading entrepôt for the budding Baltic Sea trade route, which eventually extended as far west as London and Bruges and as far east as Novgorod, in Russia. Hundreds of oaken cogs—ships powered by a single square sail—entered Lübeck’s harbor every year, their hulls bursting with Flemish cloth, Russian fur, and German salt. In less than a century, Lübeck went from a backwater to the most populous and prosperous town in northern Europe. “In medieval urban history there is hardly another example of a success so sudden and so brilliant,” writes the historian Philippe Dollinger.
Perhaps the only thing more remarkable than Lübeck’s wealth was the influence of its charter. As trade routes lengthened, new cities mushroomed all along the Baltic shore, and rather than develop a legal code from scratch, the next wave of city fathers copied Lübeck’s charter, importing its political and economic liberties. The early imitators included the nearby cities of Rostock and Danzig, but the charter was eventually adopted as far afield as Riga and Tallinn, the capitals of modern Latvia and Estonia. The medieval world had stumbled upon a formula for creating order out of chaos and prosperity amid backwardness. Lübeck ultimately became the seat of the Hanseatic League, an economic alliance of 200 cities that lasted nearly half a millennium.”
Paul Romer’s idea, while intriguing, does not feel right because in our nationalistic world sovereignty and land ownership are explosive issues. Creating cities with new foreign-run rules might solve the trust and credibility problem that many developing countries face as well as attract investments and jobs if people felt the charter would hold. However, it does not seem likely that countries would be willing to lease chunks of their land to foreign powers. The Madagascar example suggests it’s not likely to happen. Besides, Lübeck did not have foreign rule. There is no way Henry the Lion would have let a foreign ruler take charge.
I suspect that a large purchase of land from a poor country in an unpopulated area, most likely in Africa, might work if the new country’s sovereignty could be enforced.
I look forward to seeing some experimentation on the idea in the future!
Non sequitur: One of Paul Romer’s research papers in the early 90s was the inspiration for my junior paper at Princeton: Tariff Policy with Differentiated Products. Mathematically inclined readers wishing to assuage their curiosity can check it out :)
Earlier this year, I wrote a relatively thorough blog post on how my partner Jose Marin and I make angel investments: A SuperAngel’s Investment Guide. While revisiting the topic, I realized a few elements were worth clarifying.
In the article I mentioned how we only focus on consumer facing companies and how we invest in a wide variety of geographies. It’s worth pointing out that our geographic focus is bounded by the nature of the idea, that our investments fall into three categories, that we never join the board of the companies we invest in, and typically don’t do follow-ons.
1. Geographic Specificity:
We invest in innovative ideas in the US market.
If we are going to take concept risk, we don’t want to take market risk. To the extent an idea is unproven; we’ll place a bet on the US market. Should the market prove to be a niche, the US market might be large enough for the company to be a success. Getaround which recently won Techcrunch Disrupt is such an example (and hopefully won’t be a small niche :)
We invest in proven models in Brazil, Russia and Germany and to a lesser extent in Turkey, China, the UK and the rest of the world.
If we are going to take market risk, we expect the model to be proven. We don’t have absolutes in terms of what “proven” means, but for the most part we expect the original concept to have reached $100 million in revenues and to be either profitable or have a clear path to profitability given its gross margins and potential net margins. Viajanet falls into this category.
2. Investment Types:
Traditional Angel Investing
For up to 40 companies a year, we are small investors in projects where the funding is led by others. Typically the funding is led by our VC friends (Redpoint, General Catalyst, Bessemer, DN Capital) or our angel friends and friendly early stage funds such as Oleg Tscheltzoff, Team Europe, and Xavier Niel and Jeremie Berrebi of Kima Ventures. In those deals we mostly play a passive role. We involve ourselves only to the extent the entrepreneur wants an introduction to a VC or potential partner, or quick feedback on the product or deck.
Projects we Advise and Accompany
For up to 6 companies per year, we lead the round. We do the full screening of the project. We help the entrepreneur with his presentation. We bridge the entrepreneur if necessary. We raise the funds from our angel network (200 first tier angels). We do monthly follow-up calls and 3 yearly meetings in person. We are typically very involved during the first 12-24 months – basically until the startup gets a VC on board who takes over from us.
Projects we Initiate
For up to 2 companies per year, we start the companies. This is Jose Marin’s and Carlos Martin’s day job at IG Expansion and I help out a little. We identify the model, bring in amazing co-founders with 20-30% of equity, invest the first $2-3 million and raise the first VC round after that. In 2010, we started Viajanet, an Expedia for Latin America. In 2011, we launched Lofty, a next generation HomeAway / Airbnb. Later this year we will help launch a new ecommerce project in Brazil headed by my brother Olivier.
3. We don’t join the board of companies we invest in
When I started angel investing in 2005, I invested a lot of money in very few companies and typically joined the board, organized regular meetings and was very involved. This early batch of companies mostly failed, and I realized that most of the time spent was not productive and definitely not scalable given my day job as Co-CEO of OLX and my desire not to spend more than 5 hours a week (or 10 hours in a crazy week) on angel investing.
An email update or a 5-10 minute phone call once in a while is more than enough to get a sense of how the business is doing. Moreover, rather than having structured times to talk, it’s much better to be available punctually when the entrepreneur needs help. This works better for the entrepreneurs because they get the help they need when they need it and don’t have to spend nearly as much time on reporting.
We sometimes don’t talk to the entrepreneurs for 6 months or more, but then end up spending a lot of time with them discussing a term sheet they might have received if they are fund raising, etc.
4. We typically don’t do follow-ons
Jose and I typically invest $10 – $250k each in companies we decide to invest in, with an average of $50k for me and $25k for Jose. We typically get a few percentage points of the company and our investment is typically part of a $500k – $1 million round. Pre money valuations vary dramatically based on the product development stage, capital requirements, team experience and company traction, but range from $300k – $3 million with an average around $1.5 million.
The reason we typically don’t do follow-ons is that the VC round tends to happen before the model is really proven and at a high enough price that our pro-rata would represent a significant amount of capital which just does not fit our model (though it makes sense for VCs which have more capital to deploy). This is all the more true in these frothy times as the duration between an angel round and a VC round has compressed while valuations have increased. We would rather invest the money in new startups.
We follow-on only when it’s a no brainer and we would look like idiots if we did not given the company’s traction and the terms of the fund raising.
Angel Investing Update
As mentioned in the prior angel investing post, 2010 was a year for the record books. We invested in 22 companies, followed on in 4 others and had 5 exits. At the end of last year, we decided to slow down the pace of our angel investing due to the frothiness of the market and the trend, especially in the US, towards convertible notes, either uncapped or with high caps, instead of priced rounds.
We never invest in convertible loans unless they have a low valuation cap. We feel that the 15-25% discount to the series A they typically offer is not enough compensation for the much greater risk of investing at a very early stage, especially since a series A round is far from guaranteed to happen. If the entrepreneur insists on the convertible structure, we will just wait to invest in the series A.
Moreover, we feel that convertible loans are a bad idea for a startup. They typically are due in 18 months. They work out better for the entrepreneur from a dilution perspective if a VC round happens during that time period. However, should a round not happen, it guarantees a failure as the company will not have the money to repay the loan. In these frothy times, it’s easy to assume that a company will raise a VC round, but people forget how rapidly investment conditions can change and should focus on building companies that have staying power instead. Even in these times, many companies will not, and many should not, raise VC money given the market size they are going after, the market dynamics, etc.
It’s not inconceivable that a technical default by the US or a real default by Greece, or worse Italy or Spain, could send the credit markets and all investment markets in a deep freeze. If this was the case most of the companies which raised convertibles would fail. In 2000-2001, I invested in 7 companies. One went under immediately. If you had asked me how much the 6 remaining ones were worth in 2002, I would have told you zero. Yet over the course of the next 6 years most of them ended up doing incredibly well with 1 IPO and 4 very successful exits, despite the fact most failed to raise venture money for many years. Had they raised money through convertible loans, they probably would not have had the same staying power.
Somehow, despite the frothiness of the current environment, we ended up finding many great entrepreneurs to invest in and are on track to invest in twice as many companies as in 2010, which was by far our most prolific year. In 2011, we have already invested in 23 companies, followed on in 5 companies and had 4 exits with many more investments pending.
We had a partial exit in Viajanet and full exits in Dineromail, Phanfare and FamilyBuilder. The first two were huge wins: Dineromail was my largest angel exit in absolute dollars and Viajanet my highest return on investment ever with a 50x return in a year. Phanfare was the only loss with a 90% write-off.
Here are the companies we invested in so far this year:
January 2011: eVenues.com, an Airbnb for meeting spaces
June 2011: Gezlong, we helped structure the round for the Jetsetter of Turkey
June 2011: Newpeaks Invest, stealth Brazilian ecommerce project
June 2011: Follow-on investment in Martingale which runs a hobbies marketplace
July 2011: Falcon, stealth German ecommerce project
July 2011: Visual Revenue, front page performance improvement for online media
July 2011: DeporVillage, online Spanish ecommerce site for sporting goods
Excluding the companies I ran (Aucland, Zingy and OLX), I have now made a total of 77 investments ($10 million invested), had 16 exits or closures (11 gains, 5 losses, $9 million recouped) and still have 62 companies in the portfolio.
We’ll see what the rest of 2011 has in store for us. We would actually like to slow down the pace of our investing, but we keep running into fantastic entrepreneurs we feel compelled to back.
In the meantime, you can watch my keynote at La Red Innova which summarizes everything we learned about angel investing:
I am also including the post keynote interview for your viewing pleasure:
Over the last two weeks I had the pleasure of attending the eG8 Summit in Paris at the invitation of French President Nicolas Sarkozy and being invited to tea with David Cameron, the Prime Minister of the UK, at 10 Downing Street. I wanted to share my reflections on both experiences.
The fact that Sarkozy got 1,000 Internet entrepreneurs together in Paris in less than 6 weeks was actually a very impressive feat. Moreover, the who’s who of the Internet was there: Mark Zuckerberg, John Donahue, Eric Schmidt, Sean Parker and many others!
McKinsey started by sharing the findings of a very interesting study they did on the Internet where they showed that:
For every job destroyed by the Internet, it creates 2.6 jobs
The Internet accounted for 3.7% of GDP in the countries they surveyed
The Internet was one of the fastest growing components of GDP in the countries surveyed
Sarkozy then gave a very eloquent speech where he stressed the importance of the Internet to France and as a force for liberty and freedom around the world as displayed during the Arab uprisings. Unfortunately, this is where my compliments end.
Sarkozy kept emphasizing how important it was for the Internet to be “civilized” (e.g.; regulated) and for intellectual property to be protected. The conference itself was boring as the old guard was talking to and at the entrepreneurs rather than talking with them. Worse, the smaller working “forums” were useless as the concluding slides had been written before the conference and their content in no way reflected the discussions in those forums (if anything, they said the exact opposite)! All the political “conclusions” had been reached before the conference even started!
The French government was not ready to heed the advice of the delegates. Eric Schmidt suggested: “Technology will move faster than governments, so don’t legislate before you understand the consequences. You want to tread lightly in regulating brand new industries. The trend is that incumbents will block new things … nobody who is a delegate here would want Internet growth to be slowed by some stupid rule.” American journalism professor Jeff Jarvis stood up and asked Sarkozy to take a “Hippocratic oath” for the Internet: first, do no harm. In response, the president of France said “of course,” but couched his reply in terms that address the need to protect security and privacy.
The event had no real point and seemed merely to be a photo opportunity of Sarkozy chatting with Internet leaders under the pretense he consulted the industry before passing any laws. From a content perspective LeWeb is much more interesting! Fortunately, the networking opportunities at eG8 were great and I took advantage of the opportunity to catch up with all my good French Internet friends.
The meeting at 10 Downing Street with Cameron could not have been more different. There were less than 100 Internet entrepreneurs, but all extremely relevant (which made it much more productive). Moreover, Cameron came in saying: “I disagree with Sarkozy’s conclusions and there are three things I want you to know:
The Internet represents the future of economy and is a great driver for growth and we want your companies in the UK.
We understand we don’t have the best environment yet, but are working hard putting in place the right and extremely friendly environment from a regulatory and tax perspective.
I have a great team of advisors here to help, lean on them as much as you want.”
Instead of Sarkozy’s: “We want to tax, regulate and control you”, it was: “We want to set you free to do whatever you do best and let your creative spirits run wild!”. The contrast is all the more farcical as France just banned the use of the words Facebook and Twitter on TV to the astonishment of every Internet entrepreneur in the world!
Even their personal styles could not have been more different. Sarkozy’s mannerism and tone reek of condescension and arrogance. By comparison Cameron was jovial, approachable, light hearted and self-deprecating: “I sat between Obama and Zuckerberg at the G8 and could not believe I belonged in the room!”
The conclusion is ineluctable: Cameron rules, Sarkozy sucks! Now if the Brits could just do something about the weather in London, I might even consider moving there :)
Envoye Special just aired the sequel to the show from 11 years ago that I mentioned in the previous blog post.
In this flattering portrait, they follow me around New York and Buenos Aires as I run OLX and invest in various startups. They are dead-on in their analysis that for entrepreneurs national boundaries have largely lost their meaning as we create global companies with a global labor force addressing a global audience.
I also recommend the bonus interview of Cyrille Devaud who authored the show who effectively distills the substantific essence of entrepreneurship.
You can watch my section of the show below:
Alternatively, here is the full show:
WARNING: The following content may contain elements of self-indulgence, megalomania, and narcissism that are not suitable for some audiences. Viewer discretion is advised.
Remy Debrant who managed all the PR for Aucland during the bubble days managed to dig up this great TV coverage on Aucland. If you are dying to hear what I sounded like 11 years ago or just to see what I looked like with a bit more hair, check it out.
Capital
Funnily enough for a country where capitalism is at best regarded as a necessary evil, Capital is an iconic show in France. Capital presents a business theme every week and enjoys a cult like following, partly because of their critical tone.
Eleven years ago we were lucky that Capital used Aucland to showcase the concept of online auctions. They filmed two bidders competing for a Palm Pilot. They interviewed the seller. The filmed the meeting of the buyer and the seller. They followed my cousin, who was head of sales, as he tried to convince one of the largest comics collectors to put some comics on the site and gave a step by step explanation of how to do that. They even followed me to the Prime Minister’s office where I went to argue that we should not be regulated like the offline auction business where you needed a government auctioneer license to operate and had to guarantee the authenticity of each item.
Let me now take you back to March 19, 2000, with CRT monitors, dialup modems and all!
Envoye Special
Envoye Special is an investigative journalism show that covers a wide variety of topics. As the bubble inflated entrepreneurs started being celebrated, seemingly the first time in France. While Capital decided to present online auctions, Envoye Special was more interested in the human side of the story: what are entrepreneurs like and what do they do? I was lucky to be selected as one of the entrepreneurs they showcased.
In the clip below, Cyrille Devaud, the fantastic reporter who prepared the interview follows me to Spain as we deal with a PR crisis because a user tried to sell his kidney on the site. It’s funny to see us excited about our PR coup. We managed to turn the story into one about our vigilance and prompt action which led to several hundred new users that day. Somehow that seemed huge at the time! For reference, OLX now routinely gets over 8 million visitors on a good day…
Some of the themes still resonate. On the opening scene I explain how the world had changed: where the big used to beat the small, the fast now beat the slow. I also describe stock options which were a novel concept in France. Unfortunately no one made money from stock options in Aucland, but I am proud that many of the employees later became very successful either in my subsequent startups, Zingy and OLX or in other startups.
Tomorrow, Envoye Special is presenting the sequel: “11 years later what happened to him”, filmed by the same reporter, Cyrille Devaud and his loyal cameraman Cedric Foure. If you are in France you can see it on Saturday at 13:55 on France 2.
Culture Pub
Culture Pub is another iconic show in France. Every week they showcase the best TV ads from around the world. The Aucland TV ad was amazing and even won a Silver Lion in Cannes. However, it created a huge controversy when it was introduced in France because we killed a grandmother (who kind of looked like the mascot of our main competitor) and we used the tagline: “anything can be bought it’s a matter of price”.
Because of the controversy the ad was pulled within one day of hitting the airwaves by the censorship bureau. In a way it was the best thing that happened to us. Not only did I get the opportunity to go defend freedom of speech on all the talk shows, it led us to cut the ad while the grandmother is falling and to say: “The rest of this ad has been censored. To see the rest of this ad go to www.aucland.fr”. As far as we can tell this was the first time in the world a TV ad did this (Nike later did something similar in the US) and traffic went through the roof.
I posted the video when it first came out in 2007 and watched it again this morning and it feels much more relevant today than it did then. It might not be a bubble yet, but the environment is definitely getting frothy. Most of the larger companies going public or being acquired are clear leaders with revenues and profits, albeit with dizzying valuations. However, at the seed stage seemingly anyone with an idea can get funded. Moreover, the terms have worsened significantly for investors as “uncapped convertibles”* have become more common for the best deals. This frothiness at the seed stage is making the war for talent insanely competitive resulting in failed or marginally successful startups being acquired only for their teams! This won’t become a full blown bubble until marginal companies start going public or getting exits based on hope rather than real success, but it sure is getting hot in here! Now is definitely a good time to be starting or selling a company.
By the way, if you have not seen this video of the Ricther Scales at the 2010 Crunchies, it’s well worth checking out as well!
* An uncapped convertible means the seed investors invest in a note that will convert to equity at a discount to a Series A deal at whatever that price is done. This is as opposed to a priced deal where there is a valuation that is defined and we are buying equity or a capped convertible where the note will convert, but the price of the conversion has a ceiling. As I explained in my angel investment guide, Jose and I don’t like convertibles because we don’t feel they properly reward us for the risks of investing in a seed round, especially since a Series A is far from guaranteed to happen.
Read this amazing article by my good friend Xenios Thrasyvoulou, the Founder & CEO of Peopleperhour, one of my portfolio companies. He recalls his amazing journey in entrepreneurship and all the lessons learned. Once again grit, tenacity, passion and staying power conquer all!
Welcome! I am an Internet entrepreneur, angel investor, student and lover of life, aspiring Renaissance man and co-CEO of OLX, one of the largest free classifieds sites in the world.
Comments (11)
