A few days ago, I had the privilege of interviewing veteran venture capitalist and angel investor Ross Blankenship. Founder of Angel King Investors, Ross regularly speaks about entrepreneurship and investing, and has published extensively on the topic.
We sat down to talk about what VCs are looking for in startups in 2018, and what pitfalls they should avoid. Plus, Ross shares surprising insights on what really captures a VC’s heart—and wallet.
For those who aren’t familiar with you, can you give us a quick-hit background? You’re from Texas, and started your professional life in law, correct?
That’s right. I grew up in a little town on the border of Arkansas called Texarkana, Texas. Eventually, I migrated up to the northeast by way of several different schools. I ended up staying there for a little bit, until I graduated from Cornell University. Then I went down to law school in St. Louis. Now I live in Colorado.
I think Colorado is just right for me. I lived in DC for a while, and established a couple of companies in the mid-Atlantic region. I become an advisor and, well, just accomplished what I wanted to accomplish. After 10 years, I just wanted open space with a clean environment, less traffic, and a strong entrepreneurial scene. To be honest, I didn’t really ever get that sense that DC was an entrepreneurial hub.
Then there’s the mountains and just the communities in Denver and Boulder. Just amazing.
That’s a great segue, actually, because I want to get right into your experience with entrepreneurs of late. For those who are green, can you quickly explain the difference between venture capitalists and angel investors?
Sure. So, if you look at the broad spectrum of investments, there are two main types—private and public. I focus on private-side investing—which would include venture capital and angel investment. On the public side of investment are stocks, ETFs, mutual funds, bonds, robo-investing, and the like.
Angel investing is literally planting a seed and hoping that seed turns into a return of a thousand-fold (or more) on the initial capital. It’s the very earliest stage of a company’s existence. Naturally, it’s a higher risk and requires more work. But it can also mean higher rewards. Sometimes, small initial investments explode into something really big. That kind of investing is actually what initially inspired me—specifically, the early investments made in Facebook by Peter Thiel and others. In their case, thousands of turned into billions of dollars.
I mentioned hard work—and that’s just as much on the investors as it is on the entrepreneur. As angel investors, we have to go out and do a lot of networking and scouting because the good startups don’t have time to go looking for investors. And when we find one we want to invest in, it’s like jumping off a cliff—and falling or rising with the winds of the company. It’s a really hands-on, engaged way to invest.
Venture capitalists are a bit different. These are investors who go to a startup after angel investors have helped get things going, and connects at the second or third round—or later—of investing. There’s less risk at this point because the company is more established and has some proven revenue.
Okay, so let’s pretend I’m an entrepreneur interested in launching my own startup. I know I have a great product and I ultimately want to scale, so I’m going to need investment from the outside. As a way of reverse-engineering this, how do I find the right investors?
I’m not plugging angelkings.com, but you can certainly send your ideas to us there. Or you can connect to any of the investors we list on the site.
But if you want a more in-person approach, I recommend going to conferences in your industry. I always make a point to go to these, and reach out to speakers and attendees. It’s the thought leaders that really grab my attention. And because I believe it is the hustle that makes entrepreneurs ultimately successful, I look for the really ambitious, driven people. The ones that reach out to me—that make a point to connect
I’m glad you mentioned the qualities of some of the entrepreneurs you notice, which ties into your proprietary Blankenship Formula. In it, you spell out all of the key startups elements necessary for investment—40% team, followed by various percentages of product, financials, and process. Tell me about that 40%. What are you looking for in a team?
Whatever product you may have—however great it is—a startup will only work because of the people. I’ve known that for a while and I wanted to put a number to it, hence the Blankenship Formula. So what am I looking for? A sense of purpose and personal investment in an idea. Look at Larry Page from Google, for example. He was willing to walk away from a million dollars early on in Google’s history. He wanted more and believed enough in his ideas to take them farther. Plenty of startup founders are just interested in the acquisition—and the dollars that come with it. I want someone who’s in it for the long haul. They make the company successful, which is why I look at this above any other metric.
So what about the ideal product? What are you looking for there?
Building a product is not just about following trends or creating something that’s “hot.” It is about building a product that people love—that will keep them coming back to you over and over again. In other words, I want a product that build dependence and habit.
That’s more about how you’re set up to scale. Do you consider things like cybersecurity and data handling? Also, how do you plan on scaling? What of your process will you be able to automate and how? I need to know that you’re thinking about these things.
What about marketing efforts? Surely that’s a big part of what you’re looking at.
More than marketing strategy itself, I’m looking for a story—a narrative, an icon. Think about the big business names you know. People like Richard Branson, Mark Zuckerberg—even J.K. Rowling. These people had stories that they brought to the table, that made their companies and products relatable. If I don’t see that story, I’m not going to invest. If you have a story, the marketing follows.
Let’s say I’m in space where I know I have a compelling story, a solid team, and a great product. How do I figure out how much money I need to raise? You’ve been quoted as saying, “Don’t raise money unless you need to and you’re ready to grow.” How do you know you’re there?
First off, I want to thank you for bringing that up. So often, I want to scream from one coast to the other: “Don’t raise money unless you absolutely need it!”
The reason for that is actually very important. When you raise money, you are bringing in partners and their responsibilities. You have to grow the company the way you pitched it to them. Why? Because in exchange for investment you’re giving them common or preferred stock—part ownership in your company. So, they help steer the ship and you have less control.
Also, outside investment is basically putting you in debt, and you don’t want to take on that debt until you’re ready to scale and grow profits. I usually advise that when you finally put yourself out there for funding, you should look for 18 months worth—just the monthly burn rate times 18. That’s not assuming any revenue. That’s just keeping the company moving.
When you do take the dive as an investor, to what extent are you involved as a mentor or guide as that company grows?
Well, I think I serve on the board of maybe five or six startups at the moment. When I choose to serve, it’s really based on how much I love the product and potential. I know a lot of people think being a board member is kind of a sinecure, but the opposite is true—you become a serious advisor, spending 50-120 hours a month on that startup. You have to see the company through thick and thin.
In most cases, though, I get on a conference call with the startups I’ve invested in every three to four weeks and we talk about challenges, successes, progress, and so on. Any less than that is a red flag, really.
I’ve recently been reading a lot about Millennial ambitions in business, and it seems that many look for more than just a paycheck in their jobs. They want purpose and community impact. Do you look for these in a startup mission, too?
Absolutely. You have to start with WHY—understand the founders’ motivation and how deep it goes. Are they obsessed with building something cool to get rich quick, or do they have a bigger purpose in mind? The best case is that these founders started by doing something as a hobby and turned it into a business.
These days, you need to have a mission-drive business. If you aren’t trying to change the world for the better, one of three things will happen: You’ll create a moderately successful lifestyle business that never really grows; you won’t be able to hire people effectively and will eventually tank; or you will fail right out of the gates.
I’d like to close things out with a look at startup trends in 2018. You’re focused on biotech now; can you speak to what you’re seeing in that industry?
I just invested in a company called Notable Labs in San Francisco that is doing a lot of really cool diagnosis of early stage cancer. I am just so tired of hearing about 25-year-olds who are killed by cancer—it crushes me. So that’s a big personal motivation. I’m also looking into new medical technologies in Alzheimer’s and Parkinson’s treatments. A lot of what Angel Kings looks at now are early stage biotech companies—companies that can literally change people’s lives.
My second big area of focus—and very definitely a growing trend—is cryptocurrency. I started investing about six years ago, and as we all know, it’s exploding now. I love the idea of Bitcoin, Ethereum, and the like because it takes the control away from the banks and democratizes the economy. We’re at the start of what could be a very lucrative, complicated industry.
What about the sharing economy—the next generation of Lyft, AirBnB, and so forth?
Oh, yes, there’s lots of opportunity there. It is just surging—and can entail anything from data sharing to property sharing. The huge appeal is that people can get paid using stuff they already own. But I think there might be more focus on digital sharing [rather than sharing physical goods] in 2018.
I’ve been reading a lot about growth in the Internet of Things (IoT) world. Do you think that’s also a big area for entrepreneurial innovation?
To be honest, I think we’re going to see a point in 2018-2019 when people realize IoT is less about need and more about luxury and convenience. Do we really need to have our lights turn on automatically when we enter a room? All we have to do is flip a switch. Still, it will be interesting to see how the software around this develops.
What about pitfalls you would encourage entrepreneurs to avoid?
Don’t get caught up in trends or politics. Focus on the thing you want to build and WHY you want to build it. What are you trying to accomplish? What is your story? Don’t let noise distract you from what’s important.
Good advice. Any last words of inspiration?
Go build something that you always wanted to build. This is your year. It doesn’t matter if you have a full-time job right now. If you are tinkering with an idea, run with it. You want to look back in 20-30 years and be able to say you spent your life doing what you’re passionate about. And sure, tomorrow will always seem like a better day to start. But it’s not. Today is your day.
For more information about Ross Blankenship and to connect with Angel King Investors, visit angelkings.com.
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