[00:00:00] 

Paul O'Brien: Seed stage capital from angel investors, is effectively the R&D of our economy

All angel investors should never say the word revenue, should never say the word profit, ever ever ever.

The celebrity in our culture used to be the athletes or the astronauts, . Now it's the entrepreneur.

I'm grateful to you, but you're going to lose your money.

Bootstrapping is not better, bootstrapping is a path.

30 years ago, marketing was all of the work related to the market, all of it. And yet today it's perceived as just promoting what you've got or advertising what you're doing or being an influencer.

 The second leading cause of startup failure is marketing.

 I get to slide two in their pitch deck and I'm like, nope! Yeah, but we already raised $500,000.

I'm like, no, I can tell you're gonna fail. Well, What? How?

 I am not investing in you if you're not a storyteller.

 You must, you must, you must, you must, you must create your audience. 

Andrew Kazlow: Welcome to the Diligent Observer, the first podcast exclusively focused on helping angel investors make better bets. [00:01:00] I'm your host, Andrew, and every week we explore what works, what doesn't, and why through conversations with experienced startup investors and operators.

My guest today is Paul O'Brien, an ecosystem builder, founder of media tech ventures, and most importantly, a challenger of conventional wisdom. Paul brings a unique combination of an economist mindset, deep media expertise, and a passion for seeing entrepreneurs flourish. In this episode, we explore why specialized expertise is the most powerful value add, how venture's future depends on massive consolidation, and what separates tomorrow's successful angels from those who are destined to wash out.

I hope you enjoy learning from Paul as much as I did.

Paul, thanks for being with me today.

Paul O'Brien: Thank you very much. Good to see you this morning.. 

Andrew Kazlow: Well, Paul, I'd love to start with just what's exciting to you right now. What are you working on? What's occupying your mind space? that 

Paul O'Brien: There could not be a bigger question [00:02:00] coming out of the US election, going into a new year. What's what it's both weighing on me and exciting me and it has to be the, frankly, just the, the global shift that we're seeing in uh, public opinion about policy and regulation, uh, and, and the role of entrepreneurship and innovation in that.

And what I'm referring to is of course, not just what's going on in the us but what's been going on in Argentina, what's been going on in Europe, uh, certainly what's been going on in the US And and heck even Canada with the news of Justin Trudeau Um,  I like to think that what we're seeing is somewhat of a a new age a of independence. Uh, A social change with regards to this notion that we can and should have the right and the support of our communities to thrive individually.

In our world, what that means is a tremendous boon for entrepreneurs, refocus of appreciating [00:03:00] what it is that people like us do, and thanks to then AI, thanks to what's going on in social media, thanks to what's going on, even with blockchain and VR and some of the stuff that we sort of quickly moved past. I think we're actually this year going to see a resurgence and, and a new enthusiasm for how these new technologies can help us live the lives and work in the ways that we prefer and should be able to work.

Andrew Kazlow: So on that topic, one of the things that I've talked about on 

this show somewhat regularly is how a lot of these new tools, AI some of this support for individualism and creating something new is going to raise the waterline and make it easier for everybody to start companies, to start businesses, there's gonna be lots more entrepreneurs out there than there was a few years ago. That's amazing! But also really difficult for the investor who now has to parse through a [00:04:00] whole lot more shiny garbage as a previous guest, Igor Belogorodsky mentioned. Uh, What's your take on that? How do you think about parsing through this increased deal flow and the opportunities just everywhere from an investor's perspective?

Paul O'Brien: I'm going to apologize in advance to your audience because I tend to be a critic of investors with though a healthy and supportive reason for doing so. classically trained, I'm an economist and I'm a marketer. I just happened to start my career in Silicon Valley. And so I work with startups, I work in the startup ecosystem, I work with venture capital.

I look at trends, I look at what's going on in industries. My point being, in the last 20 years, we've seen a rush of people who want to invest in startups in the same sense that we've seen a rush of people who want to do a startup [00:05:00] that you know, roughly 2005, 2007, 2008. 

Right before the mortgage crisis and the bust, we started to turn such people into the new celebrity. The celebrity in our culture used to be the athletes or the astronauts, or even the scientists to some extent. Now it's the entrepreneur. I think everybody can agree. And to a great extent as well, it's being able to go to a happy hour and say, you're an angel investor, or a venture capitalist.

That is a wonderful thing. It's a wonderful thing. The challenge in that though, uh, is that at the same time, the internet completely broke our understanding of what marketing means. And what I mean by that is that, uh, historically, 30 years ago, marketing was all of the work related to the market, all of it. Market research and doing competitive analysis and figuring out what team you should have and figuring out who the investors are. It was literally everything. And yet today it's perceived as more so just [00:06:00] promoting what you've got or advertising what you're doing or being an influencer.

The challenge inherent in those two things happening, the enthusiasm and the exuberance and the celebrity of entrepreneurship and investing. As well as the disruption of what marketing means. Means that we have a whole bunch of people in the ecosystem now who aren't doing marketing, traditional marketing. Aren't doing marketing on their own behalf.

And there's my criticism and encouragement, angel investors, that yes, uh, with AI, just like we saw with the metaverse, just like we saw with the decentralized boom of a couple of years ago with blockchain, just like we saw with the crypto boom. If you just exuberantly invest in things because your friends so, or because you saw a great pitch, or because uh, you think someone has a great idea, I'm grateful to you, but you're going to lose your money. You, you, You aren't doing the marketing work or working with the marketers to understand what are the real trends in AI? What's [00:07:00] actually possible? What is just irrational exuberance to use a word from the early 2000s.

What's this irrational exuberance where you have maybe small businesses doing a lot with AI? Which seems appealing and seems sexy, and maybe that's something exciting to invest in. And yet at the end of the day, all they're really doing is replacing some tools with new tools. They're going to deliver multiples of return that you might expect from a really disruptive innovation.

No, probably not. What I get really passionate about when I'm working with angel investors and venture capitalists is the idea or the notion that 20-25 years ago, even 15 years ago most people who today are individual investors, even family offices, people who want to be angel investors,

most of those people would be LPs. They would put their money with experienced professionals who are managing directors, who are general partners, who are people like myself, who are managing partners and funds. They would put the money with people who know what they're doing. With the people that get the deal [00:08:00] flow,

have experience with startups, have teams of people, uh, EIRs, uh, staff, people who do due diligence on things, principals who look at trends in the market and trends in the ecosystem in order to better direct where the capital is allocated. And what's interesting about now is aside from my enthusiasm for the shift in culture socially, what's interesting now is I think we're going to see a lot of disruption in the way capital moves into startups because we got a lot of enthusiasm and a lot of support for startups and entrepreneurship.

And it needs to get consolidated. In a sense, we need investors to exit. We need investors to get acquired, the old notion that when there's a lot of new startups, uh, in a certain sector, at some point you have what's called acquisition and consolidation where you end up with just a few players

in the space. I pretty strongly believe the investment community needs to go through that now, itself. It needs to consolidate, it needs to acquire other people. You need to stop [00:09:00] trying to be an investor yourself, for the most part, some of you are great at it. But for the most part, stop being an investor yourself. Find a couple other people, and start consolidating or start working with some other people that know what they're dong.

Andrew Kazlow: Okay. So let me ask, what does that look like? Let's say that, the entire investor community. Here's what you just said. And they go, yep, Paul, you're right. You know what? We should start consolidating. What does the next three years look like? How does that happen in reality? 

Paul O'Brien: Well, the next three years presents an interesting question in the sense that, I mean, let's be honest for the next year, we're not going to know. The SECs is going to get disrupted. We can be sure because Elon and Vivek and all that's going on in the US certainly wants to change that. How? Hard to say.

We're even seeing the FCC, not the SEC, but the FCC, the Federal Communications Commission, also get pretty heavily disrupted, which means what? Which means change in the way the internet works, change in the way media works, change the way advertising works, change the way news works. All of that's going to change almost everything [00:10:00] we do or what we need to think about in our ecosystem.

How? Hard to say. We start to posit, but we can't really be certain what that means. How does it look more holistically? Recently for a host of reasons in our culture, there's been a backlash against venture capital, right? There's been a really serious push that bootstrapping is better. Which by the way is Forgive me and edit this out if I shouldn't swear on your show, but it's absolutely bullshit. Bootstrapping is not better, bootstrapping is a path.

It is not better It's one path that's right for certain things. It's ideal for certain things and many things in fact, most things do not get venture capital ever. They don't get investment. Therefore, you should bootstrap. That's where that comes from. Besides the fact that literally every startup bootstraps to a point. Even the notion of bootstrapping to me is disruptive and misleading in entrepreneurship because of the fact that it's sort of, it sort of leads some startups and founders to believe that you can get capital to start.

Nope. You got to bootstrap your way to being able to appeal to angel [00:11:00] investors. Point being, uh, what does that look like in the next couple of years? I think that criticism and that negativity towards venture capital was severely misplaced. It's absolutely wrong. Venture capital is meant for certain things.

It's not meant for all things. The business model in venture capital is very sophisticated and very well developed and it works, by which I mean what, a certain size of the fund is almost required. Like if 20 million dollar venture capital fund, please don't ever call me, because the metrics just don't work out at that size of a fund.

You have to be much more substantial than that just to have the dry capital, just to have the budget available, the funding available, the money available to run your team. Which is to say you also need to have a team we know that model works really really well. I think what happened is the problem is you had this exuberance of entrepreneurship. You had a lot of more people wanting to do startups, and those people were pissed off that venture capital wouldn't support them.

And so you saw [00:12:00] criticism of venture capital. What's my point? I think in the next 3 years, it really just needs to shift back to that model. And to a great extent the venture capital firms that are thriving aren't shifting back, they still operate under that model. right A two and twenty, 20% and 2%. A team in place, principals and associates not just MET, not just GPs you raise capital. You're actually in the business of raising capital and managing the money.

You're not in the business of sponsoring startup events and and going to demo days. That's what individuals do. It needs to shift back to that because that model works really well. And it works well because what you have in place are partners who are also taking the risks with you.

Number one, you have professionals who are involved, whether they're principals or associates or EIRs, executives and residents, a head of marketing, a head of technology. Bless you, investor. I guarantee you do not know a fraction of what someone like me knows about marketing. You do [00:13:00] not know a fraction of what a professional Chief Technology Officer knows about technology.

You just don't. And so if you're trying to do due diligence on startups because you think so, or because you like the idea or because somebody told you it was a good idea, again, you're going to lose the money. Why? Because you need the people in your circle who understand this stuff much more meaningfully than you do frankly.

That's not your role. That's not your job in life. It's not your experience. There's nothing wrong with that. Your job is to be the risk taker and the risk tolerant individual with regard to capital and to have that somewhat philanthropic mindset. And what do we mean by philanthropic mindset?

Investors, you know better than I do if you wanted to make money on investing, you'd be in real estate. You wouldn't be investing in startups. So you are a part of our ecosystem because you are to some extent philanthropists. But in order to be philanthropists that are effective, you have to have the people in place.

You have to have the business model in place. You have to acknowledge that a lot of people have come before you who [00:14:00] know better than you, what it is that you could or should be doing. That's what I hope to see in the next couple of years. After we figure out what's going to happen with governments and regulations and the changes in the administrations, then hopefully that'll settle out and bring us back to, honestly, a bit of reality with regard to how startups investing should work.

Andrew Kazlow: So let's continue this thought exercise. Cause this is kind of fun. 

Paul O'Brien: Sure! 

Andrew Kazlow: It's five years from now. Let's say some of this consolidation has happened. Let's say notionally half of the active angel investors are now just LPs and funds, and there's half-ish still actively deploying dollars directly into small companies.

Describe for me what the effective angel investor looks like. How do I recognize them? What are the markers? Uh, What do they say to sound like so that I know, okay, this guy is a good potential addition [00:15:00] to my cap table if I'm a founder or if I'm another angel, this is somebody I should listen to and respect their perspective.

Like Describe for me, the effective angel in five years. They're still doing this personally while most have left and are doing the LP thing.

Paul O'Brien: Number one, you promote the hell out of the people you're working with. What's interesting about the rate of startup failure, the average rate, we say it's 90% of all startups fail. Whether it's more or less doesn't really matter, it's around there. What's interesting about that is we know for a fact what causes startups to fail.

It's been researched extensively. The number one single greatest cause of startup failure is the wrong team, a disruptive team, inexperienced team. It has something to do with the team. And yet we don't have angel investors who are demanding that team fix itself, correct itself, or find the right people.

And that's what I mean by promote. I don't mean [00:16:00] promote as in promote the startup and try to get attraction and so forth. I mean the fact that if you're taking a risk by putting $250,000 into a venture that is likely to fail because it's very early stage, the single thing you should be doing is ensuring they have the right people in place.

Promote the hell out of it, right? "Hey, Andrew I need you to talk to Scott because I know you don't know him, but he is exactly the person you need on your team and even if you need a little bit more capital to get him on board, we got to do that." That's what you should hear from angel investors first and foremost. number one Number two, we also know for a definitive fact, the second leading cause of startup failure is marketing.

And I touched on that a little bit, right? Not advertising and promotions, but actual marketing. Market research, competitive analysis, connecting with the press, understanding who partners might be following trends in the ecosystem, that's what marketing does. Marketing is supposed to direct essentially what the rest of the team is doing.

They're supposed to [00:17:00] be telling everybody what to do. Not the CEO, not the founder. Marketing is supposed to say to product and, and the engineers and, and sales, here's what you must do. And we don't see angel investors doing that either, much. And the reason angel investors aren't doing that much, frankly is, is something we touched on.

The idea of marketing was disrupted. We have too many marketers who are just influencers or SEOs or promising leads and what that causes in startups is then a perception that marketing is bullshit. Cause the work that these people are doing isn't working well, no kidding. Cause they're not actually marketers and they're not actually doing marketing and inherent in those two things.

Hopefully you can see why that's in fact, the only thing angels should be doing. Because number one is team, and number two is marketing. If you're getting the wrong people in the case in number two, the startup's dead. It's done before you called Paul for advice. And And I mean that. The number of startups that I see that come to me and they're looking for an A round, [00:18:00] I get to slide two in their pitch deck and I'm like, nope! Yeah, but we already raised $500,000.

I'm like, no, I can tell you're gonna fail. Well, What? How? Man, there are articles and podcasts about this stuff. You're not even paying attention. right? Where, Where is your angel investor telling you how to fix this? That has to change. Here's the challenge. And here's what's exciting.

 Hopefully in five years, we see most of these individuals participating as LPs. Why? Because most of these individuals who are investing themselves, invest as though they're investing in businesses.

That's their experience, right? They're business investors. They're small business owners. They're perhaps real estate investors. In Texas we joke that they come out of the oil gas industry. You know what a startup is like? A startup is not like putting a hole in the ground and pumping oil.

That's not what it's like at all. But these people that have those experiences, which means they have those expectations. And so, Andrew you've you've got a, an MVP that's just gone live. [00:19:00] You pretend you know who your customers are, but let's be honest, you don't have a clue because you just launched a freaking MVP And you have an angel investor going I need you to focus on customers and I want to see 20% revenue growth month over month. And so you do what? You focus on that. Which is the dumbest advice ever as a startup. That all angel investors should never say the word revenue, should never say the word profit, ever ever ever. If you say revenue or profit, you should be an LP because what you're saying is you want to be involved in a later stage startup, and that's fine. Please be involved in later stage startup, we need that. But what we more importantly need and we're seeing it in the trends with regard to venture capital What we more importantly need is seed stage capital. Which understands that it is not about revenue. There is almost zero guarantee of success. Seed stage capital from angel investors,

it's why you're called angels [00:20:00] "philanthropy", you're the savior, is effectively the R&D of our economy. It's the R&D of our economy Which means what? You're literally putting capital to work to try things, to test things in order to figure out what does not work. So that as something emerges that does, the venture capital community can find it deliver better returns. 

When, When seed stage and angel investors aren't doing their job effectively, we end up with a hell of a lot more volume that shouldn't be there at a venture capital stage. You see a lot more failures at the venture capital stage. You see a lot more waste. And frankly you see a sort of stagnation of the economy in the ecosystem, which is somewhat what we're experiencing now. Where you have a lot of entrepreneurs who can't raise money. Why? Because all these angel investors are saying what's your revenue run rate?

Well, it's zero. What do you mean it's zero, Paul? Maybe you should focus more on customers. What? Like, I only know if I make three customers right now. And I don't even know how [00:21:00] to get at customers yet because i'm a technical founder and I just launched a brilliant new technology I'm looking for angel investment to get that to market. You're supposed to help me figure out how to get it to market not expect that I know how to do it. That we should see this course correction again in the role that these people play, in the stage in which they work and in appreciating that, again seed stage angel investment stage pre-seed.

I hate the word pre-seed because it's the fuck is pre seed guys. I'm giving you money before I actually start your company because that's what seed means we're starting with, right? I'm gonna give you money before that which makes it even worse when you have an angel investor. It's like I'll do pre-seeds so we can focus on revenue. I think i've made my point.

Hopefully exhaustively and brutally and critically. And if you don't like me for it, I don't really care. Because I don't want to work with investors who don't know what they're doing. Be an angel investor. If you are an angel investor. If you're not, be a venture capitalist, be an LP, be an advisor.

 Join some syndicates. Participate in [00:22:00] a different way. Because again we figured out how this world works 25, 35 years ago. Stop trying to reinvent the wheel. We know what works and what doesn't.

Andrew Kazlow: Paul, it's interesting because in my sphere, I'm seeing this trend, at least over the last few years, it seems like check sizes for the average angel are getting a little bit smaller and they're almost building their own fund, right? Portfolio theory is getting out there and so many angels say, okay, well I need to be in at least 20 deals or whatever the number is in order to have a valid portfolio. That's a lot of work. And so I think there is this realization. That some angels are having that, you know what? It would be a lot easier to just throw this into a fund and go on with my life. And so I think it's an interesting trend that will naturally course correct over the next few years, where they realize it's a lot more work than you would think to do this well, and you do have to know what you're [00:23:00] doing and angels will be around for a year or two, realize that.

And then dip because of what you're talking about.

Paul O'Brien: The challenge in that thought is what's going to happen is you're going to see hundreds of thousands of angel investors just lose all of their money and disappear.

And then criticize things more and startups suck and you know, you should never invest in startups, I've lost everything. It's because you did it wrong, dumbass. What I mean by that, positive encouraging point, angel investors. What I mean by that is, 

if you're not a part of the community at large and that includes both being very active and well-known as an angel investor in events, in meetups. throughout the entire ecosystem not just at the startup hub downtown, not just at the incubator, I mean, don't be ridiculous. There's no better way to be very myopic and have a narrow view of, [00:24:00] of the industry in which you want to serve than to go to the one thing.

To go to startup week and be like, hey, yeah, I'm an angel investor. All you do is go to startup week. No, come on. You have to be known. that, that When I was in Silicon Valley, you knew who these people were. Like you'd say, who are the top angel? That's like uh, Fred Wilson, Mark Cuban.

Right. Why? Cause they're freaking out there. Why? It's critical that they are because it's impossible for an individual to have a broad view of the industry or the sector of the economy. It's impossible. You just can't do it, right? Even if you're following Twitter religiously or you're all over the Facebook group for the startup ecosystem, you're still getting a narrow biased view of your ecosystem.

You can't do that. That doesn't work, right? You're going to get the stuff that's maybe promoted more. You're going to get the stuff that's evangelized more. You're going to get the stuff that Chamath is promoting right now. And that's great, but that's not the way to get a broad view of, of an ecosystem in which to invest.

 And that's [00:25:00] critical because it's difficult than it's critical because what I'm pointing out in my word ecosystem and industry and sector, we've made a huge mistake in the last 15, 20 years. This is tremendous in Texas, as I'm sure you know, Andrew. We've made this huge mistake of just referring to startups generically.

Or technology generically. Hey, you want to be a, you want to be a startup investor? Come to demo day downtown, and we're going to show you all of the startups. Cause everything's here. Hopefully you could just hear me saying that everyone and appreciate that's just complete horseshit.

That's absolute bullshit. It's not, It's not possible, right? In your city, there are hundreds of startups 20 minutes outside of downtown that don't ever go to there and never go to the demo days because they don't bother. And so if you're, if you're a passive participant, if you are pretending to be an angel investor because you want to be. If you think it's cool so you just you show up. You're actually harming the ecosystem [00:26:00] and you're harming yourself because you are going to lose money. Because you're not seeing, you're not aware of everything that's going on. And so, what you need to be doing is being much more public, much more outspoken, sponsoring some things, supporting some things with a focus on what it is that you actually have experience with. And by the way, that is not startups and it's not tech.

It's something specific, it's Ecommerce, it's pharma, it's media tech, it's ad tech. It's something very specific. So that, two things happen. So that, everyone gets to know you as one of the first people to call and talk to about that sector in particular. Which means you get what? You get more insight to it.

You get more deal flow for it. You get the stuff that is relevant to your experience. Number one. Number two, your role as an angel is not just investing in startups. It's investing in the sector. It's investing in the ecosystem. [00:27:00] It's supporting the incubator for that stuff. Not a tech incubator, not a startup incubator, but the Ecommerce incubator, which means what?

It means that incubator is going to be more effective. It means that accelerator is going to be more effective. It means that the week or the conference or the demo event for that sector is going to be more effective. Which means then you again have better deal flow. You have more advisors in the ecosystem who know what they're doing.

You have more service providers, consultants and journalists who know what they're doing. Why? Because the ecosystem, the sector itself is better supported. We've lost that a bit. And truthfully, frankly, in Texas, we've lost that a lot. We see a bit of that segmentation in defense in Texas.

We see a bit of that segmentation in energy, but beyond that, we still kind of have this mishmash of everybody who's an entrepreneur and everybody who's in tech and everybody's doing a startup. They're all part of the same community and it's false it's false and it's [00:28:00] misleading and it's dangerous to think that way. So angel investors specialize. Be up front, be out there, be involved. I'm encouraging that for your sake, because we know that that's what results in you ultimately getting better returns than you're just trying to do it yourself, or you're just showing up at some stuff and throwing some checks around.

I don't want you to lose your money that way, because then you become a detractor, you harm the ecosystem, you mislead the ecosystem, and you're not doing anybody any favors. If you're not actually involved in the way that you should be.

Andrew Kazlow: I think it's a fascinating point. I mean, in the nonprofit kind of giving world, the famous book, "When Helping Hurts" talks a lot about this concept where, hey, it feels good in some ways to give and to contribute to certain things, but in the long run, that may or may not actually drive the outcome that you're aiming for.

And so I think this point is really interesting that it can [00:29:00] almost be thought about the same way in the angel space is to be a generalist and to just participate wantonly, can actually hurt more than it helps. Even though it feels good, it feels like you're supporting the ecosystem and sure, there could be some positive conversations and some positive outcomes, but at a macro level, the better, more effective long term help would be to specialize Is what you're saying.

Paul O'Brien: You're actually reminding me of a great point. That's actually, in fact, more relevant to angel investing. Which is that we're starting to study more on the economic side of venture capital.

We're starting to study more why Europe remains behind the United States. And one of the prevalent reasons that we're seeing is the prolific participation of government and grants in that seed stage. The amount of money that's available in Europe for seed stage, for R&D, for [00:30:00] starting out, dwarfs the US on a per capita basis. US has got more, but in Europe, the average person can much more easily get money to start something from the government, the grants. What's the problem in that? The problem in that is similar to your point about philantrophy doing more harm than good.

The problem in that is what that means is, then you don't have angel investors. Why? Go get the money from the EU. You then don't have capital that is experienced. You don't have capital that's advisory. You have what we call dumb capital in the US frankly, right? They're just giving you money, but then you don't have money that has expectations.

You don't have money that can help you. You don't have money that has experience and can tell you what to do. And that to a great extent is the singular reason that Europe is considered to be relatively behind the US in terms of value creation through innovation that stifles the early stage, right?

Stifles the early stage. It means that indeed those early startups can be [00:31:00] successful. But it means that as those early startups get to the next stage, they start seeking Series A capital. And the reason we see this or they start coming to the US to seek capital. We look at those things and go, okay, but you didn't do any of the things that are necessary at a seed stage.

 You launched your MVP and it, I see it. It's great. It's brilliant. It's amazing. But you didn't develop any partnerships. You don't have any early signs of monetization. You didn't do any of the things that are required to get you Series A funding. Why? Well, because somebody just gave you money so you could get to market.

Your angel community, our angel community can learn a lot from appreciating how important they are. In seeing how other countries which have tech and are prolific with capital, in seeing though how those countries are actually behind. They're [00:32:00] behind because these good intentions are actually harming things.

 They're actually stifling things a bit.

Andrew Kazlow: Okay, Paul. So I want to continue this let's say this happens, the market reorients itself and 50% of active angels moved to LP status only. And they're not writing personal checks. Let's talk about how to make those investment decisions well. Because you're talking about half of half of my current audience is going to move to just being a great LP.

Talk me through, as a VC yourself, as someone that's active in this community, how do you identify a great fund to participate in? Uh, What is your diligence process look like for your own dollars? As you think about allocating to other funds. How do you suss that out? Because we all have seen the stats that, you know, it's the top quartile that generate all the returns for the asset [00:33:00] class.

So talk me through, how you would encourage an angel to diligence their VC investments.

Paul O'Brien: I'm going to start with where you ended. The top quartile delivering all the returns is an outcome of circumstances, not because of expertise or specialization. We can all name the top funds. Can't we? First round capital, Sequoia, et cetera, et cetera. Therefore what? Therefore all of the more interesting and valuable startups are brought to their attention.

Those founders and the other investors involved in those startups want those VCs involved. Therefore those VCs end up with better returns. It has nothing to do with anything but that. Truly, we know it doesn't. That's what happens if you look at the cap tables of all of these successful startups, they all have [00:34:00] at least one or two of those well-known major investors. It's what you'd refer to as perception bias, right?

We see a data point and we think oh, well, I want to be like that fund. No, you're you're perceiving what's happening in the wrong way. That fund isn't actually inherently better. They have better circumstances is my point. And so what do we hope happens? What should happen? What do you need to do if you ship to being an LP?

Well, it's not dissimilar to my encouragement of what you need to do as an angel investor. Number one, you must focus on your domain expertise and your sector experience and distill it down to those funds. Why? Well, most of those major funds that we see or perceive to be exceptionally successful are now considered to invest in anything.

 We'd look at them and we think oh, they'll invest in whatever startups and tech. That's not actually how they got their initial success. Their initial success was because [00:35:00] they were experts in, they were founders from, they had a passion for a specific sector of the economy. Social media, Ecommerce, before that.

 And, you see that in their portfolios, right? They were in Facebook and Reddit, and Twitter. Now they invest in everything. Well, yeah, but they got these exceptional returns because they knew what they were doing in specific sectors of the economy. And they attracted LPs and they worked with LPs who had a passion for that.

The challenge is that as capital and entrepreneurship moved out of Silicon Valley, and it's now prolific everywhere, we didn't have the same diligence. We didn't have the same rigor about our approach because we all just wanted to raise our hands and help. We all just wanted to participate. And so instead of being an angel investor and saying, look, I only invest in biotech, medtech, and pharma.

That's it. Yeah. But Paul, I have this great deal in AI. I don't know shit about AI. [00:36:00] Why the hell would you bring that to me? Well because you're going to get rich. Okay. But then you still, angel investor, need to say, piss off. I don't know anything about AI. I know pharma and biotech and medtech. That's it.

That's what I support. That's what i'm passionate about. That's where my values are That's where my vision for the future is I want to fix the healthcare industry. So what am I going to do? I'm going to look for the funds or the general partners or the managing directors who do that. That's it.

Why? For the same reason I was talking about with angel investors those funds get that deal flow. Those funds have that perception in the economy. Those funds are appreciated for their support at that stage of the ecosystem. And if it's not an existing fund, the encouragement or the direction is the same, find the people that you could partner with to start a fund who share the same focus. 

Not because you can't or won't invest in everything, but because we all need to know that you are [00:37:00] experts in you're focused on you're passionate about specific things. And then as you deliver better returns and better impacts, you can start investing some other stuff just like every other major fund did, and does. We need you to build the sector in which you should participate. We need to know that you're a partner, and an investor in that stuff. Really think about it if you think about Texas, Can you do that?

Can you name for me VCs who are specifically focused on specific things or specific sectors? You really can't do it. I can't do it And I know most of them. Because they all say we invest in everything or we invest in Austin. What? No, what what specifically do you invest in? You have to be You have to be clear about that. We need you to be clear about that. Founders need you to be clear about that

Andrew Kazlow: So Paul, I'd be remiss if I didn't ask you about your focus area, which is in the media space. We'd have a lot of time, but I'd love to hear, given your experience, your story, what are some of the trends, the things that are happening in the media [00:38:00] venture world right now that are worth talking about? Uh, And then maybe in that, what are some things that are being talked about too much that you think are overhyped?

Paul O'Brien: I'm gonna answer it two ways if I can. And the first again is perhaps just to help everyone. my, My media first brand, I was the founder of a company called MediaTech Ventures that media-centric focus, is not in fact specialization or being narrow about the media industry.

 I'm actually an economist for the startup ecosystem and I help venture capital get deployed more effectively. I work with cities that are trying to be startup ecosystems and the reason I have that media first branding. Actually harkens back to the 1970s, when we figured out that only two things create value in business, marketing and innovation, media and technology, media tech, that if you are a founder, if you're an advisor, if you're a startup [00:39:00] by and large, I know you're going to fail because your entire worldview is on the product or the technology or the solution, and I know you're going to fail, period.

Why? Because you're neglecting the more substantial value creator, which is the marketing or media, the storytelling. Hopefully you're seeing that if you're, if you've been following social media for the last three or four years. Almost everyone is coming out now saying, if you are not a storyteller as an entrepreneur, you're going to fail, or I am not investing in you if you're not a storyteller.

Or if you do not have a community, if you're not on Substack, if you don't have a newsletter, then I'm not investing in you. I don't care what you're doing. Why? Because you must, you must, you must, you must, you must create your audience. You must support your audience. You must drive demand, right?

Obviously, otherwise you don't have anything. You got a solution. Nobody's going to pay you for a solution. They're going to pay you because you create value with the solution, which means you have an audience and demanded partners and so forth. So in my work, I require that if I'm going to work with you as an investor, if I'm going to work [00:40:00] with you as a city, if I'm going to work with you as a founder, I'm going to require that you start doing something online.

 And if you won't, I don't care. See you later. Cause I'm not going to work with you knowing you're going to fail. The trends in media itself are somewhat related to that. They're somewhat related to that in that we're seeing a demand for a shift back into ad tech, publishing tech, news tech, the sectors of the economy that support and monetize the storytelling. We know that Medium and WordPress and a lot of the infrastructure that we use on the marketing side of the media side, these days, we know that that's not terribly sophisticated.

 We know it could be a lot more sophisticated. We see AI dropping into that really aggressively. Really, that's just AI or AI entrepreneurs trying to take advantage of the fact that we know these media and marketing platforms aren't as great as they could be. My point being the trend we're seeing, the reason we need more angel investment or venture capital in that sector is we know [00:41:00] that. You just think of problems and opportunities in the economy that we can solve.

Well, it's news and publishing and social media and advertising. Because it's all, it's all roughly 15 years out of date. And AI in and of itself is not the answer. right? AI is a path to a solution. So that's one. Number two, the big trend is, consumers. And it's just two trends. So we'll wrap up cause I know we were short on time. Number two is consumers are sick of subscriptions. We do not want to be paying for video games on a monthly basis. If you're into video games, no one wants to be nickel than dime. No one wants the gambling apps that's dying.

 And many of us are trying to put it out of business because those people suck. That we hate that, hate that business consumers do, but we're also seeing it in streaming. We're seeing Netflix. We're seeing streaming media trying to push to be more like cable. YouTube just raised their rates.

YouTube TV just raised their rates to almost 80 bucks a month. And there was [00:42:00] just a huge backlash. Everyone knows and should know, streaming television does not cost that much, is not worth that price. Period. It's not. And so people are not going to pay it. We're seeing a rise in torrenting again. Which is I'm not even going to say pirating or stealing because I don't believe that.

Uh, We're seeing a rise in torrenting, which is downloading video so that we can watch it on our terms. Uh, If you want me to pay for it, I'm happy to pay for it. Make it appropriately priced. And so in that sector, two, we're seeing opportunities for people to invest or people to disrupt. X for example, Twitter X just announced they're going to launch X TV.

Yay, right? What's it going to be? Is it going to be compelling? Who knows, but it's going to shake up the streaming sector somewhat. And I'm excited that's going to happen because consumers are just sick of having to pay through the nose for what we know costs pennies on the dollar relative to what cable used to cost.

Andrew Kazlow: Love it. Yeah. Well, I didn't know about the, X TV coming. So we'll keep an [00:43:00] eye out on that one should be a interesting, interesting story, no matter what.

Paul O'Brien: It should be for sure. Hey, man. Thanks for having me here.

this this has been a blast.

 How you been? As you wrap up, how are things going for you? What does 25 look like for you?

Andrew Kazlow: Well, lots of Substack coming this year. That's a big focus. So taking every word you just said and rolling with it. Big focus on growing the podcast, growing the show, build the audience this year, 

Paul O'Brien: cheers to that. And so maybe let me wrap up by adding the same for those of you that would love to connect with me or follow me, my favorite new channel for that is Substack. And if The Diligent Observer is focusing on that as well, I do highly want to encourage you get on it.

Here's why I'm big on Quora. I'm big on LinkedIn. I'm big on Twitter. If you want to follow me somewhere else, fine. What I've learned in fact, though, is the user experience and the ability to get content you want. On Substack is it just dwarfs everything else. I'm addicted to Substack and just engaging with people and chatting with people and [00:44:00] commenting and passing notes around point being I'm now on Substack with a fervor, please follow me there.

Find me there. It's Startup Economists. I'm sure if you look up Paul O'Brien, that would also work. I'd love to have you there in part two, because I'm running a survey right now related to what we've been talking about, and I want your input, everybody. My survey is, Don't tell me if venture capital is lacking in your ecosystem. Tell me why? 

There's a reason that capital is not available as prolifically in your sector of the economy or in your region of the world, as it should be. I want to study what that is. And I think it's could be regulatory. It could be cultural, could be a lack of a community. There's something else that stifles you all from investing more.

I want to know what that is. So hit me up on Substack and take that survey for me.

Andrew Kazlow: Paul, this has been a blast. Thanks for joining. Look forward very much to our next conversation .

Paul O'Brien: Cheers, everybody. Thanks.

Andrew Kazlow: Thanks for listening to this episode of the diligent observer. I'm your host, [00:45:00] Andrew Kazlow. And if you're looking to make better bets as an angel investor, subscribe for more at the diligent observer dot sub stack. Dot com.