Angel investing is more than financial upside

Melissa Withers 0:00

I think quest to professionalize angel investing and optimize for investor upside inescapable realities of angel investing, which is that it is not a a category that can be singularly defined. I never, ever, ever make an angel investment into a company if I believe that my only upside is a financial one. If there

Introduction

Melissa Withers 0:21

is not some other ROI for me in that transaction, then I'm not gonna do it. And therefore too, um we've lost touch a little bit with some of the origins of angel investing as a higher risk, um higher reward, sort of vibey, somewhat more spontaneous part of the capital continuum.

Andrew Kazlow 0:37

Welcome to the Diligent Observer, where we help angel investors see what most miss. 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 Melissa Withers, managing partner of Rev Up Capital, a boutique revenue-based financing firm that she co-founded after years of active equity investing. In this episode, Melissa explains why capital allocation is so much more like poker than it is chess, introduces the pretzel problem, and explains her belief that angel investing should be a small part of your portfolio, but a big part of your life. I hope you enjoy learning from Melissa as much as

Why angel investing isn’t an asset class

Andrew Kazlow 1:19

I did. Melissa, thank you for being with me today. Thanks for having me. Well, I'm excited to jump in, and I'd love to start with uh a really interesting position that you've developed. Uh you have this concept that angel investing is not an asset class. Could you explain that for me?

Melissa Withers 1:44

Hot take. Yeah. So, you know, I think one of the interesting things over the last, we'll say 20 years has been what I'll call the professionalization of angel investing. If you look at the origin of angel investing, um, again, none of these things are more than 30 years old, but if you look at the origin of angel investing, it you know, it it didn't come from a place of professionalization, right? It was individuals sometimes acting alone or in groups, you know, making um somewhat spontaneous decisions about supporting early stage companies, right? And then there were some big wins, and the category became well, the thing became a category. And I think what followed over particularly over the last, we'll say 15 years has been um this attempt to take angel investing and turn it into an asset class similar to real estate investing or putting your money, you know, over here. And uh in this, I think, quest to professionalize angel investing and optimize for investor upside, uh, we've lost

The problem with professionalizing angel investing

Melissa Withers 2:47

touch with some of the inescapable realities of angel investing, which is that it is um not a category that can be singularly defined. It is not, it is very heterogeneous, there's a lot of heterogeneity in it. And it's uh it does not perform in singular or um trend-driven ways, the way asset classes typically do. So you have um a lot of conversation about how do we extract more value out of angel investing and how do we angel invest and optimize around upside. And it picks up the language of uh sort of fight overall financial services. Um, and I think in that we've ended up with a lot of disappointed angels who haven't seen the returns or liquidity that they wanted through their investment. And we've seen a lot of consolidation of angel dollars moving into positions where it feels that it's operating from a more secure, um, upside protected base. And therefore, too, um, we've lost touch a little bit with some of the origins of angel investing as a higher risk, um higher reward, um, sort of vibe, somewhat more spontaneous part of the capital continuum.

Andrew Kazlow 3:52

Aaron Ross Powell Do you feel like it's a just a definition problem? Because it's almost like there's you know, underneath what is often described as an angel investor is like 47 different things like you've just described. So I feel like it's a there's just different categories that don't yet have labels for them. And I get I would imagine that in 10 years, perhaps we have a few more of those categories. Do you think this is gonna get refined or does this problem continue forever?

Melissa Withers 4:18

Yeah, I do think I think some of it is a naming problem. So for example, we call all equity investing venture capital. But there is a huge difference between an individual investor, angel investor, putting $20,000 into a company and an institutional venture fund joining as a preferred stockholder in a Series A round. But they both live under the same uh like we walk around talking about venture capital, right? So yeah, I think we don't have a lot of language to talk about early stage investing. And that language that we do have has been informed by a relatively narrow view on what the continuum looks like. So yes, I think some of it is just um the like grouping of a large category of investing in under a single name, Angel, it which has really come to represent all non-institutional equity investing into companies like that, because there's no other place to put it, right? So yeah. And so you can have an angel investor that's new to angel investing, that's writing small checks, that's doing it in a values-aligned way, and then you can have an angel group that is running a diligence process that is as like comprehensive and perhaps cumbersome as a venture fund, right? Both called the same thing. Yeah, some of it's naming for sure.

Andrew Kazlow 5:33

Do you feel like this is a good thing? Like that so many more people are trying to do this, that people are getting involved in this, that people are trying to level up

What ROI should angels actually expect?

Andrew Kazlow 5:43

and systematize and become more professional, or do you feel like it dilutes what makes an angel investor so uh special? Because I I can feel like there's arguments on on both sides.

Melissa Withers 5:54

Yeah, I I don't, I don't, I don't think there's a binary good bad to that. I think there are consequences to having people come into an activity with a with misalignment in the set of expectations that they have, both in terms of risk and reward. So I think there's negative consequences or downside consequences to this, but I wouldn't say it's bad. I mean, there's nothing wrong with people trying to optimize for better financial upside. I mean, I can't fault angel investors for wanting to continuously push into investment opportunities that are more likely to yield financial upside. But I do think that there's a category of angel investing that is motivated by a calculus, an ROI calculus that isn't predicated purely on financial upside, that has historically been a very important part of angel investing. So there are angel investors who, when they angel invest, of course they don't want to burn their money in a barrel. I angel invest, I don't want to burn my money in a barrel, but I never, ever, ever make an angel investment into a company if I believe that my only upside is a financial one. If there is not some other ROI for me in that transaction, then I'm not gonna do it. And that value can be either values aligned, things that I just care about, things I want to be a part of. They can be very self-motivating. Um, perhaps this is just a group of investors that I want to be a part of because there's other opportunity and value that I'm gonna unlock by being on that bench with those people. Um, it could be a category that I'm just passionate about. And I know that there's a high likelihood that I may lose an individual investment from a cash perspective, but in pushing the whole category forward, ultimately I'll be a winner as a human or in perhaps as an investor when the whole category um rises. So I think the the challenges and this for some in this rush to believe that angel investing can have these predictable best practices. Maybe that's kind of what I mean by professionalization. I it in the hunt for predictable best practices,

The two kinds of great angel investors

Melissa Withers 7:58

um, I think a lot of the upside of angel investment is lost for founders and investors alike.

Andrew Kazlow 8:04

I think it's so important to emphasize this point that there's this gigantic portion of what makes a great angel great, totally assigned to the value they provide and the value they assign to that deal, not in the financial upside. Like the other stuff, the other reasons that they're participating and giving back. Yeah. I feel like this loss you're emphasizing tends to come when that gets deprioritized and it becomes more about optimizing the financial ROI and performance, and it becomes more professional to your words. You have to kind of sacrifice some of those intrinsic motivations. Like I want to get back, I believe in this.

Melissa Withers 8:45

There are only two kinds of good angel investors ones that do a lot and ones that do nothing at all. Uh advice that I give often to founders, right? It's the ones in the muddy middle that you gotta watch out for.

Andrew Kazlow 8:56

Explain. Give it give me an example on both sides.

Melissa Withers 8:58

So a high value angel investor that can also support the business in ways outside of their cash contribution, very valuable to a business, right? Like just that's like opening doors. They know the industry, customer to draw, whatever. Just like and you know, an angel investor that actually has the ability as a human being to make a meaningful contribution to the business outside their cash contribution, two thumbs up. Um, another really great angel is an angel that funds your company and then gets out of your way and lets you run your business and understands their role as a relatively passive participant and they're cool with it. In the middle is a large category of angel investors who uh believe they have a lot of value and want to be very intimately involved in your business and end up really just kind of causing a lot of friction and getting in your way and and um really um taking a lot of time and energy away from other higher value activities. And so it's the muddy middle. Um, and that's you know, sometimes where you'll find investors that are, you know, they think they're protecting against economic law. Like they're they're they're protecting against economic downside by getting involved. And there it's yeah. So yeah, there are two kinds of really great angels, the ones that do a lot and the ones that do nothing at all.

Andrew Kazlow 10:11

Okay, so I'm listening to this. I'm trying to be involved and serve my portfolio and be helpful to them. You said that,

Knowing when to stay out of the way

Andrew Kazlow 10:19

and I'm immediately thinking, oh my god, am I in the middle or am I actually being helpful? How do I know?

Melissa Withers 10:24

You know. You know when your help is wanted and needed, and you know when it's not. I mean, don't overcomplicate it, right? If you're a relatively sentient being who understands the like the realities of a founder's life on the day, like you know if they're happy to hear from you. Are they reaching out? Are you inserting yourself into conversations where you shouldn't? Are you overstepping your area of expertise, right? I mean, one of the most important things I do as an investor, either professionally through my fund or as an angel, is to know when to keep my mouth shut, right? Like to know when I really don't have the answer. And if I can't be supportive, like just sit down and shut up. Just don't get involved, right? So I don't want to make this into something magical or mystical. I think, you know, it's pretty obvious. If you are adding value, you know it. If you are not, um, you probably know it. And it doesn't mean you shouldn't get involved. I mean, there are times when as an investor, I mean, you have fiduciary rights. And, you know, if you want information from a founder that you've given money to, yeah, you deserve to have access to that information. If the found like, so I'm not suggesting that, you know, you just should sit around and do nothing and let the world happen to you. I'm talking more about this in ongoing active engagement, right? And this idea that you're gonna add value and and steer the ship in some way, right? Or or participate in the navigation of the ship. And um, there are like many instances where investors get involved and they just shouldn't because they're not actually adding value. But I think you would know if you were not wanted. I know when I'm not wanted. Doesn't mean I don't continue to show up, but it's pretty obvious when someone's like, I'm good. Not enough of you.

Andrew Kazlow 11:59

What's fun about this conversation is it kind of questions one of the default assumptions I see in many investor communities, which is we need to be more systematic and professional and effective. And that's maybe for this group, but maybe not. And and every individual is different.

Melissa Withers 12:14

Yeah, I mean, like the even those words, systematic and professional, are effectively orthogonal to most of the day-to-day operating realities of a true early stage company. I mean, we're talking really early stage company. I'm not talking about a company that has years of operating, you know, like again, uh like like a little over here is different, but like, yes, just the word systematic and professional. Like I just don't, I'm not sure it helps the cause, um, as they say.

Andrew Kazlow 12:41

You have uh built some really interesting pathways to help founders raise capital in ways that are separate from the simple I have to raise equity capital pathway. And so to dovetail into another kind of channel of not going the standard route, I wonder if you could just articulate a little

Why angel equity is harder than it looks

Andrew Kazlow 13:00

bit more about the constraints that the equity only conception of raising money imposes on a founder and like why that is a challenge for someone.

Melissa Withers 13:12

Yeah, I I think what angel investors need to so when I angel invest, I do it as an equity investor, right? Um so just to make clear, I I have a fund that I developed um a couple years ago as a reaction to the liquidity crisis of equity being the only way to win, blah, blah, blah, blah, a topic for another day. I think what uh you have to understand when you become an early equity holder in a company as an angel investor, the the the path that that company has to go down for you to liquidate that equity is is complex. And in some ways, the outcomes that produce the big rewards that I think we've sort of dreamed of or maybe been like told to wish for um don't happen that often. Right? Exits are actually hard to come by. And when you angel invest, you're very often coming in as a, you know, you're just gonna come in in a position within the company that unless you have a lot of money to follow on, if they continue to raise money, or you can get to the end of the journey and the exits, um, aside from not materializing at all, which is most angel investments just don't exit, the exit event when you finally get to it may not be as productive for you as you hope. I when I first learned about this, I didn't get it because it it fundamentally didn't make sense. Why should the first money, highest risk money in, be rewarded the worst at the end? Like I didn't understand dilution. Like I just did not understand the need to continue to invest to retain an effective position within a company. And I think most people don't understand when you're investing into really high risk, high reward companies that absolutely are going to need a lot of downstream capital to be successful. As an angel investor, if you don't have the capacity to continue to re-up and re-invest into that company, your position at the terminus may not be quite as glamorous as it as you think. And um, I think it's a complex concept that get like I that is takes the fun out of angel investing in some ways. I mean, you almost don't want to know about it because if you knew how like unlikely it was that you were gonna get that big multiple, you probably would never do it. But I do think that most people that angel invest just also don't understand how dismal the statistics are on exits, right? And so um now that said, the nice thing about angel investing and with an into a good company is there are other ways to make angels whole. And good companies find ways to reward angels and make them whole, even if a big exit doesn't materialize. So it's again, there it's just understanding the structure of the equity model in general limits some of the flexibility that you have and may affect it, may affect your downstream positioning in ways that aren't kind of too sophisticated to want to understand when you start angel investing.

Andrew Kazlow 15:52

Can you give an example, maybe from early in your journey as an investor, of like how you came to understand that reality?

Melissa Withers 15:58

Sure. So I started

Why exits are so rare

Melissa Withers 16:00

out as an equity investor. My partner and I did about 90 companies through an early stage equity model. And it was through that process that I came to understand um just how rarefied an exit event really was for the vast majority of companies, and really came to understand the sort of shotgun methodology that makes big venture work. Because remember, angel investing adopted the model of institutional venture, right? It it decided, well, this is what the guys do over here, so we're gonna do it way over here, right?

Andrew Kazlow 16:31

Specifically referring to like you gotta make 20 deals, whatever.

Melissa Withers 16:36

Well, not so much the portfolio theory, just the equity theory. Most angel investors that are coming into the market today are not making 20 angel investments a year, and they're not using that kind of shotgun scatter map approach, right? So if you think about a traditional equity fund, you like in the one that I once was a part of, you had, you know, 100 companies. Your expectation is that 80 of those companies will outright fail. Then you'll have 20 left. Of those 20, maybe 10 will be decent. And then of those 10, two will hopefully repay the whole fund. And your job as a manager and as an investor is to divert all of your attention away from the losers as quickly as possible and put all of your attention and resources and follow-on money into the five that might actually produce the exit that you want. And that is the that's a fund model. Well, it turns out that making one off angel investments using the same tool effectively doesn't work as well if you're not playing a portfolio model, right? So when a lot of angel investors invest, it's challenging to make lots of money on one or two or three or four investments, right? Because you don't, you don't have that ability, you don't have that amortization, right, across a very large, like needle in a haystack, right? Which is what ventures kind of like looking for. They're looking for already use needle in a haystack. The angel level, right, it's a little harder to use those same vehicles and produce the same outcomes, but under very radically different circumstances. So it's just sort of a reality that's built or baked into the equity-only system. On the other hand, when it works, you know, it can work really well in a relatively small investment. Can you know get a four or five X multiple on an investment that can be extremely exciting, especially if you are investing into things that you know you just also care about. So it's it's it can work. It's just a different, um, it's a little, it's a little different. And so you end up what we have today is a sort of liquidity crisis for a generation of angels who did not see the exits that they wanted over the last decade, and they're very frustrated by that, right? And understandably so, right? It's um I have uh most of my my angel investments have never liquidated. It's just welcome to the party, right? Yeah, so it's something that I think is hard to explain, um, but is sort of a reality of the game.

Andrew Kazlow 18:50

It's an interesting moment. I feel like just in my own work over the last couple of years, we're in this really strange moment where there's all this energy and excitement and new angels coming into the ecosystem, right? Education. Oh, wait, I can invest in this kind of stuff. No way, this is how this works. All these new communities that are forming all over the place. We featured a ton of them here. Uh, and there's this generation of people that have been doing this for a while that are trying to share these lessons that you've just articulated. And so it's this fun kind of hybrid uh environment in terms of you know angel capital at the moment.

Melissa Withers 19:26

Yeah, we really and the the entrepreneurial ecosystem really needs that capital, right? It's a it's really important part of the capital continuum. And in the absence of early, high-risk walking around money, a lot of really great ideas never get off the ground. So it's a super important part of the capital continuum, like it or leave it. I mean, there are other markets in the world that are like there are markets where the government funds much more of early stage entrepreneurship than we do in North America, right? We have a privatized capital approach to entrepreneurship and it's super important. And it is really exciting. I, you know, and I sit in a lot of rooms with a lot of really exciting angel investors who are rolling up their sleeves and getting involved in very important industry categories. And without them, we are sunk, right? So it is super important. Um, and it it's it's just, I think, about creating honest conversations so that there's mission and values alignment so that you don't end up with another exhausted generation of angel investors who don't feel like they got an appropriate ROI from their investment, whatever that ROI may be for them.

Andrew Kazlow 20:33

Can you talk about what you describe as the capital navigation job uh for the founder? Um obviously the most important capital in any founder's cap table is the capital that I provided as an investor. And so other than that, walk me through the journey. Like if I'm listening to this and I'm not really I've never been a founder, I haven't been through that journey,

The founder’s capital navigation problem

Andrew Kazlow 20:55

which is a giant portion of Angels, help me understand um that capital navigation challenge for the founder.

Melissa Withers 21:04

Yeah, so anyone that's built a business, right, for Reels knows that having a capital strategy, a comprehensive capital strategy, isn't just about raising money. It's about understanding how you're gonna fund the operations of the business in a way that promotes growth. And uh in startup land, in startup school, we sort of organized our thinking around this and our training programs around a concept that you fund your business by raising successive rounds of equity capital. And that's how businesses get built. It's just factually incorrect. So very few businesses are exclusively funded by successive rounds of of equity funding. It's a very rarefied edge of the spectrum that are. Think like real hard tech, long path to market, right? Companies that don't have any paths to revenue, like those come medicine, robots, rockets, right? For sure. Um, there's a Very important segment of companies that are, in fact, really funded exclusively by high risk, high rewards, speculative equity capital for a very long time. Okay. That makes up a tiny percentage of most companies that are created each year in the United States, right? The rest of the companies out there cannot, should not, and will not be able to build, scale, and survive using only one kind of capital. So if you've had any exposure to business building outside of your entrepreneurial journey, you kind of know that and you've seen that and you're sort of already a bit facile knowing that you're going to have to understand a lot about the way money moves in and out of your business to build a capital strategy around that and using different kinds of tools at different times. So using some equity money for this and using some debt for that, and maybe using something like what we do, a revenue-based financing opportunity, like with your angel money, like all that in a bag of chips. That reality is just a big open black hole in our entrepreneurial education system.

Why equity alone isn’t enough

Melissa Withers 23:00

And it's really hard for a founder to find a capital mentor who has real operating experience and understands more than one kinds of more than one kind of these tools. And so usually what you get exposure to are angel investors who are really not familiar with with those tools, or venture investors who aren't familiar with those tools, or startup accelerator operators who actually have never built businesses before, right? So there's just this sort of capital navigation job that most founders like just don't come to the party like expert in because they just don't have a background in it, right? They're really good at their product, their customer, their market, their service. And then they get to this place where they're like, like something really good happens. I have a company that suddenly needed $20 million in inventory financing because they signed a $20 million, sorry, a $60 million contract. It was like a dream come true. And then all of a sudden the other shoe dropped and they realized that the company that signed that $60 million contract doesn't pre-fund your inventory. So they're like, oh. And I know that sounds really silly. This is a very smart company, but they air, they went from needing a million dollars in inventory financing to literally needing a $20 million revolving credit line. Well, that slowed things down for a hot second. Because you don't just go, you don't just walk out there and be like, here's my little piece of paper. I think I'll take 20 million, right? So there's just so, and that's kind of an extreme example, but yeah, there's just there are very it's like 99% of all companies use more than one kind of capital throughout the course of their journey. But in startup land, in entrepreneurship land, we only talk about equity and sometimes venture debt when we're feeling feisty. But that's just like there's just not a lot of like dialogue about all the other kinds of capital that you're gonna need to actually go from early stage, you know, hitting the market to becoming a $10 plus million dollar company.

Andrew Kazlow 24:42

A quick note before we continue the conversation. Alongside the Diligent Observer Podcast and Newsletter, I also run an outsourced operations service specifically built to serve angel networks. My team handles things like initial screening, social media, newsletter prep, platform management, and a whole lot more. The kinds of things that either aren't getting done or shouldn't be done by busy community leaders. If that sounds interesting to you, send me a note. Now, back to it. Why is that? I mean, it it it's interesting as you're describing this, because one of the things I've noticed in this ecosystem is the venture is just so darn sexy. Like it's so fun to talk about and look at these cool stories. Oh my gosh. Like this is the only common gloss on it. That's kind of the the the starting assumption for a lot of founders and investors. So like why is this not talked about as much? Why is that the only story that makes it?

Melissa Withers 25:35

Again, some of it's just the origin of who had the microphone in the beginning, right? Like a lot of our uh when it entrepreneurship has been a part of our country's like fundamental economic fabric from the very beginning, right? It's just been ha entrepreneurship and America. Like it's you can't uncouple it, right? For better and for worse, right? But you gotta remember that this whole startup thing, this is like a 25, 30-year-old phenomena. Like it's there were always startups and always businesses, right? It's just one day it suddenly decided, like a lot of forces convened, and there was this new kind of entrepreneurship. This sort of like, think back to like Facebook and you know, like it was different. It was this, it was this sort of second wave of technology during entrepreneurship. And at the time, there was like that, that's the origin of it all. And so the stories about what matters and what's important come from that place. And it so it just reflects the origin, right? I mean, the rest of the stuff though is still happening. Like, like if you look at the Inc. 5000 list of fastest growing companies in North America, a very small percentage of them are funded by institutional investment, right? That's like a magazine publishes a list of 5,000 companies every year that are fast growing, pretty interesting, and not like you know, fewer than 5% of them are funded by institutional venture, right? So it's still happening. It's just we tend to get sort of locked into this like really narrow sliver of entrepreneurship, which is really this conversation about super high growth, niche, unicorn-y companies. And so our whole conversation about funding entrepreneurship got a little hijacked by uh by that. And then what we thought we would do is just sort of take that model and try to spread it out across a larger group of companies, and it it just didn't quite work as well as we wanted it to.

Andrew Kazlow 27:18

This whole thing, this

Why venture gets all the attention

Andrew Kazlow 27:19

whole conversation kind of reminds me of a moment uh in business school where they were basically like, Hey, have you heard of the bond market? Did you know that this whole gigantic thing existed?

Melissa Withers 27:32

It was like Yeah, yeah. Totally. Yeah. Wait, what? This isn't the only thing. This is a thing. Yeah, yeah, yeah. For sure. Yeah, it's it's again, all this stuff has always been happening, and there have been lots of people building companies for a long time. And there are also a lot of companies that like out there that have used lots of different kinds of capital, and like it's just normal. It's not a big deal, right? But it yeah, I just just like in this place of startup land where we talk about about we tend to just stick to what what we think we know. Like it just, it's it's kind of self-perpetuates, right? Like the the knowledge gets passed down and um I mean it's changing though. It's changing, it's changing all the time. And sometimes necessity, right? I mean, we've seen a lot of the challenges that's come out of this one size fits all approach to funding companies. Like there's a no question there's been a lack of liquidity for those who are, you know, using equity-only models to invest into early stage companies, right? You see that the, you know, it's really only the top decile venture funds that are really producing liquidity for their investors. You know, you see it in the angel investing community where there's a generation of angel investors who are, you know, really struggling with the lack of liquidity that they've gotten on these investments. And um, you know, so there's just so there's just a lot, there's more conversation today there was than there was 10 years ago. Um, I could tell you that. But yeah, it's just it it's easier to talk about the sexy stuff and just people just kind of revert to that because it's always been the language, right? But it's changing. It's definitely changing.

Andrew Kazlow 28:56

Aaron Powell So say more about what you've been doing the last few years and why you kind of pivoted into this current structure. Like what's the story here? Why is this something you're excited about?

Melissa Withers 29:05

Yeah. So after doing 90 companies through a traditional equity model, I just became frustrated with the constraints of the venture-only system. There was just this myopic obsession with unicorn hunting was orthogonal to many of the things that I wanted to accomplish as an investor into innovation and entrepreneurship. There were just a lot of companies that I was encountering that probably weren't going to be unicorns. But that doesn't mean they weren't going to be very large, exciting, important companies. I mean, you realize a unicorn has to have a $2 billion valuation, right? Like there's a lot of good things that don't ever get a $2 billion valuation. So, but somehow anything that didn't get that was like a pizza shop, right? But in between a pizza shop and a unicorn is a really important and exciting group of companies. And I wanted to, I thought it was tragic that investors could not access those companies effectively because you weren't going to find them in the top decile venture funds. And you probably weren't going to find them even like through your angel investing. But they were really good companies worthy of investment. Um and many of them were doing things, important things in parts of the country where we need entrepreneurship. Like I also think the concentration of entrepreneurship to six zip codes is a giant problem. Like I, and that's again following the venture model. And the venture model needs to follow its model because that's what it's predicated on. They're not doing anything wrong, by the way. And like they should keep doing what they do. So my partner and I wanted to unlock that. So what we recognized was that if we could have a model that wasn't optimized exclusively for exits, well, then suddenly we could invest in a lot more companies. Because if every decision you made at the beginning was predicated on what you thought would happen at the end, you were creating a pretty narrow aperture for opportunity. If you could monetize an investment through a company just having really great growth, revenue growth, well, now like there was thousands of companies that you could get excited about. Um and so we started that um almost a decade ago. We've done 70 companies. We've deployed um now $26 million into this model and very um pleased and proud and excited. And then also I, you know, I really wanted to invest in companies that I care about, right? That are doing things that matter in the world. And um, yeah, but companies that were making things that the world wanted and needed, and fintech and healthcare and and all kinds of things. Um, it just was more uh natural to where I come from as a human and the kind of entrepreneurship that, you know, helped helped my family stay afloat and helped me become the first person in my family to graduate college. And you're just like that kind of entrepreneurship is like it's like bigger than a bread box, but probably not a unicorn. Like those are my people. And I wanted a model that could work there. So getting out of the exit or bust constraints of traditional venture was the was was what I I my hypothesis of what I thought

Expanding the founder capital toolkit

Melissa Withers 31:52

would make that possible, and thankfully it worked.

Andrew Kazlow 31:55

Do you think more will follow in your footsteps here? Because I'm starting to sense this kind of reaction against the unicorn or bust model. Like I in the last couple of years, I feel like I've been in a number of conversations where I've heard a number of cons similar frustrations where they're like, these are great companies.

Melissa Withers 32:13

Yeah, I mean, there's already more money in outside of venture than there is in venture, like it like from a private capital standpoint. So yeah, I mean, again, I think it's like I still equity invest in when it makes sense, right? Like high risk, high reward, the comp that's what the company needs. It's I think it's just for me, the conversation is more about a healthy conversation about expanding the toolkit, not vilifying one tool. Like it's venture isn't bad, venture isn't broken, right? Like it's not. It's just, it's just if all you have is a hammer, everything looks like a nail. And the truth is that American entrepreneurship isn't just nails, right? And so, like we our companies, for example, also use equity, right? So our companies, I think the last kind of we they've raised, they raised about $50 million in equity before we invested and have already raised like $160 million after. But not all of them, because not all of them need to go on to raise institutional rounds. But the ones that needed to and wanted to, coo for them, right? So I think it's more about just the capital toolkit is expanding. It's already expanding. I'm not alone, by the way. I'm not the only one that does this. Um, I mean, I was early in, you know, really proud to have kind of maybe been like a little bit of a Russian icebreaker for some of this thinking, but there's a bunch of really awesome people out there um also joining in the movement to diversify the toolkit for early stage investing. And so, yes, I think it will we we would be wise collectively to continue to find new ways to fund American entrepreneurship um outside of just traditional venture capital. I'm I think like it's a you could say it's a matter of life or death in terms of the our nation's economy and our economic future, and if you believe that entrepreneurship and innovation matter. But that does not mean that we still shouldn't have high risk, high reward venture, right? Because it funds rockets and robots and medicine and all kinds of things that need that sort of long-term patient high-risk capital. And we should keep putting money over there and we should keep trying to make that system better, right? Like, but we should also do other things, right?

Andrew Kazlow 34:15

Are there other categories of funding like in this toolkit as you describe it? Are there other categories that you see starting to emerge that you're excited about that are changing? Like I'm sure we still have gaps, but like what are you seeing that you're excited about maybe outside of revenue-based and outside of traditional equity?

Melissa Withers 34:35

Sure. I mean, I'm a I'll tell like my there is no good or bad capital. There's just the like, well, there's some. There's some really predatory bad capital. Okay. Like, but I tend to not like I tend to try not to talk about the edges. Like there's always a binary, and you can find them if you're looking for it. But the truth is, most of our lives is like, if by if everything was binary, what a magical world we would be in because we could just make good choices and everything would work out. Um, my reaction is there's

The “pretzel problem”

Melissa Withers 35:00

really there's not really much bad capital. There's just um using the wrong capital at the wrong time in the wrong way. So there is, um, I think there's a lot of people doing some very exciting work in like debt models, right? And uh, you know, allowing companies to access debt in a way that's more for affordable, that's less scary, right? So there's some people doing good work to create um debt options that don't require personal guarantees. Like, so I think there's like there, there are a lot of good people out there doing work to expand the toolkit. Um, it puts the burden on the founder, though, again, to continue to recognize that there are more options out there today. It doesn't mean you're gonna be able to access them all, but there are more options out there today than when I started a company. So I could sort of delay my education about the pros and cons. Like all capital has is like good and bad. Like there are downsides to my model, right? That you that an operator has to be aware of, right? Like it's not, if it was all smooth sailing, like you'd fund it yourself. In the best scenario, as an entrepreneur, you don't take anybody else's money, right? Like in terms of having no downside risk of a cost of capital, right? So what you want to do is kind of modulate those risks and try to do your best to um make good choices. I I talk a lot about what I call pretzel problems, and I see this a lot where founders twist themselves into like a pretzel in order to match what an investor is looking for. But like you can't untwist a pretzel, like like what happened, like it a pretzel breaks, it doesn't untwist. And so some contortions you can't get out of. So there are some capital decisions that once you make them, you're kind of stuck with them. And I think like that's all put up against the reality that as founders, and I've been one myself, you don't, you're not always able to optimize for the best capital. Sometimes you just like you gotta choose from what you have in front of you in order to not die, right? And so all of this is happening in a reality where like desperation may be a factor in your capital strategy that you know you gotta kind of take head on. Um, especially if you're building a business without perks of privilege and you don't have a ton of wealth and you don't have wealthy friends, right? Like, yeah, you may sometimes have to take money from somebody you don't want to take it from at terms you don't love, right? But what you what you want to try to do is is make responsible decisions as much as you know, as much as you can. So yeah, I'm excited about all of it. Um, but all you know, I think the more capital evolves, the more important it is that we help educate our founders to navigate those options and try to as much as possible avoid misappropriating capital, right? Taking the wrong capital at the wrong time for the wrong job.

Andrew Kazlow 37:36

I think this is just such an important. I'm literally talking to a founder yesterday. He's like, I'm trying to raise 2 million, I've got 500K committed. Uh, should I keep going? Like, do I just take this and and go build? And it's like, I don't know.

Melissa Withers 37:49

You don't know, like maybe, maybe, maybe not. I don't know. People ask all the time. Like, they think um, like a lot of times people expect me to be like anti-equity, and I'm absolutely not at all. Some of my favorite companies have a lot of equity at play in my own portfolio. Um, I'm I'm like really, it's just more about having a a cogent capital strategy

Investing is poker, not chess

Melissa Withers 38:10

that evolves with you. And it yeah, and the the I read a a kind of like, you know, like airplane books, like the like pop science airplane books. I'm a big fan of like airplane books. And um I I have a book club with my some of my founders, and last year we read a book called Thinking in Bets by a woman named Annie Duke, and she was a psychiatrist, psychologist or social psychologist researcher, and she became a professional poker player. And she's made a whole line of business and written a bunch of books about um the problem, like like life is poker, not chess, right? In chess, you see all the pieces and you're working with a all-known facts, with the notable exception that you might not be able to predict my behavior, but you can see everything. I'm not holding anything back. Where in poker, right, which I learned to play a couple years ago, it's the opposite, right? Like there's you don't know, there's a lot of unknowns, right? And so a lot of this sort of her takeaway was binary thinking is problematic. It's not usually right or wrong, good or bad. Uh life is not really a set of binary decisions, right? It's really about understanding risk and reward and making and recognizing that a good decision can produce a bad outcome, and a bad decision can produce a good outcome, right? Like sometimes you win at cards by making a really stupid choice, right? And then sometimes you lose at cards by making a really smart choice. And so I think part of building a company and being an early stage investor is understanding that we don't see all the pieces. And like that's part of the thrill of it, is each piece is revealed as you go, and uh hypothesizing about what the missing piece is. I mean, that's part of the thrill and the joy. But I think that that way of thinking for many people, rate, like we like many of us got very successful by being like binary thinkers, like right, wrong, choose, decide. And in I think in entrepreneurship, like that's just not the way to think about it. And capital is especially true because you don't really know when you make a capital choice, you're using your past performance and a speculative plan for the future, and you're trying to make a good choice, but you don't know what's around the corner, right? You don't maybe a better option pops up tomorrow and you're like, I already did that, right? Or, or you lose a customer, or you suddenly get five customers and it you could have raised that money at a higher valuation. I mean, you just don't know. So, what you're just trying to do is is you know, kind of understand probabilistic risk, right? And thinking about like what could happen. And I think that's part of the thrill of the game. Um, and a lot, I think that's what gets people into angel investing, by the way, is if most, again, most people entering angel investing, you know, have a healthy understanding of the risk and they just want to be part of something interesting and they want to be part of the future. And most angel investors I meet today want to help solve problems in the world, and they fundamentally believe that entrepreneurship and innovation is a part of that, right? As do I. And so I think reframing it that, you know, we're playing poker, not chess, it's very, it's very liberating. It's very liberating. Because that was something like you're just like, okay, I couldn't possibly be right all the time. It just takes a little pressure out of it.

Andrew Kazlow 41:17

Okay, so Melissa, I'm listening to you thinking to myself, man, I I want to help my founders get better at thinking through this. I have my own set of experiences, but like who what are the where do you point founders to go learn more about all this? I mean, say go back to school, get a degree, online stuff. Are there like one or two things that you recommend for founders that are trying to get smarter about this that I can latch on to?

Melissa Withers 41:43

So we are living in a moment that I wouldn't wish on my worst enemy uh from a founder perspective. We're living at a time where the shrinking half-life of everything is making it exceedingly difficult for operators to pick a thing to operationalize and stabilize around, right? We're living at a time where the half-life of a business model, a value delivery model, uh like a like distribution model, you name it, may like it might last for weeks, not years. And I cannot underscore the I mean, that's maybe the only benefit of being a woman of a certain age is that I remember when the pace of of change was a little slower, right? And so you're we're living at a time where there's a shrinking half-life of everything. So what but if you're in a constant state of chaos and nothing stabilizes and you don't lock into anything, you also can't build a business that way.

Andrew Kazlow 42:37

I think just to just interrupt to make sure I'm talking. You're saying this is because AI and everything. Yeah, everything. Yeah, all the things.

Melissa Withers 42:44

Yes, literally. Like it's been accelerating in general because of technology, but uh absolutely in this moment, AI has done nothing except flood that with gas. Like it's it's just I so when I started my first company, Clay Christensen

Why business models are changing faster

Melissa Withers 43:00

was an advisor. And at the time he was, you know, leading this narrative around disruptive innovation. I remember he got up, you know, he was talking one day about how you know my dad hit like he could have run the same business model for 10 or 15 years and or 20 years, and now you might be able to run the same business model for 10. Can you imagine today a business model that lasts for 10 years? Like, and back then that seemed terrifying. And now it's so like you're like, how droll. Like, imagine a business model that lasts like literally, Clay Christensen was a genius, amazing person. Um, but also a genius, right? Like, imagine now, fast forward, like telling someone that you'd have a business model that would last for 10 years. Like, it's funny, I can't even keep a straight face, right? So certainly, and I definitely like, I mean, I am talking about the accelerating power of AI against the shrinking halfway of everything. So, what are we optimizing for, right? And it's changing all of our concepts around longevity and creating value. I had to give you a whole nother like episode thoughts on this changing sine wave of value. Creation, right? The amount of value is get is there if it's not getting bigger, but the time you have to capture it is shrinking. So the whole sine wave of value is changing. And then you have companies and investors, and we're all out of alignment now. Like we're not, like our models are not tracking to each other. We're spreading out into space on a scattergraph. Like it's like it's like a K curve and it's worse, right? And so the best advice that I can give to operators today is you've got to continue to put yourself in the position to be around other people who are thinking about the things that you're thinking about, like on the regular, right? So what you can't do is put your head down and hope that you yourself as a solo, like or your little team, you're gonna solve all these problems, right? The like the crowd is solving problems, right? And so I think this has always been true. It's always been my advice, but like if you have to build the right group of peers and advisors and advocates, and you need to dedicate tons of time and energy to the activity of maintaining that network as a core business function, not as a, and many times you get pulled into the operating weeds and then you hit the skids and you like you're you don't what while that was going on, even in a couple short months, all of those network connections have dimmed and are no like are less valuable in that moment of urgency. It's like an operational imperative now that you are you are plugged into the crowd that is operating in and adjacent to your space because that you need all the listening capability, all of the conversational capability, all of the collaborative capability that's happening out there. Very little of your future is gonna be predicated on what you decide in here. And that's that's not that's different. Like that's a that's a shift. I think before we gave nice lip service to that, but I think it's now an operational imperative. The idea that you, your little operating team is gonna figure it out. I don't care how smart you are,

Founders need stronger networks

Melissa Withers 46:00

like it's just not gonna happen. You're gonna figure it out because you're gonna be plugging into um a network of information and ideas that are gonna like clue you in on how to solve these very difficult problems. So, like the best advice, it's probably the same advice I would have given a founder when I started doing this 15 years ago. But I would say it now that if that if you are not doing that, like it's too late. Like if you like if you are starting a company today and you don't already have that kind of network or at least a nascent version of it, good luck with that. Oh my god, he's spectacles. I just I just wagged my lip gloss at the camera. It's a classic, classic move. I'm like, or I'll wave my lip gloss at you and you'll be doomed.

Andrew Kazlow 46:42

Mic dropped. So technically, this is like you're basically saying, go network with fears. Make the time for that. Don't skip, don't skip drinks.

Melissa Withers 46:50

Fears, advisors, ever like you have to. Like, and I know people talk about like put your head down, don't waste your time at cocktail. Yeah, I mean, don't be an idiot. You like you gotta go to the but it's it's actually like really, it's maybe even a little more complex. And this is why it's hard. It's not just go to drinks. You need an entire operating protocol for how you know who you need to be talking to, and how your organization, your everyone inside your company at every level of the function. Like if your people two levels below you like aren't also doing that, same problem, right? It's almost like everyone in the organization now has to be part of a really robust learning network, right? It's very spongy. You gotta be very spongy today to figure out what to do next because you've got to hear about the stuff, man. You gotta like hear about it while it's going down, and um, you gotta get in on it.

Andrew Kazlow 47:45

Um so give me some more examples because this is obviously very important, but I feel like there's a risk of this message not making it through practically. Like, what does this actually look like in practice?

Melissa Withers 47:57

I mean, it is investing real time and money into building operational capacity to do environmental listening in your industry. It is it is real time and money developing a market-facing persona so you can participate in those conversations. Um, you know, I talk a lot about the rising cost of authenticity in the age of AI, right? And the fact now that no one buys anything from a logo, right? It it like anything. Like you don't need to be a Fortune 500 company anymore to need a personality-led brand. Like people don't buy from logos, right? But you might be a founder that just isn't comfortable with that and figuring out how, like to participate in these real meaty conversations, you you have to have some kind of point of view. Developing that point of view, sharing that point of view, knowing where and how to share it. This is like this is real work. Like, this isn't like like you know, on Sundays I jot down a list of names of people that I want to talk to. Like, this isn't networking. This is actually building an operational capability that allows your company to have an authentic voice and an ongoing conversation about the future of your industry. And the that is now something that used to, you could kind of put that off, and it was reserved for like the medium to larger size businesses, needed like, and you'd go to conferences and listen to them, right? Well, that's not the world is flat now in that regard, right? And so from the earliest days of a company, you need a meaningful point of view and an and a authentic personality to enter into the places where the conversations are happening while you are also doing the blocking and tackling of building your business. Like it's a tr it the most concrete way I can describe it is it's like building a organizational function.

Angel investing is deeply personal

Melissa Withers 49:40

The way you would build a sales apparatus, you need to build a persona apparatus that is out there listening to and participating in the conversations that are going to shape the future of your industry. And that is something that is like expensive, time consuming, and often out of the realm of expertise of founding teams that maybe are not native to that kind of activity.

Andrew Kazlow 50:07

I love this, and I'm obviously buying into this running podcast. I mean, this is like the the Harry Stabbings, you know, 20 BC, starting from a dorm room, making calls, getting on show, and then now he's where he is now, and it's just insane. All that built on his personal face and story and conversations and relationships.

Melissa Withers 50:24

Yeah, and just to you know, kind of bring it back to angel investors. Like early stage investing is at its best, is very intimate. Like it's again, it's very it's really not transactional and it's not a meritocracy. And anyone who it like thinks it is is is, I think, maybe being a bit delusional, right? Founder and investor, right? You're not, as an angel investor, you are not picking the absolute best companies. And as a founder, you are not getting investment because you are the absolute best customer. The actual chemistry that's happening there is far more nuanced, right? Do you need to be a decent company? Sure. Um, like as an investor, do you need to be kind of smart and know like what's a like a like what's good versus stupid? Sure. But at the end of the day, if you unpack it, what's happening is like a much more interesting chemistry, right? I mean, that's what makes it fun. There's so much um personality and vibe and instinct and all kinds of stuff that has nothing to do with like the fundamentals of the business, right? Because they're so, I mean, again, the business you meet today, if it's a good company, it shouldn't even look the same a year from now, right? They're doing it right, it should be different. So I think there's, you know, a lot to be said about leaning into that as an angel and making that part of your calculus, right? And instead of leaning away from it, leaning into it. So it becomes, it's like a the old iceberg metaphor, right? It's not the tip of the iceberg that sinks this ship, it's everything that's below the water, right? I think with angel investing, the things that are gonna make your angel investing experience so much more fruitful are below the water, right? There, there it's not this like, how do I five X my $50,000? It's it's everything that's below that. Like, what, like, what's the what's the meaningful expression of what I want to do with my wealth, right? And I think, you know, and I do think there are a lot of angel investors coming into the space today that are maybe aren't using that, those words, those are my words, but are they aware of that and they are thinking about making angel investing part of their wealth management strategy, but a very small part of their wealth management strategy, but a huge part of their sort of aspirational and emotional lives, right? Like it should be a small part of your portfolio, unless you're super duper rich, right? But even proportionally super duper rich, it's still gonna be a small proportion of your of your wealth management strategy, but it should, I think in the best scenario, it's a large, a large percentage of your aspirational and emotional and um like inspirational self. Like I think that's the right ratio to think about it.

Andrew Kazlow 52:55

Melissa, I think that is a beautiful place to stop. Thank you for the positive.

Melissa Withers 52:59

I'm trying

Small portfolio, big life

Melissa Withers 53:00

trying not to be Debbie Downer, so I'm really glad I'm really glad I found like a place where it wasn't like qua qua qua. Angel investing is tough, yeah.

Andrew Kazlow 53:08

But I think you put you put really well thought out language to what makes this so special.

Melissa Withers 53:17

And so I I'm it's like investing with your heart doesn't mean you're a financial idiot. Right. And I think that's like it's kind of gendered, right? I think that language like has been hard because like it's kind of feels feminine to say that, right? I'm a very good investor. I am smart, I make good decisions, and I've made a lot of money for my investors by being a smart, good investor. I perform my best when I when I'm investing fully with the entirety of my being. And when I'm investing with my heart, in the sense that all of what my values and beliefs tell me about the world in concert with what my brain tells me about the relative risks of what I'm doing, though that's the place where like I perform. And I think in angel investing, that is like you'll never regret that. You never, you'll never regret that if you really, like, if you're really investing fully with like that, you'll you're gonna get the most out of angel investing than if you are optimizing for some little upside part of the up the asset class, right? You won't need I think you'll never regret that.

Andrew Kazlow 54:22

Melissa, thank you for joining me today. Yeah, thanks so much for having me.

Melissa Withers 54:25

It was really fun. I appreciate it. Thank you.

Andrew Kazlow 54:30

Thanks for listening to this episode of the Diligent Observer. I'm your host, Andrew. And if you're an angel investor looking for essential angel infel in five minutes every week, I think you'd enjoy my newsletter. I send my best stuff, interesting deals, and more straight to your inbox so you never miss a thing. Subscribe today at the DiligentObserver.com.