Welcome to Inside the Mind of a NYC Angel Investor, a new series at AlleyWatch in which we speak with New York City-based Angel Investors . Up first in the hot seat is Kristopher Brown, Partner at Dechert. Kristopher sat down with AlleyWatch to talk about how he started in angel investing, the changes he’s seen over the last 20 years, and the evolution of New York as a place for entrepreneurship.
If you are a NYC-based Angel interested in participating in this series, please send us an email. We’d love to chat. If you are interested in sponsoring this series that showcases the leading minds in angel investing in NYC, we’d also love to chat. Send us a note.
Inside the Mind of a New York Angel Investor: Kristopher Brown
Bart Clareman, AlleyWatch: Tell us about your path into angel investing?
Kristopher Brown: I’m a lawyer, but I’ve always had an interest in business. My younger brother went to Harvard and worked at Microsoft over the summers and after graduation, and he exposed me to a lot of cool things. He was the program manager for the ActiveX (active desktop) project in the early ’90s before Explorer even existed and then went on to help create the Xbox – he was the original programmer and gave it the name. Even though I was working at Sherman & Sterling doing big, public M&A deals, I was really excited by this Internet phenomenon that was happening.
In 1993-4 I tested the waters making my first angel investment into a company that my brother’s girlfriend, now wife, had joined. It used what was then referred to as “push technology” to create a ticker tape at the bottom of your computer screen to show how your stock portfolio was doing, whether it was up or down and you could push on an arrow with the ticker symbol and you could see news stories about the company. And while this sounds not that exciting today, it was really cool back then to have instantaneous access to your stock portfolio. I invested $15,000 in that company.
A funny thing about that – the angel who led that round, Tom Alberg, invested $30,000, and afterward he told me he was also just about to put $30,000 into another great company in the Seattle area. He proceeded to describe an interesting company that would sell books online called Amazon.com. I thought it sounded interesting but easily replicable and not so exciting so I politely passed.
Is that the pass that you regret the most?
Honestly, I don’t really regret it. On a level of course I do, but I enjoy the story now more than anything else.
In any case, that was my first investment, and that company got acquired by Fiserv. Some time in between I left the big law firm I was at and went to a boutique called Reboul MacMurray that focused on venture and private equity.
I was a jack-of-all-trades. I did venture deals, private equity deals, M&A deals, fund formation – you name it. It was in that context that I worked on the formation of some of the Index Ventures funds when they were just starting back in the late ‘90s.
Index gave me the opportunity to invest alongside them in their fund and that’s how I got exposure to Skype. Skype was like a 60x return in 2 years, and that really changed my life. I’d had all this law school and college debt that I could finally pay off.
As a lawyer I couldn’t invest into my own clients, except in cases where the client invites you, but I did see a ton of deal flow. This was early days of the Internet in New York – it was called Silicon Alley back then – and I just started being in that world. I was going to events, seeing companies, I started having the opportunity to invest small amounts, as little as $5,000 or $10,000 into interesting companies.
With friends I would start companies on the side. I couldn’t be involved because I was a full-time lawyer, but we would have the idea and then we’d find a little team and start things. That gave me a little taste of actually being an entrepreneur as well and I continued to make investments into various companies and still do it to this day, though it’s become more global – I’m agnostic to where in the world a company is. For example, I was in Singapore and Hong Kong last week, where as a lawyer I recently advised Lazada (an Amazon.com-like company that covers SE Asia on a $1 billion investment it took in from Alibaba) but spent time on the side meeting with local fintech startups I may invest in.
As an angel are you limited in terms of the stage of investment where you can participate?
I decided about 15 years ago that if I’m going into a company for the first time, my criteria would be $3M pre-money valuation, maybe now I’ll go to $4M, though I really have stuck with that $3M, regardless of inflation. I like to be really, really early into these companies, because I think the ultimate return is greater if you’re in at the beginning.
As far as what that means over time – if I’m already in the companies then I’ll participate, but it will happen that the rounds get to such a high valuation that my pro-rata would be way too much money to invest. But I’ll always participate what I can in future rounds of companies I believe in.
Angel investors often gripe about getting boxed out by VCs in later rounds – have you encountered that phenomenon and how have you managed it?
Technically, yes. But one of the things that’s helped me is I get very deeply involved with companies and put my heart and soul into them to be helpful. So, even if I’m not technically a so-called “major investor” anymore when they’ve done their D round and have raised $90M, I’ll usually get asked to continue to participate. Sometimes I’ll even be carved out as someone who gets special rights, even though my stake is much smaller.
I believe all of this is a relationship business. The way that I’m helpful to companies means they want to involve me, so I’ve never been locked out.
Have you ever thought to “turn pro” so to speak and go full on into Venture?
I’ve been asked that a lot of times. My answer is – I am in Venture. I’ve been in Venture longer than most Venture Capitalists. I’ve been doing Venture since the early ‘90s.
I happen to be a lawyer, too. That’s one of the great things about being a lawyer is you can be all sorts of things. I can’t let it interfere with my practice, I can’t let there be conflicts. But despite the pressure on lawyers to bill a ton of time and have a lot of clients, there are still 24 hours in a day and 7 days a week.
Some people like to go fishing; some people like to play golf. Many lawyers do those things, but I don’t. I do this. It’s just what I love to do. I’m an entrepreneur at heart that got turned into a lawyer.
You’ve been in the New York entrepreneurial ecosystem for over 20 years. How has it changed in that time and when, in your opinion, did New York arrive as a legitimate peer to Silicon Valley?
I don’t think it has arrived. We have all the elements; it’s sort of shocking that it hasn’t.
I’ll put it this way: I’ve been doing IPOs for a long time; my very first was of Israel-based tech company Amdocs back in 1998. Around that time, there was a famous sign right behind the Flatiron Building that said, “Welcome to Silicon Alley;” it was put up by a famous company called DoubleClick, which was later bought by Google.
When DoubleClick got bought by Google, we all thought, “wow, that’s the moment.” The first big tech company out of New York and it made sense – it was ads, and New York is all about ads. And the feeling was, this is gong to lead to this giant influx of angel investing because now you’d have all these people who were at DoubleClick who would have all this money. And, you know, it just didn’t take off in the way everyone was expecting.
We’ve never had that series or even one or two giant Internet deals here that made the huge splash. It’s been more of a deal here and there, some things happening under the radar, enough to keep it growing but not enough to make us known as a center for tech.
Why is that, in your opinion?
I think it’s because – look, I’m a poor kid originally born in Fairbanks, Alaska and had an outhouse. I live in TriBeCa and now my next-door neighbor is Taylor Swift. People here, we’re just used to big things – New Yorkers can’t really be wowed.
And that’s part of it for the tech scene here – we’ve done all of these great things, but it’s just sort of “yawn” in comparison to all the other great things going on in New York.
I went to an event once and an investor said the thing about New York is tech is always going to be the fifth or sixth most interesting game in town, it sounds like you believe the same?
That’s exactly it. We have such cool stuff here. You go to California and tech is all they’ve got. Well, let’s not forget Hollywood down south. And look – I’m no New York snob, I actually graduated, technically, from Palo Alto Senior High School. I grew up partly in Palo Alto, CA. I love the West Coast.
But there’s a reason people all over the world love New York. New York has an energy and an excitement that’s so massive that nothing stands out here. Even Trump’s not a big deal here. The barricades were up for like three days in front of Trump Tower, now there’s nothing.
Tell us about your investment thesis – what excites you?
I tend to like life sciences, healthcare information technology, and tech broadly defined.
My philosophy as an investor is, I’m always wowed by innovations that will be coming down the pike and hitting those sectors. I read voraciously. I’m in the community so I see things early. My sense of curiosity means I get exposed to what might be coming in those sectors before other people do.
I’ve watched again and again, it’s often not the first entrant into a sector that makes a killing. It’s often someone who sees what the first entrant is doing and refines it.
I try to see what’s coming, try to look at the universe of companies on the cutting edge, and then realize that the world, including incumbents and others, will put up resistance to anything that will completely disrupt the status quo. So I then look for and invest in things that are more of a transition technology to that future with the cutting edge tech – something that’s more of an interim type technology.
My portfolio company Powermat is a fun example. It’s not truly wireless power, just magnetic induction, which Nikola Tesla invented around 1899. And Dynamics has computerized credit cards, not anything fancy like Apple Pay – just a computer in a credit card form factor. So MasterCard and Visa aren’t displaced by Apple.
From a returns perspective, does focusing on incremental improvements lead to more singles and doubles as opposed to home runs?
I think it leads to more home runs, because I actually think the people who are way too far ahead of things get stalled. The cutting edge companies go bankrupt, or they’re too early. Either way, they scare the shit out of the incumbents who then turn around and say, “oh my gosh, I have to go buy something like that that doesn’t ruin my business, and oh by way I’ll pay a ton of money for it.”
There’s a great book by Tim Wu called The Master Switch: The Rise and Fall of Information Empires. He calls it “the cycle”, and he notes this has been happening with technology since at least the 1850s, beginning with the wireless telegraph and transitioning from that to radio and then to TV and cable and the internet and now to wireless/mobile. AI and robotics are next, of course. Basically it’s these series of 10-15 year cycles that take you back the 7 or 8 technology revolutions to the 1850s.
Every time there was some completely disruptive technology the incumbents tried to stall it. They brought patent suits and in the end they screwed the first one or two companies, but eventually someone came along and took it to a new level.
Technology moves so fast. If you were around in the late ‘90s you thought Microsoft was a lock and no one would ever survive against them. Yet lo and behold, these companies come along and within a few years, they’ve completely replaced the incumbent and become the dominant ones.
We’re living in an era today where people think Apple, Google and Facebook are invincible – it’s bullshit. We all thought that was true of Microsoft years ago, and IBM before that. It’s those scared people in those positions of monopoly that you want to cater your investment opportunities to.
Tell us more about the companies you invest in. What is the number one thing an entrepreneur can do to make their business interesting to you?
It needs to be the people. All that I just said, the hardest part is making sure it’s a group of entrepreneurs.
Frankly, that’s what I spend the most time on after I have an investment. Talking with entrepreneurs, giving my advice – I’m never a big enough investor to tell them what to do, but I try to give them the wisdom I’ve acquired.
Some will listen and some won’t. For me, trying to figure out who are those people who are flexible thinkers, and the ones that aren’t just caught up in things like near-term valuations, is really important. If you’re hung up that someone will only give you $2M at a $10M valuation and you want a $15M valuation, to me you’re being ridiculous – it just doesn’t matter.
I truly, honestly believe it’s always better to own 1% of a $1B dollar company rather than $100% of a $100 company. I’ve given that advice so many times and it’s amazing how many people hear that and say, “wow, that’s great advice” as if they hadn’t thought of it themselves because they get so caught up on valuation.
So – people who are, even at a very young age, flexible, able to see that perspective, realize they’re not so certain – I mean, I love the certainty and enthusiasm they have around, oh I’ve got the greatest deal, we’re the only ones doing it, but what I look for are people who have had to change things around and mix things up, who had to rethink their strategy. If they can think flexibly that’s what will make them successful.
You hear stories about founders, like the founder of Snap who now says that from day one he had this a-ha premonition that disappearing images were what kids wanted. It could be true, or it could be a fiction created after the fact. I bet what he has is a total ability to see what was working and what wasn’t working with his platform, and I’ll bet if you really looked back on it, it started a little bit differently and he moved it in this direction – because that’s what successful entrepreneurs do.
So people are the most important thing. I invest in people, people, and people. It sounds trite but it’s totally true.
For the aspiring entrepreneur who is scanning the landscape of NYC-based investors, what should they know about Kristopher Brown?
I’m inherently curious and I try to be helpful to everyone I meet. There are a lot of barriers for entrepreneurs. One way I can be helpful is I know it’s not so easy to tap angels or angel groups. So, even if it’s not for me, I try to leave an entrepreneur with some little inspiration about – keep going, if it’s not for me there will be someone else that will be interested, and I try to connect them with another angel or another fund or someone I know that can be helpful. It’s really important to be helpful to each other in this ecosystem. It’s not a competition thing; we’re all in it together. We call it coopetition.
I always try to leave people I meet with a little better off than when they came to me, because I think that’s what people did for me when I was a young person, and it helped me and now’s my chance to pay it forward. I’m a big believer in fate – I started off with nothing, basically, and people along the way gave me chances and helped me and encouraged me.
As an entrepreneur I always found it relatively simple to find and connect with VCs but more challenging to find angels. What are tips and tricks for entrepreneurs to find quality angels in New York?
It’s super hard. There are various angel groups that focus on one thing or another – they’ll focus on life sciences or tech or on the East Coast or West Coast or India. At the end of the day, people who have been around a long time – and I’m turning 50 this year, which isn’t ancient but it’s like dog years, in Internet years that’s a long time – and have remained interested and curious and they’re staying on top of it, they can point you in the right direction.
What you have to remember is that it’s much less than six degrees of separation here. Six degrees is a global thing, I find it’s two or three at most in New York. With a simple email introduction I can get an entrepreneur in front of someone who can really help with what they’re doing. And it’s worth doing for me because, it’s such little time, 5-10 minutes, and the potential payback is so huge – you never know what a person will become.
How do you source opportunities? How have your methods changed over the years?
A lot of it comes through what we’re doing here – I’ll get some interesting opportunity from someone who reads this article and Googles me. One of my companies, the founding entrepreneur mentioned me as his first angel in an interview on CNBC and I started getting all these phone calls.
It’s stuff like that and friends of friends who will reach out to me. On top of that, I do a lot of reading and do my own research. So I source through a combination of word of mouth, my network, and going out in search of things that I think are cool.
Give us your state of NYC entrepreneurship as we stand at the outset of 2017 – what trends are you watching closely, what headwinds/tailwinds are you mindful of, etc.?
It’s very strong, there’s a lot of entrepreneurial activity. There are a lot of high expectations about the ability to raise money. It’s harder maybe than in years past to get angels in, largely because on, the tech side, there haven’t been as many exits through IPOs or M&A as people would have thought. I don’t need to tell you everyone’s excited about Snap hoping its success leads to a lowering of the dam and more companies going out.
In the public markets, I think we would benefit a little from the post-Trump euphoria that has occurred. Even though professionally I take companies public, I personally stopped investing in the public capital markets in 2008 and I’ve put every extra dime I’ve had into private companies and venture capital funds. I believe in private companies and I believe I can know those companies much better than I can the public companies, even though you’d think the opposite with all the financial reporting.
But no matter my own portfolio, the public markets absolutely do shape the overall state of mind. And right now, everyone in the public markets is applauding Trump, and everyone’s public portfolio is way, way up, but I think we’re due for another downturn because that’s how the world works.
I don’t want to be a doom and gloom guy but there are huge opportunities during the downturns. Honestly, I find I’m busiest during the downturns and have the best opportunities then.
As a matter of fact, I hope there will be a correction, because when there’s not a correction things crash. I always like it when the market tumbles a bit because it makes people get nervous and nervousness is good – people should be careful in thinking about these things.
What advice do you give to entrepreneurs who worry about the signaling effects of taking money from one type of VC/angel or another?
My advice always is to take the money if you can get it. Unless you’ve heard of something unethical about the investor or they’ve done something to hurt an entrepreneur. Go with people who are offering you money because if they’re that interested in you they’re going to make the time to help you.
There is always someone sexier or more sophisticated. But you know what, those guys – there are statistics that say the best deals go to the biggest funds, the biggest names – but there are plenty of great deals led by people you’ve never heard of.
You knew Steve Jobs – is there a Steve Jobs story that encapsulates your experience with him?
You know, Steve Jobs was an incredibly decisive man. I have two prized emails from Steve Jobs that I’ve printed out and put on my wall. Both instances were cases where he was considering buying two of my portfolio companies and had spent lots of time – literally, in one case, over a year – and then after completely coming to understand the opportunity, he killed the deals.
He did it with such class that, you know, you were burned by Steve Jobs but you were sort of proud it. He came to completely understand the opportunity and once he understood it he did his own thing.
It was never unethical, per se, or illegal or anything, but I think other people’s stories would back up that this was the way he operated. And yet, he did it with charm and finesse and you couldn’t help but respect it.
What’s one thing you we wouldn’t know about you from reading your LinkedIn?
The reason I became a lawyer is because of the CIA. I went to Brown University and with my applied mathematics and economics background had planned to go to business school or into consulting. But I also worked at an investigative magazine on campus and used my background to get an interview at the CIA when they came to Brown to recruit. It was very controversial at the time because the CIA had been banned from recruiting from the “liberal” Ivy League schools since the 1960s and was only just invited back in 1987 for the first time. With my background, the CIA was very interested, but I had alternate plans to secretly tape record my interview and write a story about the experience. Brown was, in retrospect, rightfully furious when the story was published and almost expelled me. In the end, I hadn’t done anything wrong, but they still blacklisted me from the campus recruitment center, leaving me with the only option of applying to law school last minute.