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. In the hot seat this time is David S. Rose, Managing Partner of Rose Tech Ventures. David is the Founder & CEO of Gust, Founder and Chairman Emeritus of New York Angels, and is the Founding Track Chair for Finance and Entrepreneurship at Singularity University. David sat down with AlleyWatch to talk about how the New York startup ecosystem has evolved in the years since he was named “the patriarch of Silicon Alley,” how he came to found New York Angels, and his thoughts on how near the Singularity really is.
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 NYC Angel Investor: David S. Rose
Bart Clareman:, AlleyWatch: Tell us about your journey into the angel business – how did you become an investor and why this asset class?
David S. Rose: I was brought up with a role model of an entrepreneur – my father is an entrepreneur so, sure enough, I started my first company when I was about 10 years old: “Rose Productions, A Multimedia Organization”. My brother was a magician and would do children’s birthday parties. Our marketing department helped him understand that, as a performer, he really needed headshots and fliers and business cards and brochures and posters, and Rose Productions would be happy to supply them.
That was great until about a year later when my one client realized the sum total of his revenues equaled the sum total of my revenues, so I lost my one client. But I was undeterred, and I continued starting companies all the way through high school, college, and business school.
In college I got into letterpress printing, which is still my avocation, and ran the print shop in my college as an entrepreneurial venture. At Yale, I majored in Urban Affairs, and then began my career in government with Senator Daniel Patrick Moynihan, first as his Special Assistant for Urban Affairs, and then as Acting Regional Director of his New York office.
Despite having an enormous amount of fun conducting congressional investigations, sitting on boards with the Mayor, and drafting OpEd pieces for the New York Times, after a couple of years I realized I was at heart a private sector entrepreneur. So I left Moynihan, went back to Columbia to get an MBA in real estate finance, and then joined my family’s businesses in entrepreneurial real estate development. I spent the next decade as a real estate developer.
Did you ever lose your passion for starting new companies of your own?
Never. Along the way, I kept starting companies on the side. I started one of the very first computer training companies, The Computer Classroom, with my business school math professor in 1983. In 1988 I started a software company that turned into a wireless messaging company; when that began to take off, I transitioned from real estate into tech.
From there I fell backward into venture capital financing. I raised my first VC round in 1991 from Warburg Pincus, which ultimately enabled us to develop the first wireless Internet broadcast network, called AirMedia Live. That got us more financing, and more people; the company expanded and became a multinational with 125 employees.
Along the way I was a finalist for the E&Y Entrepreneur of the Year award here in New York. (As an example of how I come from an entrepreneurial family, although I was a finalist in 1999, my father actually won the award in 2003! He is currently 87 years old and still chugging away as an entrepreneur.
How did you go from starting companies to investing in them?
After the dot com boom came the dot com crash, which completely wiped out my wireless Internet company. At that point, having been unceremoniously removed from the entrepreneurial playpen, all I could do was become an investor. There, too, I had a family history, as I’m actually a third generation angel investor as well as a third generation entrepreneur.
I joined the local angel group, which back then was an offshoot of the New York New Media Association, the trade association for dotcom companies in New York. Eventually, the trade association disbanded, so I spun the angels out into a new group called New York Angels, along with a group of serious investors like Esther Dyson, Alan Patricof, Josh Kopelman, and Howard Morgan. Once that took off, I started doing more and more investing.
Around that time I also got involved with Ray Kurzweil (author of The Singularity is Near) and Peter Diamandis (Founder of the X-Prize competition) as an Associate Founder of Singularity University. SU is a next generation Silicon Valley think tank and training ground for the world of exponentially growing technology, and I founded its Finance, Entrepreneurship and Economics track.
How did you go from there to founding Gust?
If you put everything together— my background as an entrepreneur, as an investor, and as a theorist on the future of business— I realized there was a one-time opportunity to effectively rebuild the global financial ecosystem for financing of companies.
The stock market initially began in 1701 in Amsterdam as a way to aggregate public monies so merchants could afford to buy ships and set forth to trade. These days there are 700,000 US businesses that get incorporated and hire employees every year, none of whom get financed through the public markets. Instead, the existing capital markets have moved from capital formation to exits, so there’s no way for the public to get money into these early stage companies.
At the same time, the cost of starting a company has dropped like a rock. My first company took $20m in VC to get to the shipment of our first Internet product in the early ‘90s. My second company took only $2m. Some years later, my first angel investment company took $200k to get to its first Internet product shipment.
Nine years ago, I led New York Angels’ investment into Pond5, an online marketplace for video stock footage. When they came to us, the founders had a website that was up and running and generating revenue, a full management team, and they had spent a grand total of $20k—yet another order of magnitude decrease.
How much of that is costs dropping versus you or your management teams getting better?
It’s all costs dropping. These are all exponential cost reductions. Back when I was running AirMedia, my wireless company, we had a whole server room filled with computers and air conditioners. By the time Pond5 was founded, literally everything was hosted online in the cloud, and they used existing tools and open source stacks rather than having to build things themselves. They got a $500k check from New York Angels and that was the first and last capital they took before we exited at a $130m valuation.
Today, if you have an idea for an app or a website, you can sketch it on the back of a napkin and send it off to UpWork, where there are over 12 million freelancers from around the world who’d be happy to design or code something for you for a few thousand dollars.
As costs decrease, it means more and more people are able to invest. That’s why the pool of available capital is expanding, from private equity to venture capitalists to active angel investors and now into the world of unaccredited crowdfunding. Access to capital is expanding, and the ability to do things with that capital is expanding.
At the same time you have a globalized world, and while in the beginning it seemed like everything happened only in Silicon Valley, now New York is actually growing faster as a tech center than Silicon Valley. In fact, Accenture did a survey of all the world’s major cities last summer, looking at startup growth, investment, governmental support and so on, and determined that the #1 innovation startup ecosystem in the world was New York City.
Speaking of New York City’s ascension as a tech center, can other jurisdictions follow in those footsteps or is New York—being New York—unique?
Several years ago if you had been in charge of economic development for a city or state or country, you would have asked, “how can I get a big company to build a plant here and create lots of solid, blue collar jobs?” Back in the 1920’s, a Ford manufacturing plant would have 100,000 employees…today you can do that exact same thing with 1% of the people.
Then in the 1960s and ’70s and ’80s, economic development efforts turned to attracting corporate back office operations centers with white collar jobs like processing checks or running call centers. But now those have all disappeared as well, either because they have been off-shored or because it’s all been computerized.
So the question is, if you’re in charge of economic development in 2017, what can you do to grow your city/state/country. And it turns out that all you can do in the new world of exponential tech is to grow and incubate new companies. It’s like planting your own food instead of going to the supermarket.
To do that, one needs to ask, how can government help startups? First, there are some baseline things which we are wonderfully fortunate in the U.S. to have, like the rule of law, the bankruptcy courts, and little to no corruption.
After that, the initial instinct of government economic development agencies is to attempt to “buy” innovation, by starting a venture fund investing in startups. But that simply doesn’t work. Think about it: VCs fund a quarter of a percent of the startups they see, and if the VCs aren’t that good at it, how could a city be good at it? The bottom line is that cities can’t realistically put dollars to work as direct investments.
So then they try to give out tax breaks…but startup companies don’t make any profits so tax breaks don’t particularly help them! So then they turn to their last resort: nurturing their ecosystem by cheerleading it and helping the ecosystem to help itself. Help startup entrepreneurs find access to other entrepreneurs, and to investors and other resources.
I realized several years ago that technology was changing exponentially and that globalization was affecting every area of business, yet there was no infrastructure to connect new companies to investors, so I started a company called Gust with an ambitious goal to rebuild the global financial markets infrastructure. Today, Gust has over 500,000 companies on our platforms, with over 10,000 new ones joining each month. We have entrepreneurs in 191 countries and 70,000 investors in 157 countries. As the first platform to reach that kind of scale both with investors and entrepreneurs, we already have a whole lot of the pieces involved in the ecosystem engaged on our platform.
Because Gust connects all of the players in the ecosystem, we were chosen by the City of New York to build a platform called Digital.NYC, which is now the official online hub for the City’s entire startup ecosystem: it’s got virtually every startup, investor, job, event, blog, video, workspace, accelerator, you name it.
And because we’re a global platform, once we were doing it for New York we were able to do it as well for other major cities, including London and Boston.
Last month at NY Tech Meetup, we unveiled a brand new platform called Gust Launch. This is a completely disruptive offering that is effectively a “Company as a Service.” If you are a startup entrepreneur and you want to create a new high growth company, simply go to launch.gust.com, hit a button and it does everything for you: incorporating you in Delaware, acting as your registered agent, filing with the IRS for your tax ID number, setting up your accounting software, your bank account, your cap table, option plan, and much more – and we do it all for as little as $199 per month! Gust Launch was the most upvoted entry on Product Hunt the day it was appeard. Our goal is to take all the friction out of being a high growth entrepreneur, provide all the tools you need so you can focus on building a high-growth business.
You mention the platforms you’ve built for New York, Boston, and London –these are hubs already. What do you need to encourage entrepreneurship in Chattanooga or Boise or other cities that have relatively small startup ecosystems?
This is something we’ve given a lot of thought to. One of the key things is ‘critical mass.’ You can’t manufacture critical mass. But what you can do is identify what you already have and use it as a jumping off point.
Keep in mind that when I started my first tech company here in 1983, there was no tech industry in New York. In the early 1990s, Red Herring magazine referred to me as “Patriarch of Silicon Alley” – for my 10 person startup! It’s easy to be the patriarch when there are only four other companies in your family. Today, New York is the fastest growing and second largest startup innovation ecosystem in the world, and it started completely, totally from scratch less than 30 years ago.
There is no question that New York had a lot of advantages. But any place can take a similar approach. Look at places like Boulder, CO or Austin, TX: there’s nothing inherently “tech” about those places – they’re not centers of industry. But what they had was a core, whether it was UT Austin in the former, or folks like Brad Feld and Techstars in the latter – those were just enough to serve as seeds that could then germinate into the center of a larger community. This is something you’re increasingly seeing around the world today.
What cities can’t do is to manufacture something that doesn’t exist. But what they can do is identify everything that does exist, make it really visible, and provide the role models and the access to help startups find investors and investors find startups and everyone find ancillary resources.
How has the angel investing community evolved since your early days?
My late great uncle, David Rose (after whom I was named) was one of the first angel investors in the mid-20th century. Back then it wasn’t called “angel investing”. That term was initially applied only to people who would fund Broadway shows, because Broadway shows are even riskier than tech startups and nobody in their right mind would ever invest in one of them. Their backers were like angels coming from heaven to drop in cash.
In the 1970s the term began to be applied to people investing in other kinds of things aside from Broadway shows. Back then, nobody knew anyone that did it. In fact, there wasn’t even a term called “startup”. So when my Uncle Dave was doing this, it was a weird thing; he was like the old guy you keep locked in a closet, nobody understood what he was doing.
Once the dot com boom exploded, all of a sudden a few of big hits— the Microsofts and Apples and Oracles—caught people’s attention and it became the cool thing to do. Angel investing, which was initially an arcane and “in-group thing”, is now much more accessible. There are half a dozen angel groups in New York City alone. There are over 800 angel groups around the world for whom Gust provides back-end tools and services.
Today, angel investing is anything but an in-group; by now it’s just part of the culture. There are TV shows—such as Shark Tank, which is basically a glorified view of angel investing, or Silicon Valley, which is fun fiction—that make it into the general zeitgeist. It’s now an accepted way for people who have some money to diversify and get some alpha in their investments.
I’ve always joked that being an angel investor is like being a grandparent. You have all the fun of children without having to change the diapers.
What makes a great angel investor?
Somebody who really wants to be an angel. You have to love and support entrepreneurship. You don’t have to be as crazy as an entrepreneur—let’s face it, most entrepreneurs are crazy as bedbugs, and they should be—but you have to be close. And you have to understand going in that you are likely to lose all your money. You have to want to support entrepreneurs, and you have to go in having a long time horizon. The average holding time for an angel investment in the US is nine years, during which your money is not liquid, and is simply not going to come out…not to mention that it is also insanely risky.
That being said, if you have the cash to be able to do it, and you diversify your investments across at least 10, 20, or 30 companies, and you can really add value, then this can be extraordinarily rewarding and fun.
Finish this sentence: “The biggest mistake entrepreneurs make is…”
“Running out of cash.”
Ultimately, Cash is King. Entrepreneurs are always, by definition, optimistic and megalomaniacal, and convinced that they are going to change the world. And you have to be! There’s no such thing as an entrepreneur who doesn’t believe he or she is not going to change the world; they simply must have that extraordinary level of vision and optimism.
The only problem is that optimism leads you to say, “well, of course I’ll be making $50m in revenue my first year,” and it turns out that that never happens. The optimism keeps you going, but as Ben Franklin said, “experience is a hard school but some will learn through no other.” Once you’re out of money, you have no hand to play. Even if you had a great company and a great idea and could have just done it with a little more time, you’re out of money and you can’t do it.
That’s why companies that can bootstrap are by far the best kind of company to start. The less money you need to get to where you need to go, the better off you’ll be. Unfortunately, because of things like Shark Tank and all the sensationalist tech blogs out there—not including AlleyWatch, of course—the assumption is, “I have an idea, oh quick, I need a VC!”
Again, entrepreneurs are optimistic. There’s an old saying that the very first thing an entrepreneur does is design the company t-shirt. We’re now modifying that, because today the first thing entrepreneurs do is build their pitch deck for a VC, and then you design the t-shirt.
You mentioned your work at Singularity University – how close are we to the Singularity, and in that world, what jobs will remain?
Ray Kurzweil, who wrote the book The Singularity is Near and is the Chancellor of Singularity University as well as Director of Research at Google, projects that the Technological Singularity is coming around 2045, which is 28 years from today, when computers and humans will merge. That seems so outlandish to most people that they dismiss it out of hand. But as Ray points out, if he’s off by a full order of magnitude, OK, it’s 2052 – because once you get into exponentials things grow that fast.
In the same way, if you’d have mentioned self-driving cars three years ago, people would have said “oh yeah that’s The Jetsons,” or “maybe in my children’s lifetime”. Today, California has allowed self-driving vehicles, Uber is testing them in Pittsburgh, and every major tech and auto company is furiously jockeying for position in a market that doesn’t yet exist. This stuff is happening.
I liken Singularity University to getting a permanently attached pair of augmented reality goggles, where everything you look is now seen in the context of exponential growth.
What trends or sectors are most interesting to you in 2017?
The great thing about being an angel investor and about thinking of things in exponentials is that I don’t have to believe in one sector. Sure, things are happening with the Internet of Things and every aspect of FinTech, but who would have thought that companies like Oscar could challenge healthcare or Warby Parker could challenge incumbents in the eyeglasses market?
What technology has now done is to jump out the lab and cross into everyone’s DNA. I don’t care whether you’re talking about traditional manufacturing businesses or autonomous vehicles or Internet of Things or wearable tech, you’re now seeing technology exponentially permeate everything. So rather than saying the answer is “plastics” (to quote the line from The Graduate), I’d say to entrepreneurs and investors, “find an area you know about, and just look around…you will quickly see how it’s being disrupted by technology.”
You’ve mentioned the momentum New York City has as an innovation hub. Assess the state of entrepreneurship and investing in New York versus Silicon Valley.
They arose from very different origins. Silicon Valley came out of the initial chip fabrication and semiconductor world of Fairchild Semiconductor, which in turn begat all the “Fairchildren” including Intel, National Semiconductor and many of the other early chip and hardware companies, which in turn begat software companies during the PC boom. Silicon Valley started out as orange groves but essentially has become a one-company town, with the company being Tech.
Meanwhile, on the East Coast you had Boston, which was a home for life sciences and mini-computers. New York had no tech startup scene at all, but what New York did have was it was its undisputed status as Capital of the World. It’s the capital of not only the financial industry and the media industry but also advertising, marketing, fashion and many others. Once computers and technology grew exponentially and hit the mainstream, thus becoming an enabler for everything else, New York began to assume its rightful place—historically at least—as the center of the universe.
New York today is the capital of what we call “hyphen-tech.” It’s the world center of financial-technology, advertising-technology, fashion-technology, food-technology, and some new industries like 3-D printing and Internet of Things are gaining an enormous foothold here as well.
Because New York comes out of a business background rather than a pure technological one like the Valley did, the zeitgeist here is different. People on the West Coast tend to be either “go big or go home – it’s Uber or nothing”. They’re into enormous visions, and the economics are less important…because if you’re going to be Google or Uber or Facebook, it doesn’t matter at what valuations you invest, or anything else. It just matters that you get a piece of it.
New York, coming at startups from the perspective of business, is a bit more hardheaded and a bit less visionary. Investors here approach it a bit more as “show me the money”. New York investors realize that not every company is going to become a decacorn, but whereas in Silicon Valley it’s decacorn or go home, in New York it’s, “OK, it’s not a decacorn, but is it at least likely to be a gazelle?” Can it be one of the top 3-5% of companies that account for 90% of growth in jobs and GDP?
I’ve heard of unicorns and decacorns, but what’s a gazelle?
A gazelle is a fast-growing company that’s growing 20% year over year for five years from a base of at least $1m. These are the really solid, growing companies that are the backbone of the U.S. economy; in Silicon Valley these companies might be seen as failures, but in New York we say, “you know what? If I can invest at a sensible valuation this could be a great proposition.”
You’re the author of two books – The Startup Checklist: 25 Steps to a Scalable, High-Growth Business (with a foreword by Bill Gross) and Angel Investing: The Gust Guide to Making Money & Having Fun Investing in Startups (with a foreword by Reid Hoffman) – other than those, what books do you recommend to the aspiring entrepreneur and the aspiring angel investor?
The first appendix in The Startup Checklist provides a reading list of books for entrepreneurs, which I abstracted into this blog post. Among the books I recommend are ones including Tim Berry’s The Lean Business Plan, Garr Reynold’s Presentation Zen and Lex Sisney’s Organizational Physics. Interested readers should check out the list; there are a bunch of great books on it.