#69 - Jason Calacanis - “This is a Little, Secret Way... A Dark Art of Becoming Truly Wealthy... Massive Wealth"
Jason Calacanis, a renowned angel investor and podcaster, discusses the fundamentals of angel investing, including how to identify opportunities in the "Goldilocks zone" before venture capital enters, the importance of starting small with $1,000-$5,000 bets, and the critical role of being in Silicon Valley. He emphasizes that angel investing is a accessible path to building substantial wealth that most people don't know about, requiring primarily capital, time, network, or expertise.
Summary
Jason Calacanis shares his journey from Brooklyn tech journalist to successful angel investor, having invested in over 150 companies including unicorns like Uber and Thumbtack. He defines angel investing as investing in companies before Series A funding, typically at valuations of $5-$8 million, explaining that this phase offers the highest risk-reward opportunities compared to public markets.
Calacanis introduces the concept of the "Goldilocks zone"—the sweet spot after a product launch with initial traction but before venture capital involvement—where investors can dramatically reduce downside risk by eliminating the 99% of companies that fail to get traction. He advocates a portfolio approach similar to poker, starting with small $1,000-$5,000 bets across 50-100 companies, quadrupling down on breakout successes, and avoiding the cardinal mistake of putting too much capital into early investments based on charismatic founder pitches.
On building a network and deal flow, Calacanis outlines a practical system: invest through syndicates on platforms like AngelList, SeedInvest, or Republic; identify co-investors; then proactively network with them to build proprietary deal flow. He emphasizes the importance of location, claiming Silicon Valley provides approximately a 100-10,000x advantage in deal flow compared to other markets, and discusses how founders and recent entrepreneurs as co-investors provide better oversight due to skin in the game.
Regarding valuation and exit strategy, Calacanis recommends dollar-cost averaging exits through multiple tranches rather than holding or selling entire positions at once, particularly when later-stage investors like hedge funds enter. He argues this reduces regret and maintains upside optionality. He discusses following on investments only when there's clear performance metrics, implementing side letter requirements for monthly updates with key financial data, and holding founders accountable to provide regular communication.
Calacanis addresses several practical considerations: the importance of monthly investor updates from founders as a sign of operational discipline; the use of advisor roles and equity as an entry point for those without capital; the danger of adverse selection in equity crowdfunding; and the tax benefits of Qualified Small Business Stock (QSBS) which can provide tax-free gains on up to $10 million in gains if properly structured.
On market timing and the pitch meeting, Calacanis emphasizes asking "why now?" to identify companies benefiting from technological changes (like GPS for Uber or cheap bandwidth for YouTube). He advocates the "big ears, small mouth" approach in meetings—asking short questions and listening rather than talking. He also discusses the cyclical nature of investing bubbles and the dangers of ICOs, comparing them unfavorably to his disciplined approach of rewarding performance with follow-on investment rather than funding ideas with massive upfront capital.
Finally, Calacanis shares personal applications of his philosophy, including involving his seven-year-old daughter in entrepreneurship through an ice cream startup to teach leadership and risk-taking, and discusses the broader implications of AI and robotics eliminating 30 million jobs, motivating his focus on building grit and independence in the next generation.
About this episode
In Episode 69, we welcome legendary angel investor, Jason Calacanis. We start with Jason’s background. From Brooklyn, he worked his way through college, then was in New York at the breaking of the internet. He started his own blogging company, and eventually sold his business for $30M. Later, he landed at Sequoia Capital as part of its “scouts” program, and went on to be an angel investor in a handful of unicorns (a startup company valued at over $1B). As the conversation turns to angel investing, Meb starts broadly, asking Jason about the basics of angel investing. Jason defines it as individuals investing in companies before the venture capital guys get involved (before a Series A). He tells us that the more you can analyze a company through data, the lesser chance it’s an angel investment. That’s because to get the huge returns that come through a true angel investment, there has to be some level of risk (in part, related to having less data-driven information about a company’s financials). So, the challenge is to find that “Goldilocks” period – before revenues are so high that a VC is interested, but after a startup company has launched a product and shown a hint of traction (so many early stage companies end up failing even to launch a product). When you time your investment in this manner, you reduce your downside risk. Meb makes a parallel to traditional equity investing, where only a handful of stocks make up the majority of overall market gains. He suggests this dynamic is likely even more exaggerated in angel investing. Jason agrees. That’s why he suggests you want to go slow at the beginning, ramping up as you learn more, building your network, and growing your deal-flow. But when you get it right, it can result in massive wealth. Or as Jason says, “I think that this is a little secret way… a dark art of becoming truly wealthy… massive wealth.” Meb points the conversation toward a section of Jason’s book which made the point that to get started in angel investing, you need at least one of four things: money, time, expertise, or a great network. He asks Jason to expound. So, Jason provides us some color on these different angel-factors. This dovetails into how much of your net worth should be allocated toward angel investments. It’s a great conversation diving into the math of various net-worth-percentages, and how a couple of investment-winners can have a profound impact on your overall wealth. Meb tells us about his own early-stage investing experience, and how the contagious optimism is exciting. Meb asks what are some resources and places to go for more information. Jason points toward doing some syndicate deals. By doing so, you can read the deal memos, and track the investments even if you never actually invest. It’s a great way to learn – Jason uses the analogy of playing fantasy baseball. The guys go on to discuss ways to grow your network through other syndicate investors. A bit later, Meb asks about pitch meetings when company founders are looking for money. What’s your role as a potential investor in these meetings? Jason likes to ask the question “What are you working on?” He then provides some great reasons why this question is effective. A follow-up question is “Why now?” In essence, what has changed that makes this moment right for your business? For example, for Uber, it was GPS on phones. Curious what the “why now?” of the moment is? Robotics is one of them. Jason gives us a couple others (but you’ll have to listen to discover what they are). The conversation drifts into how to exit your angel investment (or invest more). Jason says if you have a breakout success you want to quadruple down. For instance, if a big VC like Sequoia is thinking about investing, you’d definitely want to jam as much money in as possible. The guys then discuss taking some money off the table if your investment goes public, perhaps selling 25% of your position at four different times. Meb likes this idea, as we discuss the behavioral challenges of investing so often, with so many investors thinking in binary terms – “in or out?” But scaling is such a powerful concept. There’s so much more in this episode, and if you’ve ever been curious about angel investing, you’re going to learn from the best. The guys discuss how the lack of liquidity can be a blessing in disguise… why the sophomore year of angel investing can be brutal… a great way to tell if your angel investment is doing poorly… a huge ($10M huge) tax benefit of early stage investing… and of course, Jason’s most memorable trade – it turns out, he was the 3rd or 4th investor in Uber. Want to hear the details? You’ll get them all and more in Episode 69. Learn more about your ad choices. Visit megaphone.fm/adchoices
Key Insights
- Calacanis argues that by investing only in the 1-2% of companies with proven traction, angel investors eliminate 99% of the downside risk despite investing in early-stage companies.
- He contends that Silicon Valley provides a 100-10,000x advantage in deal flow compared to other markets, making geographic location essential for angel investing success.
- Calacanis claims that two-thirds of stock market returns come from a small percentage of companies, just as in angel investing where a few unicorns generate the majority of portfolio returns, making diversification and patience critical.
- He argues that founders are inherently charismatic and persuasive by nature, making them poor judges of their own pitch quality, so new investors should view founders seeking angel capital as potentially the last resort after established investors have passed.
- Calacanis states that major technological shifts like GPS availability, bandwidth commoditization, and storage costs are the "why now" that determine whether startups succeed, not founder ambition alone.
- He contends that monthly operational updates from founders serve as a leading indicator of management quality and company viability, making them more valuable than quarterly or annual communication.
- Calacanis argues that illiquidity in private investing is actually a feature, not a bug, because it forces investors to be thoughtful and prevents the self-sabotaging overtrading common in public markets.
- He claims that dollar-cost averaging exits through multiple tranches across a company's lifecycle, rather than binary hold-or-sell decisions, reduces regret and maintains optionality better than alternative strategies.
- Calacanis states that nearly every ICO funds companies that don't yet exist, replicating the SPAC and incubator bubble patterns from the dot-com era, creating systematic risk of total loss.
- He contends that being a successful angel investor requires willingness to say no to follow-on funding requests when founders lack demonstrated performance, despite the social difficulty of that position.
- Calacanis argues that co-investing with former entrepreneurs in syndicates aligns incentives better than traditional mutual fund structures where managers often have no skin in the game.
- He claims that the ability to build network through systematic outreach to co-investors (via deal memos and syndicate participation) democratizes access to proprietary deal flow that was previously gatekept to famous investors.
Topics
Transcript
Introducing MetaGlasses. You have questions, they've got answers. Hey Meta, what's the capital of Peru? Lima. How do you say, where's the restroom in Spanish? ¿Dónde está el baño? Hey Meta, is a hot dog a sandwich? Technically, no. Spiritually, yes. Hey Meta, what should I do with my life? That's one of life's biggest questions. What do you think? Ask anything with the new Meta Glasses. Welcome to the MebFaber show where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here. Meb Faber is the co-founder and chief investment officer…
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