Angel Investing with Charlie O’Donnell
Angel Investing with Charlie O’Donnell
At the end of every show, I ask for your suggestions on show topics and I love them, so keep them coming. Today’s show is a direct answer to podcast listener Erin’s request. She emailed me and said, “Going off of your episode on entrepreneurship, which broached the topic of angel investing, I would love to hear a show talking about the due diligence process and how more women can get their feet wet on the active investing side of things!”
The Financial Gym wouldn’t exist without Angel Investing, so I was excited to tackle this subject. Joining me today is Charlie O’Donnell, founder of Brooklyn Bridge Ventures. He was the lead investor in the Financial Gym’s seed round of funding and he is going to talk about the process of investing in startups and the best way to manage Angel Investing.
What Are We Drinking?
Charlie — Black Cherry Polar Seltzer
Shannon — Black Cherry Polar Seltzer
Podcast Notes
Charlie runs a venture capital fund called Brooklyn Bridge Ventures. It is the earliest stage investment fund in New York for startups. He invests in a wide variety of companies, from hard core tech to brick and mortar experiences like the Financial Gym, in New York.
Charlie invests only in New York, because he is the only partner at the fund and there is more than enough stuff to look at in New York.
New York is the second largest venture capital and start up community in the world, so there is no shortage of companies to invest in.
Charlie invests in New York, because of the relationships he wants to build with founders. He will randomly pop in to the Gym, because it is important as an investor to have a little more casual and friendly relationship.
He is friendly with founders, but there is also a business relationship. There is a certain level of responsibility that the founder has to Charlie and he has to them. He doesn’t want the whole relationship to only be that formality.
Being able to be in and around the community of founders, to be able to pop in when you need something or text if you need something, is important. Charlie hates the phone and he likes in-person meetings.
It is important for Charlie to figure out as many ways as possible for founders to access him as an investor.
Charlie and Shannon were introduced by another founder. He doesn’t care about warm intros.
Before Charlie started the fund, he spent almost his entire career in the venture capitalist asset class. He had a brief, but unsuccessful, stop as a founder, with $32,000 in credit card debt to prove it.
He started out in the institutional limited partner side at the General Motors Pension Fund right out of school. GM had been an investor in venture capital funds, and a little bit in larger direct investments, since the late ‘70s.
When you have large amounts of money, it doesn’t make sense to listen to individual pitches, it makes more sense to put that into venture funds.
Funds used to pitch Charlie. No one thinks of VCs having to pitch, but they need to pitch too. The money that is now in Charlie’s fund is not his, it comes from high net worth individuals that he has gone out and pitched.
Most of them are inconsistent angels. They are people who have the money to put into deals, and they probably don’t feel like they are seeing many good deals to pick out one or two, so they put it into a fund and lean into someone who does this professionally, puts themselves out there, and goes through 2,000 deals a year to find the best ones.
Of all of the asset classes, venture is the riskiest. Big risk, big return.
Risk and return is a trade off and you always want to make sure you are getting paid to take that risk.
Venture capital is the asset class with the biggest gap between the risk of the individual deal and the risk of a fund. The risk associated in investing in one start up company is huge.
There are a million things that can go wrong with just one company. You could have a founder issue, you could get sued, etc. Over the course of 30 to 35 deals, those individual instances of problems that companies experience will get diversified out to some extent.
There is a perception that the earlier stages are more risky, but you are paying a lot less, in terms of the price for the deal. Your $100,000 is buying a bigger chunk of the company than it would if you put that money into Apple, Microsoft, or Amazon. You are getting the shares cheaper to make up for the risk of a company at this stage.
It’s highly unlikely for a professional investor like Charlie, who has been in this asset class for about half of his life, to go 0 for 30 if he was investing in 30 companies — that not a single one of them will amount to any value whatsoever. Even if it doesn’t eventually IPO, there would be some salvageable value.
It is unlikely that the fund returns 100 times your money. One deal may return 100 times your money, but they will not all do that. There is an average.
There is a tighter variability over a fund than doing one deal at a time.
If you are doing it as a hobby or a favor, don’t expect a lot of return, because statistically your chances are low. You need to do enough deals where the chance of crazy stuff happening is decreased.
You could have the greatest idea ever, but the process of getting that idea to reality is very difficult, because of all of the variables.
Certain criteria are indicators of failure, like if you sit down with a founder and they can’t identify their target customer or they struggle to piece together a large enough market for a business. It is not a random guess, but what you are really trying to do is to avoid pitfalls.
Charlie has now done over 70 deals at Brooklyn Bridge Ventures. His hope is that he can identify the reasons he is not doing certain deals.
To be an angel investor, there are SEC requirements around who you are allowed to raise money from. Charlie is not a lawyer, but there are requirements for certain types of raises that require accredited investors.
To be an accredited investor you need to make at least $200,000 for the last two years, or $300,000 as a couple, and your net worth must be at least one million dollars (not counting your house).
Some raises can be solicited by a more general audience. There are looser restrictions around crowd equity raises.
There are some people who raise money from their parents, who may not technically qualify as an investor.
Charlie is only allowed to take 99 accredited investors to his fund. As somebody who is raising a $20 million fund, there is a minimum amount he is able to take from people, if he is going to get the money.
Charlie would love to be able to take $5,000 from people who want to invest, but the SEC law prevents that. They are trying to prevent you from creating a mutual fund on the side.
There are some platforms that do deals one at a time. They do accept smaller checks, because each one is a smaller fund, but your eggs are all in one basket.
Most people don’t wake up and say they want to be an angel investor. Most of them have some access to interesting deal flow. Unlike the public stock market, all of the available deals are not listed somewhere. There are crowd equity platforms, but those represent a small percentage of the deals.
When Shannon first raised money for the Financial Gym, Charlie was one of a few people that knew this deal existed.
With investing, you need to play the person across the table. The other person knows more about something than you do. You need to compare what you know with what they are telling you and figure out if it makes sense. You need to evaluate if this person’s path to this company is something you can believe in and trust.
Does this person seem to have done enough homework on it? You don’t want to get overwhelmed by a resume. If someone cannot explain something to you in a way that makes sense, it is not a good idea to assume they know what they are talking about because of the school they attended.
There is a level of common sense approach. A good founder can make that explanation to you.
Entrepreneurship is great, but the number of people who derail their whole career and go all in is very low, because it is so much riskier for the founder than the investor.
There are smart people who have done their homework and smart people who have just not done enough detailed work.
Some of it is the founder, but the rest is the market. Charlie may trust you as a founder, but there are many markets you could be in that are bad and it doesn’t matter how great you are.
The ideal startup to invest in doesn’t require x, y, and z to go exactly right. There is a forgiveness.
The concept of the Gym is very easy and straightforward, but the execution is difficult. There are other people who are trying to do models that are infinitely more difficult and are about threading a very fine needle. You don’t need to thread a fine needle at the Gym. The hard stuff is dealing with humans.
You want to invest in a difficult model, not an insanely difficult model. Of all of the really difficult startup models, you want to pick the ones that are just difficult and not insanely difficult.
There are two types of investing: direct investing with the company or investing through a venture capital fund.
Why are you doing this at all? Most people invest in this area, because they are trading wealth for interestingness. If you are doing this for a return, first and only strategy, and trying to get the most bang for your money, you are also taking the biggest swing for the fence and you might strike out.
If you are trying to maximize returns you need to think about if you are also trying to minimize risk. Most of the people who invest in a fund like Charlie’s are looking to maximize risk. Often times their other investments are less risky, because this one is more variable.
You need to be comfortable with risk if you are direct investing or investing in a fund. This is a long-term investment. This is not money you will see for a very long time.
Think about how long it takes to build a company from scratch. If you invest in a fund it is longer. Most funds are set up as blind pools. You put the money in and the manager is picking what is going in there, so you don’t get a chance to see those companies before they are chosen.
Charlie has an investor who is aging out, because he is now in his 70s. The average investor in his fund is in their mid to late forties and they are thinking about it as long-term capital. They are doing it to get access to a diversified pool. Some will invest in the fund and directly with the specific company.
A lot of people who angel invest do so with some sort of impact in mind.
As an angel investor, you need to ask, do I have special access? Do I have insider information? You need to ask the same of someone who is handling a fund. Not only are you competing with other funds for deals, you need to figure out that the deals exist in the first place. It is hard to do if you are not in the flow of deals or in the field.
Ask: If you were to have this fund five years ago, what deals could you have done? Did you know those founders? Did you see stuff and didn’t get a chance to invest in it?
Just like if you were investing directly in a company, you have to do due diligence on the fund. You need to talk to them and look at their track record.
If you have to pick one fund, you want to pick one that is investing in a number of things.
Not every company is right for every venture capitalist.
Charlie does a lot of coaching for people who want to do angel investing. If you are in or around the New York area, Charlie has a group called New to VC. You are welcome to email him at charlie@brooklynbridge.vc, and let him know you are interested in joining.
This group brings together high net worth individuals and others who are interested in the venture capital asset class. They bring in panels and speakers.
Charlie does a weekly mailer to people in the tech community about events. You can sign up for it at his blog: This is going to be Big.
TAKEAWAY: My biggest takeaway is that Angel Investing is a risky but also rewarding investment option. As long as you plan for it in your overall asset allocation mix, you can better plan for the risks involved.
Random Three Questions
What is the next place you want to go to?
What is a food you hated as a kid and how do you feel about it now?
If you won a million dollars, what would you do with it?
Connect with Charlie
Website: Brooklyn Bridge Ventures
Blog: This is Going to be Big
Social Media: @CEONYC
If you’d like to talk to my team at the Financial Gym to help you get financially fit so that you can one day become an Angel Investor, I hope you’ll reach out to us. We work with clients on anything from budget and expense management (including managing food costs) to salary negotiation and making more money. The great news is that Martinis and Your Money listeners get 15% off Financial Gym services. So head over to, or send friends to, financialgym.com to get signed up today.