Entrepreneur & angel investor David S. Rose

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The longtime player in the development of the technology community shares what he’s learned, as detailed in his book on angel investing.

A self-described serial entrepreneur (starting his first business at age 10), David S. Rose has founded or funded over 90 high-tech companies and personally raised tens of millions of dollars of venture, strategic and institutional capital. He's founder and CEO of Gust, a global platform for the sourcing and management of early-stage investments, and founder and chairman emeritus of New York Angels, one of the most active angel investment groups in the U.S. He's also associate founder of Singularity University, Silicon Valley's post-graduate program sponsored by NASA, Google and other organizations focused on the future. Rose is a native New Yorker and author of Angel Investing.


Tavis: There’s a very appealing scenario out on the zeitgeist. The perfect investor with deep pockets meets a brilliant entrepreneur and the result? Thriving new company, millions of dollars, return on investment. It happens just often enough to keep investors interested, something David S. Rose knows a little about.

His new book is called “Angel Investing: The Gust Guide to Making Money & Having Fun Investing in Startups.” He is, of course, the founder and CEO of Gust, the global platform for startup financing used by over 50,000 accredited Angel investors. David S. Rose, good to have you on this program.

David S. Rose: My pleasure.

Tavis: When did this become – Angel Investing, this is not new obviously. But when did this become the domain of, as Sly Stone would say, everyday people?

Rose: Well, surprisingly, it’s relatively recent. People tend to think of financing of all kinds as having been around forever, banks and venture capitalists, the stock market, Angels. Angel Investing in the way we think of it today is really only 20 or so years old.

Tavis: But even then, it didn’t start out as the domain or the purview of everyday people.

Rose: No, because according to the rules of the Securities and Exchange Commission, you have to be what’s called an accredited investor in order to invest in the stock of privately held companies.

And that means you have to have either an income of over $200,000 a year or assets of $1 million dollars a year. Now that’s today, but there’s something called equity crowd funding which is going to be legal maybe later on this year.

It’s already been passed by Congress and signed by the president and it’s taking a while to get through the works. But that will allow on a limited basis regular people who aren’t accredited investors to actually purchase shares of stock in startup companies.

Tavis: And that’s what I was getting at, these everyday people. So what’s your sense of what will happen? How will the floodgates, for lack of a better term, open up once that is the order of the day?

Rose: Well, I’m not sure it’s going to be floodgates. It’s going to be more than a trickle, but less than a flood because the bottom line is you really don’t want – nobody really wants people, everybody just investing in anything that sounds good or looks good.

There’s a reason we have the Securities and Exchange Commission. There’s a reason we have public stock markets because those are all very transparent, very regulated. You have to say exactly what you’re doing.

With the privately held companies, it’s all, you know, futures and it’s all nothing that’s real now. So it can be very risky to invest in it, very risky. Most startup companies fail.

Tavis: I don’t want to insult anyone, so let’s just start with a definition of what we mean when we talk about Angel Investing.

Rose: Sure. So an Angel Investor is an individual person who takes money out of his or her pocket and invests it, buying shares of stock, part ownership in a startup company, in a privately held company.

That’s different from venture capitalists who are professional money managers who raise a big pot of money from institutions and very rich people, hundreds of millions of dollars, and invests that in startup companies. And it’s different from people who buy stock on the stock market where you can just call your broker or go online and buy shares of stock in Apple or Google.

Tavis: So how does one know what the opportunities are to be an Angle Investor in?

Rose: Ah, that’s the challenge. It used to be very, very difficult. I used to equate it to an entrepreneur and an Angel Investor running around in the middle of the night on a dark football field wearing sunglasses saying, “I want money! I have money!” and trying to meet, and that didn’t work.

Increasingly now, however, because, as you said, it’s part of the zeitgeist, what you’re seeing is companies have their accelerator programs, a lot of them, where they’re helping companies get off the ground. They have demo days.

You have online platforms like Gust which has hundreds of thousands of companies listing themselves. You have in the newspapers, there are blogs that are covering them. There are all kinds of meet-ups. So now, for the first time in decades, it’s really possible to find a lot of interesting companies.

Tavis: When you go looking for, or when the opportunities are presented to you to invest in company X, Y or Z, what are you looking for specifically in the entrepreneur who I assume must be, if not the, one of the most important persons in the equation?

Rose: Without question. We call it betting the jockey, not the horse.

Tavis: Right.

Rose: And most investors, virtually all investors, would prefer to invest in a first-rate entrepreneur with an okay business plan as opposed to an okay entrepreneur with a first-rate business plan because things happen and they change.

So we look for a whole host – you have to be almost perfect to be able to get an investment because there are so many entrepreneurs out there. We look first of all for integrity. Is this person somebody we can trust?

Because if we can’t trust you, unlike a public company, you don’t have revenues yet, you don’t have sales, maybe not a product yet, so you’re going to have to make it all happen. So we have to trust that you’re going to try and do it. We want to see passion to drive this through because it can be really challenging to get a company off the ground.

We want to see experience, experience in starting up a company, experience in the area you’re investing in, experience in the skills that it takes to run a company. We want to see things like leadership ability so you can get other people to follow you. We want to see commitment to sticking around during the bad times.

We want to see a vision of a bigger thing, a better thing, a glorious future that’s going to be the lone star you follow. We want to see realism to understand that it’s very tough and not be too wildly optimistic. We want to see somebody who is flexible, who can listen to advice and pivot as required. All those things have to line up for it to make sense.

Tavis: So how does one gain all of that if one is a young kid with a great idea and it is, by definition, a startup? I’m 19, I’m 22, I’m 25. I haven’t had all the years that you or Tavis have had to gain all of that, to convince you that you should invest in my business. It is a startup, after all.

Rose: Absolutely. And just like every single book was issued in a first edition, right, by definition, every single entrepreneur was at one point a first time entrepreneur.

Tavis: Right.

Rose: And so the fact is that, although we would love to invest in serial successful entrepreneurs all day long, in reality most of the people in whom we invest are first-time entrepreneurs.

So, therefore, you look for something integrity. That doesn’t have to be, you know, experience for that. That’s integrity. Passion, you can see. Commitment, vision, those are all things that people could have at any age.

And then in terms of experience, you know, have you led anything before? Do you have a track record as a kid, whether it’s a paper route or starting a team at school? Something that can show us, give us faith to think that you can actually start and lead a project?

Tavis: You started to answer this question now, David, with the answer you’ve just given me. But how does one – how does David S. Rose at least – gotten comfortable making investments in situations or in companies, people or companies, about which you are not an expert?

I mean, obviously the reason why they’re doing it is ’cause they’re the expert. But how do you find a comfort level putting your money in something that might feel right, but you don’t even know the particular – am I making sense?

Rose: Oh, absolutely. And the answer is it’s a very fine line, right? Because on the one hand, we often say you should invest in what you know, right? So that’s why I don’t invest in fashion deals. For me, investing in a fashion deal, that would be kiss of death [laugh]. Never, ever want to do that.

Tavis: You telling me you never walked a runway?

Rose: Are you kidding? By the same token, I also don’t invest in biotech deals. You know, I’ve got a good college education, but I don’t know enough about the biotech industry to make a reasoned decision. But on things like financial technology and internet consumer products, I’m pretty good on that.

So you want to invest at least in an area where you know something and then you want to learn. What I might do occasionally is, if I’m going into a new area, invest a little bit of money with other very smart Angels in an area that I don’t know too much about and I’ll learn by doing it that way.

But in general, you want to invest in an area you know and then you want to trust and really do your due diligence. Due diligence is not just seeing what the entrepreneur gives you, but actually calling references and reading about the industry and making a reasoned decision.

Tavis: You got a wonderful chapter and I’m glad you did it about impact investing because there’s so many people, myself included, if they’re going to invest in something, they want to invest in something that’s really making a difference. I believe you can do good and do well at the same time.

Rose: Absolutely.

Tavis: Do good and do well. So for those persons who are interested in what we call impact investing, say a word about that.

Rose: Impact investing is sometimes known as double bottom line investing where you want to make money and you want to do well, and that’s great and wonderful. The problem, however, is that there is no equation that can take money on the one hand and good on the other and put them into the same mathematical equation. So, therefore, double bottom line really doesn’t work.

What you have to do – and I devote a whole chapter on this in the book – is to say, okay, I want to make an impact and that’s great, and I want to make money too. Which do I want to do first? You have to be one or the other. You have to be financially oriented first or you have to be impact oriented. Impact first or financial first.

And then if you’re an impact first investor, you can say I’m going to judge all opportunities by how big a potential societal impact they can have provided I can get at least a return of X.

On the other hand, if you’re a financial first, you’re saying I am going to try and optimize my financial return, but I have to have at least a certain amount of societal return to make this work.

But the bottom line is, if you’re talking about Angel Investing into a commercial business, the money on some level has to come first because, if it doesn’t, the company’s going to go out of business. No good will happen and your money will be lost.

Tavis: Trust factor. So many of our institutions these days no longer have the trust of the American people. The Supreme Court isn’t trusted, the president isn’t trusted, Congress certainly is not trusted, Wall Street. How do you get comfortable trusting in the process of Angel Investing?

Rose: Well, you trust in the process by understanding the process and by understanding the metrics. And the metrics are that most startup businesses fail, a majority, maybe even a large majority of startups fail.

So, therefore, if you invest in only one startup company, the odds are that you are going to lose3 100% of your money. But, therefore, if you invest in many companies, the odds are that one of those 20, 30 or 40 are actually going to be a very big success, and the sized of that success will ultimately outweigh all the failures.

So you have to understand that, if you do it right with discipline and you understand what you’re doing and you negotiate appropriate evaluations and do your due diligence and all the things the professionals Angels do that we talk about in the book, that over time the returns from a successfully managed Angel portfolio can be over 25% annually, which is really pretty significant.

Tavis: Just between the two of us, nobody’s watching, just me and you, what did you miss out on? Because you can’t win them all. So it had to be something that you missed out on.

Rose: Oh, every Angel investor has their anti-portfolio. In my case, I passed on a company called Tote where we had an opportunity to be in on the very first round of financing that turned into Pinterest.

Tavis: Oh [laugh]!

Rose: Among other things. I passed on Slingbox. Sling Media is the very first investor in that. Sold for $300 million dollars. All kinds of really interesting companies, you can’t win them all.

Tavis: Well, I’m not feeling sorry for you. You’ve done all right. His name is David S. Rose. He’s the CEO of Gust and the founder of New York Angels. His new text is called “Angel Investing: The Gust Guide to Making Money & Having Fun Investing in Startups.” Is it really fun?

Rose: It is. The most fun you can have with your clothes on.

Tavis: Well, I should try that [laugh]. That’s our show for tonight. Thanks for watching and, as always, keep the faith.

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Last modified: July 9, 2014 at 4:13 pm