Since starting my first company at 22, I’ve invested in over 70 private companies. I’ve seen some great financial returns, but have also realized a number of other benefits.
When the topic of investments comes up among entrepreneurs, I’m surprised how many think it’s either not possible or not a good idea. When you’re immersed in the startup world and surrounded by amazing people working on incredible projects, I see a lot of upside to getting involved where you can — even if you have little (or no) cash to spare.
There are three major currencies for an investor: capital, expertise, and connections. It’s easy for entrepreneurs to overlook the last two. Like any allocation of time, there are pros and cons. But I wanted to clear the air and show entrepreneurs that it’s easier than you may think to invest in other founders — and to share some of the benefits I’ve experienced.
3 ways for founders to invest
There are three general ways for founders to invest*:
- Use your company valuation to become an accredited investor
- Partner with a fund or angel
- Become a startup advisor
1. Use your company valuation
One of the first people we tried to hire at my first company, Xobni, was a friend working out of our apartment. His name is Drew Houston and he started Dropbox shortly thereafter. He wanted more equity than we were willing to give him as an employee, and he wanted to do his own thing (which worked out pretty well), so he passed. If we’d succeeded in persuading him, Dropbox might not have happened!
Drew moved to California, went through Y-Combinator, and raised his first real round of financing. My cofounder and I were lucky enough to participate in that.
The challenge of investing in private companies, unlike public companies, is the requirement that you’re an accredited investor. The first tip or trick that a founder can use is that you can become accredited based on your net worth, and that net worth doesn’t necessarily have to be liquid. In all likelihood, it will mostly be the value of your company. In this case, we had raised a VC round, which valued our company at millions of dollars. Therefore, my co-founder and I were accredited on paper.
The accreditation requirements are unfortunate because it prevents a lot of people from being able to participate — even in small amounts when a really good friend is building a company like Dropbox. Luckily as an entrepreneur, you can use your company’s valuation as a loophole to get accredited.
My investment in Dropbox was at least 10% of my liquid cash. It was a small amount of money, but not small to me at the time.
2. Partner with funds and angels
If you’re a founder, odds are you know a lot of other founders. Having a personal connection to a company is extremely valuable to funds that are looking for an “in”, so I found ways to partner with funds through scout programs. These partnerships give me more leverage on my money.
After I’d made several small investments in startups, some funds saw a mutually-beneficial opportunity. One well-known fund, CRV, came to me with a good proposition – “Hey, what if we worked together to write $100K check – $10K of your money, $90K of ours?”
Through that partnership, I’m an investor in some companies I’m really excited about. One example is Snapdocs, now backed by Sequoia. It was a great deal for both of us: CRV got exposure to some new companies, and I got the opportunity to write bigger checks. I honestly don’t know if anyone else was doing it at the time, but it worked.
Oftentimes, I would get in early through a personal connection and write one of the first checks. I’d get to know the company more and more over the course of working with them for a year or two. Then they would raise another round of financing at a high valuation and offer me a chance to go in. I wanted to participate but didn’t have enough cash. That’s where a partner came in handy.
Another trick I figured out for partnering: I was an early user of AngelList. It’s well known now but for a while, people weren’t fully utilizing it. I’d piece together anywhere from $250K – $400K to invest in companies where I had inside access, because I’d already put money in or had a connection to the founder.
A great example of this model is Teachable. I’ve come into that company through three different funds: my own personal seed check, two rounds partnering with a fund, and some advisory shares to boot (more on that next).
Since I’ve become a fairly active investor, some people have asked me why I don’t join a fund. I’ve had the opportunity . . . but I know it’s not for me right now. I don’t want to attend partner meetings or commit to a company as their series A board member for five years.
It’s also important to note that I’ve only worked with firms and partners that I have personally taken money from. I’ve never done this with somebody I’ve never worked with as an entrepreneur. Since I’d be recommending them anyway, this way I get the upside from one of these deals, and the VC gets to participate in a pro rata round and expand their network.
3. Advisory shares
Instead of actually putting in capital — whether it’s yours or a partner’s — you can put in time. These give you what are called advisory shares.
Become a “Spiritual” Cofounder
I’ve done deep advisory roles in companies with solo founders. Oftentimes, they need somebody to call at night after they’ve been beat up by VCs and employees all day long.
It’s those conversations where you can really use a co-founder, but maybe they don’t have one. I’ve acted as that early co-founder-type advisor to solo founders at four or five companies. I’ll take a point or two, be involved with the company very deeply during the first 6 to 12 months, and then taper off my involvement afterwards.
Sometimes I’ll invest out of a fund alongside of my own cash in subsequent rounds, but regardless, this is a great way to get equity in a company without actually having to put dollars in.
Use your domain expertise
With my last company, I became well-versed in mobile user acquisition and funnel optimization. I have a friend who was running a company that was doing well, but needed help in those areas.
I got involved as an advisor and I would join a marketing meeting twice a month. It ended up working out very well for me. Frankly, if I was doing a regular investment, I wouldn’t have even been able to get the same ownership: when I got involved, the company had a $60M+ valuation. It would’ve cost me a lot to get the same ownership via a traditional investment.
I really like this route because it allows you to effectively monetize the expertise you’ve developed at your own company.
Why founders should invest in startups
You can make a very strong case for focusing on your own startup and not bothering with outside investments. But in my experience, the pros outweigh the cons. Here are a few benefits to investing in other founders that you may not have considered.
Harry Markowitz once said “The only free lunch in investing is diversification.” As a long-time investor, I definitely think about that.
There’s a huge imbalance between the situations of venture investors and the entrepreneurs they back. For entrepreneurs, this is their one company; for venture investors, they’re diversified in 15-30+ companies per fund. This means that a smaller exit might be good for you and not good for them. They’re swinging for the fences, whereas you have one shot.
Now that I’m invested in 70 companies, I get to enjoy some diversification as I pursue other startup ventures. It levels the playing field a bit and makes you less reliant on this one thing working out.
This is also something I really like about Upside Partnership. If you take money as an entrepreneur from their fund, they give you upside in their fund. You get to diversify and you are incentivized to help other portfolio companies.
When I did user acquisition and funnel advising for another company, they were actually a bigger scale with many more users than my startup. This meant that they were learning much quicker than I could. It definitely helped me develop my thinking around messaging, user acquisition, and funnel optimization.
As an early investor at Dropbox, I got a firsthand look at some of the best user acquisition strategies in action, such as dual-sided incentive programs and virality. It then informed my thinking around the next business I built.
At my first company, Xobni, we successfully used an invite system. We learned it from our first investor Paul Buchheit, who was the creator of Gmail. I then worked with the founders of Mailbox to implement the same strategy. In the end, that knowledge was passed down from the Gmail founder, to us, to MailBox — and all three of us used it incredibly successfully.
There’s so much you can learn by having an excuse to work with other founders and see what’s effective for different startups. By getting involved as an advisor or investor, you can accelerate your own learning in ways that will benefit your own company.
Pay it forward
There’s an undeniable loneliness of being a CEO.
Once you’ve been through it and made it out the other side, there’s a lot of value in the reassurance you can offer to a founder who’s having a rough week.
I just got off a call with a founder who was feeling beat down about common day-to-day struggles: “Ugh, this is taking longer than I want….This guy won’t join, I want to hire him so badly…My investors are worried about XYZ.”
I was talking to another founder who bootstrapped his company. His 10-year-old wants a backyard, and he lamented that “I don’t have any money.” There are so many stresses of running a company, and it’s really nice to have somebody else to talk to. People have helped me, so I do the same for other people — even if I’m not invested in the company.
It’s the unwritten rule that you pay it forward. People were so generous to me with their time and ideas when I was just some grad school dropout trying to start my first business. Now that I’ve accrued some experience and learnings, I have the opportunity to pass it on to other entrepreneurs.
Excuse to hang out with people
I’m 37 and just had a baby. Life is very full, and I can’t make time for friends the way that I used to. It’s really nice to have a productive reason to catch up with my buddies!
A lot of people I invest in are friends: people that I’ve known before they started companies, or when they were running a previous company. It’s really nice to answer a call from your friend and say “Oh, it’s one of my investors – we should catch up on the business” (or the other way around). You have something to talk about on the business side, and inevitably you end up talking about the next surf trip, or what’s going on with the kids.
One of my really good friends founded a company that was recently acquired by Amazon. When he was in the trenches building that company, we were talking a lot more. We caught up the other day and realized that we hadn’t talked much for the past eight months since he started working at Amazon!
When you’re in it and you need that advice and people to talk to, it’s a good reason to maintain friendships.
Running a startup is hard enough. All of your investors and employees are counting on you to be 100% focused on your business. You don’t have the time to go out and take lots of meetings to assess potential investments.
I knew all that, but landed on a way to responsibly invest. The thing that I just did over and over again is I would just invest in people that I knew well and I had worked with before. Luckily, I worked with some really great people!
As a founder, it’s easy to overlook your expertise and connections. I suggest that you leverage it to diversify yourself, work with your friends, and give back to the startup community.
*Editor’s note: The advice in this article does NOT constitute legal advice. Please consult your attorney before fully pursuing any of the strategies described herein.