The blog-series “Startup People of Seattle” introduces some of the key personas in the ecosystem to learn more about what they are doing, to share their thoughts and ideas, and to promote networking.
In our 17th interview, meet Sharad Agarwal:
“In healthy real-estate markets, it is possible to achieve a 15% IRR. To achieve a significantly higher IRR in startup investing, you have to find startups that are in the fat tail. If you are investing in startups to fill that high risk – high reward hole in your portfolio like I am, you have to be disciplined to avoid the temptation to invest in low risk – low reward startups.”
Sharad Agarwal is an active angel investor in Seattle. His professional background is in computer science R&D, and he is working for Microsoft.
Q: Could you please introduce yourself?
A: I have been an active angel investor for over 5 years. I have 18 companies in my portfolio.
My professional background is in computer science R&D. I am a Principal Researcher at Microsoft Research, and have been there for over 15 years, working on advanced & applied research in mobile computing, datacenter networking, and geo-distributed cloud services. I have co-authored over 35 scientific publications with over 6,000 citations, and co-invented 47 issued patents. I have advanced Microsoft products with my research, including Windows 10 and Windows Phone 8. I recently became an ACM Distinguished Engineer. I have Computer Science Ph.D., M.S., and B.S. degrees from University of California Berkeley.
Q: You have been working for Microsoft for years now. Working for such a large company, how did you become interested in startups and angel investing?
A: I had a lot of experience investing in real estate, stocks, bonds, and mutual funds, and had a diverse investment portfolio across those asset classes. However, I felt that none of those would get me an outsized return, and I needed to include a high risk - high reward component in my investment portfolio.
Working in Computer Science and having moved up here from San Francisco, I have many friends and colleagues who are in startups. Hence, investing in startups felt like the natural choice to fill that hole in my investment strategy.
Q: On LinkedIn, I saw that you participated in SAC between 2014 and 2016. How was that experience for you and how did it lead you to Grubstakes?
A: I participated as an investor in SAC VI, SAC VII, and SAC VIII, and then as the Assistant Fund Manager for SAC IX. I had a tremendously positive experience going through SAC. John Sechrest is doing the entire Seattle startup ecosystem a huge service in training new angel investors and new entrepreneurs in the process of investing and fundraising. There is huge untapped potential in Seattle – we have many accredited investors who have not yet invested in startups, and we have a lot of experienced talent at companies like Microsoft and Amazon who have not yet embarked on their entrepreneurial journey. The almost decade long effort that John has been leading with Seattle Angel Conference is exactly what our community needs, and our community has already benefited tremendously from it, including myself.
SAC is the ideal start of an angel investing journey but should not be the end. It is first and foremost a learning opportunity. Once an investor has learned the ropes at SAC, they should be able to define their investment thesis and evaluate the different investment entities and vehicles out there for the next phase in their investment strategy.
At the end of SAC IX, a few investor colleagues and I felt the need to continue our investments in a collaborative group setting. Existing angel investing groups did not have the structure and process that we wanted. This was the genesis of Grubstakes. Together with Javier Soto, David Grampa, Ravi Grover, and Yoko Okano, we founded the network of angel investors known as Grubstakes.
Q: Could you talk more about Grubstakes? How does Grubstakes invest in startups and how involved are you in mentoring entrepreneurs through Grubstakes?
A: Grubstakes is comprised of about 50 angel investors in Seattle. We are a network of angel investors in Seattle that fund and mentor startups. Our mission is to foster an engaged, collaborative, and smart angel investor community, and to ensure that startup founders are well financed and succeed through exit. Our defining characteristic is our collaborative spirit. Grubstakes members are accessible to others, responsive to inquiry, and generous with their time. We help each other and the startups we fund. Startups that we invest in must have an ambitious vision and a realistic plan to get there. We have resources, experience, and the right attitude to partner with startups that we invest in for the long haul.
Any member of Grubstakes is able to bring a company to the membership for consideration of investment. Those members who are interested will form a due diligence team, investigate, and independently decide to invest. If some members do decide to invest, we will help them create a Grubstakes SPV in the form of an investment LLC that will pool the individual cheques into a single investment and line item in the startup's cap table. We have our own lightweight process for LLC formation, legal docs, banking, and annual LLC maintenance that the elected managing member of the LLC can follow. We also have established relationships with several investment entities in our ecosystem, including SAC, SeaChange Fund, OVF, AoA, Flying Fish Ventures and SWAN Venture Fund.
We actively mentor entrepreneurs that need and/or ask for mentorship. This includes startups that we have invested in, and those that are too early for our investment but nonetheless have the potential to one day attract our investment.
Q: What was the biggest surprise about Angel Investing for you?
A: The power law of investment returns. This was not so much a surprise because many articles have been written about it, but something that I did not fully internalize until I got into it. In healthy real-estate markets, it is possible to achieve a 15% IRR. To achieve a significantly higher IRR in startup investing, you have to find the startups that are in the fat tail. If you are investing in startups to fill that high risk – high reward hole in your portfolio like I am, you have to be disciplined to avoid the temptation to invest in low risk – low reward startups. Each dollar that I invest in the latter is a dollar that I do not have available to invest in the risky ones that may net me the higher return.
Q: What are some of the things you have learned about startup investing?
A: You have to actively manage your investments. Simply writing the cheque is not enough. Many entrepreneurs need help, feedback, advice, referrals, and recruiting talent. When I invest in a company, not only do I want a high return, I also get emotionally attached to the entrepreneur's success. I like to believe that my money is greener than that of typical angel investors because I am available to help. With my growing portfolio that is at 18 companies now, I cannot help every one of them. I focus on the ones that I can have the most impact on with my involvement and where the founding team is interested in my help.
Q: What investment thesis do you have? What are some of the criteria you use when making investment decisions?
A: My investment thesis is to make money. I don't intend to be glib in that answer, but truthfully, I do not limit myself to startups that fit a specific mold. There are many criteria that I look at in each investment, including the credentials of the founding team, product-market fit, customer excitement, willingness of the founding team to stick with their vision despite all the roadblocks they will encounter, and so on. I have no special criteria that other investors will not also have. However, there are two criteria for me that I will not compromise on. The founders have to be honest and truthful in my due diligence – I cannot invest in a team that lies or hides. The business model must be ethically sound.
Of course, all startups at the angel investing phase have many holes and unanswered questions. In doing due diligence, I have to be convinced that it is possible to fill those holes and that this team is capable of filling those holes. There are some technologies and markets that I am more familiar with, such as cloud services and B2B SaaS, so I tend to be more confident about my investigations of startups in those spaces and am able to measure the investment risk and return more accurately.
Q: What would you say is more important, portfolio diversification or investing in startups within an industry you are familiar with?
A: It depends on your ability to mitigate the risk in either strategy.
A big risk with focusing on a specific industry is quantity of quality deals. Depending on the market you are in and the industry, it may take a long time to deploy a bucket of investment dollars without lowering your investment quality bar.
In my case, I have a network of phenomenal investors who cover a wide variety of industry expertise. These are individuals in Grubstakes, some of whom I've known for years, whose opinion and expertise I value and trust. Their due diligence gives me the confidence to invest in industries that I am not familiar with. Similarly, they can rely on me to help evaluate companies in my wheelhouse and be open and honest with them about what I have found. With such a great network of people who rely on each other, I have no need to limit myself to industries that I am familiar with.
Q: How difficult is it to see companies fail early on while waiting to get cash back through an exit by a company?
A: This is the issue that I see new angel investors struggle with the most. Angel investing, specifically in companies that are at a very early stage, is a long game. You will see your failures first and your successes last. Your big successes will need time to grow the team, evolve the business model, perhaps pivot, before they make it big and get to an exit. It does not make sense to calculate a ROI before 10-15 years from the start of your angel investing, and perhaps even longer if you do not grow your portfolio quickly. You have to invest in a large number of companies and wait for the small number of big hits that will make your return.
Seeing companies in my portfolio fail is simultaneously painful and gratifying to me. So far, I have had 3 failures and 1 successful exit in my portfolio. Every company that I invest in, I get emotionally attached to, so I personally feel the impact of the failure, obviously not as much as the entrepreneurs do. It is gratifying to see the failures at the same time. I want the companies that will fail to fail early. I want the entrepreneurs to learn from the failure and move on to something else that will be successful. I see little value in prolonging the pain. The challenge for them of course is to discern the fatal roadblocks from the surmountable roadblocks. In each company's failure, I want to learn why they failed, but not memorize those lessons as there are many factors that typically lead to a failure.
The most common reason I have seen for failure is when the founding team strays from the key business thesis that they created their startup to answer. There are many distractions on the path of a startup's success that can lead you astray. One of those is relying too much on one big customer. That one customer's needs may not fit your business thesis perfectly. If you build a large team to service that one customer, and that customer disappears, then you have a lot of hungry mouths to feed with too little else growing in the garden. It is not easy to find the right balance between short-term revenue from one large customer and long-term growth.
Q: What other challenges have you experienced in angel investing?
A: Something that I don't see enough investors do (including myself) is due diligence on past investors in a company you are considering, and investors in later rounds of companies already in your portfolio. I have seen investors take a large position in a company and then lead the company astray. It is rare, but a risk worth mitigating by carefully vetting others who are or will be on the cap table.
Q: What are some other key organizations in Seattle’s startup ecosystem, like accelerators, incubators, coworking spaces, makerspaces or angel groups that you know of?
There are many and I'm sure I will miss some. Here are the ones that I interact with that I have not mentioned above:
Q: What recommendation would you give someone who is new to the ecosystem and wants to learn more about startups? Are there any Meetups, Books or Courses/Programs for example that you recommend?
A: This is where being in Seattle gives you a distinct advantage. Seattle has many open opportunities for learning about and engaging in the startup ecosystem. Seattle Startup Week has many fun events. The Seattle chapter of Startup Grind that Mike Grabham organizes has many events to hear from influential people in our ecosystem and to network with others who are also learning about startups. Startup Haven that Bob Crimmins founded organizes periodic events as well that I enjoy. Try to snag an invite to Techstars Seattle Demo Day. Of course, Seattle Angel Conference will give you the most in-depth information, especially at the workshops that are organized prior to the start of each conference. A book that I thoroughly enjoyed is Shoe Dog by Phil Knight - the Audible version is very well narrated.
Here are some things I learned from this interview:
In the interview Sharad mentioned some resources and organizations, find out more about them here:
About Seattle Angel:
A strong ecosystem creates an environment that allows startups to thrive. Seattle Angel’s goal is to strengthen Seattle’s startup ecosystem by increasing the access to funding for entrepreneurs to push their ideas further.
About the author: Sven Goepfrich
Sven Goepfrich is currently finishing his MBA in Syracuse. His studies focus on technology, innovation and entrepreneurship. At his school, he is working for the department of finance. Sven was actively interning with the Seattle Angel Conference in summer 2019. He is currently looking for full-time career opportunities in this field.
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The blog-series “Startup People of Seattle” introduces some of the key personas in the ecosystem to learn more about what they are doing, to share their thoughts and ideas, and to promote networking. Rebecca has been involved in several key organizations in Seattle’s startup ecosystem, such as Alliance of Angels, Northwest Entrepreneur Network, GeekWire and the University of Washington. Today, Rebecca is executive director of Create33, a resource center for technology entrepreneurs.Read More