The secrets of a startup guru

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Gil Penchina likes to invest in startup founders that are slightly delusional. That kind of contrarian hunch has propelled Penchina into the super angel bracket, with five $1 billion exits to his name, a high water mark for early stage investing.

Penchina single-handedly built the largest syndicated angel fund with over 500 backers and nearly $5 million per investment. His fund experienced an exit frenzy that includes LinkedIn, Paypal, Wealthfront, Cruise Automation, Dollar Shave Club, and Evite. His own tech and consulting career ranges from bulge bracket startup academies like GE and eBay, running his own shop as CEO of Wikia and co-founder of Fastly.

I caught up with Gil recently (in full disclosure, I invest with Gil) and had the chance to talk to him about the state of the startup ecosystem and his secret formula for knowing if and when a founder has what it takes to go all the way.

Jeff Cunningham: You started investing in technology 1998, and today you are the top super angel, with at least five $1 billion unicorn exits. How do you find great startup entrepreneurs?
Gil Penchina: It’s like fishing. The more you’ve been fishing, the better a fisherman you are, the better you know where to find the fish, and the more you build information traps to locate the fish. You know to go way out on this ugly part of the rocks where no one else goes. It’s still very much of a craft business.

Q. How did you decide to go into early stage investing?
I started angel investing because I like hanging out with entrepreneurs.

Q. When did you realize you had a special knack?
The first time my early stage investment went public someone said I was a genius, and now with five billion-dollar exits, more people think so, but I like to consider myself a regular guy who has this idiosyncratic antenna.

Q. What would a pie chart of your day look like?
Communication, 100 percent. All I do is talk to people, email people, take meetings with people and do interviews. Then I work at maintaining relationships with my investors because the trust people place in me is my business model.

Q. What was your most recent home run?
We had a billion-dollar exit to GM, called Cruise Automation.

Q. What areas are you looking at now?
Enterprise SaaS infrastructure. Those are probably a few areas we’ve done the most. Big data, I have honestly not been as active in as I would like because it feels like every company is building their own. I don’t think you can have a big data win as easily as you have a tools company that provides big data to other people.

Q. Has the startup investing ecosystem become more competitive?
Venture capital used to fund a few hundred A rounds to get companies going. Now, there are over 100 incubators launching over 5,000 companies a year, and that doesn’t include all the startups that start without an incubator. I’d guess there are probably 10,000 startups a year now.

Q. What changed?
The short answer is the iPhone and AWS (Amazon Web Services or the Cloud). The iPhone gave you access to a global group of users who were doing things they’d never done before, so all these new behaviors could happen, and then can be monetized. AWS made the cost of launching an internet business cheaper than opening a coffee shop.

Q. When someone comes to you with a great idea for a startup, what’s your advice?
I talk to people all the time who say, “I wanna do a startup,” or, “I wanna build a mobile app, but I don’t know how to write code,” or, “I don’t know where to start,” or, “I need some money,” or I need a team.” I generally say, “Well, the first startup I did, I did on my own PC. Second startup I did, I had to learn HTML, and I built my own website, and I just started doing it.” Momentum begets momentum, and the best way to start is to start.

Q. What is the hardest part about launching a new company?
The biggest problem is there’s no positive momentum. The universe creates awesome inertia. Your mom tells you it’s a bad idea. Your friends tell you it’s a bad idea. It takes a lot of willpower and drive and grit to get an entrepreneur to defy reality because reality says it’s not going to work.

Q. Should a startup wait for a tipping point before launching?
More like finding the right time for a concept. When you are in startup mode, things are always going to be wrong for a long while. One of the classic VC questions is, “What has changed?” I was looking at a marketplace for handbags the other day and someone said to me, they tried this five years ago and it didn’t work, so why is it going to work now?”

Q. Does an example come to mind?
In the late nineties, 100 million dollars were invested in companies like Xdrive and i-drive to do consumer backup of files on your desktop. Then years later in the early 2000s, tens of millions more were spent on cloud backup. Then along comes Dropbox, and the cost of cloud storage had gone down to the point where they could afford to give some away for free, which no one had done before. They did some other smart things around virality. Social media virality didn’t exist ten years before. They picked a good time.

Q. Did the market change its mind?
Actually, I think the market still felt it was very clear it wasn’t going to work. No one wanted to fund it. There were entrenched existing players that were charging a fair amount and looked pretty mediocre. But like most successful great startups, Dropbox didn’t steal from the existing players like I-Omega, who had a hard drive that I would connect to my laptop. They stole from a concept that was bothering users called, “It’s too hard to email a file to someone.”

Q. Is this unique to technology venture investing?
I’ll tell you a great story. I met J.J. Abrams at TED a few years ago, and he had a Q&A session. I asked him, “I just went to the movies, and I saw this movie called “Meteor” about astronauts going up into space with nuclear weapons to destroy a meteor that’s going to hit the earth. Two weeks later, I’m seeing ads for “Asteroid,” the movie about astronauts going up in space with nuclear weapons to destroy with the asteroid that’s about to hit the earth. What is wrong with you people following each other? Can’t you guys get your shit together?”

J.J. looks at me with the same look of disdain that I often have for a big company guy, and he says, “this has been going around Hollywood for 20 years and 18 months ago the cost of CGI (computer generated imagery) got to the point where you could film the movie economically. At that point, two guys raised money, and the guy who got there first won.”

Right. I was like, “Oh my God! That’s exactly what we do!” Something changed, and all of a sudden this idea that was a smoking crater of shit two years ago is now genius.

Q. Switching topics. Can I get your take on Uber and its problems?
Travis is used to being the underdog and he still thinks he’s the underdog because he thinks he’s fighting against governments. Only most of the rest of the world doesn’t think he’s the underdog anymore.

Q. What’s your advice to Kalanick?
If you are going to ask for people to respect you, I think you deal with less conflict if you can admit that you have an obligation to behave like a mature adult at all times.

Q. Is a CEO’s bad behavior a startup killer?
Not really. Steve Jobs was even more badly behaved for 30 years. Who wouldn’t bet on Steve Jobs despite the flaws?

Q. When you invest with a CEO of a startup, what is the most important advice you give him or her?
It’s a really hard job. You’re under tremendous pressure, and everyone needs you to be perfect all the time and that often creates a perverse incentive to not tell the truth. Please remember, when you get caught not telling the truth, it’s over.

Q. What do you feel about entrepreneurs who delude themselves into thinking their idea is the greatest thing ever?
All founders have to be delusional, I don’t mind that and in fact, I think it’s a requirement. The problem is when a founder fails to recognize a real problem, does nothing about it or stalls, then fabricates to sustain self-belief. Delusion is a good thing. Fabrication sucks.

Q. How do you prepare for economic crashes?
Crashes happen. They also teach us to avoid them the next time. People who see train wrecks stay away from trains. The smart ones get where they want to go faster that way.

Q. Should an entrepreneur study failures?
I don’t believe in that. I rather like the opposite, those who don’t know the past create the future. Fear is the enemy and the past stokes fear.

Q. How do you decide to take a shot at a long shot?
I like deals that look like they will be massive or zero, and if I have a lot of zeros it means I’m swinging hard at the ball. That’s a good indication of longer term success.

[This article has been reproduced with permission from Knowledge Network, the online thought leadership platform for Thunderbird School of Global Management https://thunderbird.asu.edu/knowledge-network/]