Angel Q&A: Rudy Gadre
Rudy Gadre is one of Seattle’s most prolific angel investors. Originally a lawyer by trade, he spent a number of years as a VP at Amazon and General Counsel for Facebook during some of their fastest growth years. After Facebook, he returned to his hometown of Seattle and took up angel investing as a way to grow and support his community. Rudy sat down with us to talk about some of his experiences and offer advice to the next generation of angels.
Startup Angels: Thanks so much for joining us, Rudy. To kick things off, how did you get your start in angel investing?
Rudy Gadre: I left Facebook in 2008 and moved back to Seattle. Around 2010, I was in a pretty good position financially…Facebook stock was trading in the private markets so I didn’t need to go back to work — I was really just deciding what to do with my time.
A woman I’d worked with years before gave me some good advice: ‘If you’re ever young and independently wealthy, there are a couple things to consider. First, you should optimize for being happy with whatever you choose to do with your time…you should enjoy it; second, you’ll also want to be happy with your life as you look back retrospectively. Don’t waste good opportunities.’
Around this time, some friends and family reached out and spoke with me about putting money into their company. I figured why not. I did some small deals. And it occurred to me that angel investing was a good way to stay involved in tech while helping my community — two endeavors that met my personal goals. I wanted to do something that would primarily be a Seattle civic booster. If I could possibly make some money while doing it, even better.
That’s since snowballed to over 70 angel investments.
Startup Angels: Do you remember your first investment? How did you feel when you wrote that first check?
Gadre: It was one of my friends’ companies, which ultimately didn’t go anywhere. But I wasn’t in it for the money. You’re better off making angel investments for some other reason than just the monetary return, because unless you’re investing in lots of deals / professionally, the chances that you hit a win are pretty low.
So for me, I knew these guys, I thought they had a good chance to succeed, it was an interesting project, I thought it could make money, and I also thought it would just be good for the Seattle community. So I invested.
Startup Angels: So why do you still invest in startups? What keeps you coming back?
Gadre: It’s really that same motivation — in Seattle, you can make an impact with fewer dollars and fewer deals. It’s gratifying to see the companies I’ve funded succeed. Some have gone on to A, B, and C rounds. Some have had liquidity events. It’s rewarding to see I can make a difference in the Seattle startup ecosystem.
Startup Angels: Given your sheer number of deals, do you invest more than money? Do you actively mentor and support with your time?
Gadre: I do, but it’s mostly on a triage basis. Since I’ve done so many deals, at any given time there is some percent of companies that need help with raising more money, hiring, closing partnerships, etc. So I’ll support when they need me most, and as they move on I ease off.
Startup Angels: What do you look for in entrepreneurs?
Gadre: Well, I’ve been lucky enough to work with Jeff Bezos and Mark Zuckerberg, so I’ve got a great idea what a world-class entrepreneur looks like. That being said, there’s really three main aspects I look for in entrepreneurs:
Intellect. Are they super smart? Can they see future? Can they see around twists and turns that will come their way?
Drive. Can they run through walls to make their company successful?
Charisma. Neither Bezos nor Zuckerberg was conventionally charismatic, but each had a good geeky charisma. They could get people to believe in a vision, whether those people were potential investors, hires or customers.
Of course, there are other factors I look for too, such as whether you have a track record, successful exits in the past, etc.
Startup Angels: What do you want out of your fellow investors?
Gadre: Someone who steps up if necessary. So if a company needs a bridge round, they’re willing to step in and support, etc. But if you break it down, I really see 3 types of investors:
Value-add investors: in addition to money, they offer connections, mentorship, can finance bridge rounds, etc.
Value-neutral investors: these investors will write a check but never bother the startup founders. And that’s just fine.
Value-negative investors: they’re a drain on the CEO’s time. They’re always complaining about getting their money back, aren’t supportive on a bridge, and so on. These are the investors you want to avoid working with and taking money from.
Startup Angels: What’s the biggest mistake you’ve ever made as an investor?
Gadre: As a rookie, I think the biggest mistake I made was not looking at what the entrepreneur was going to do with the company, instead thinking, “What would I do with this company?”. It’s where you fall in love with idea rather than the execution. An A team will turn a B idea into a win, while a B team will turn an A idea into crap.
Startup Angels: What are the most common mistakes that you see other angels make?
Gadre: Well, really all angels make the same mistakes. That includes:
Falling in love with the idea.
Not evaluating the size of the market opportunity correctly.
Not focusing on the team, and instead focusing more on the business. At the end of the day, the team is your bet. Competitors will emerge, there will be ups and downs, and your team must see its way through all the twists and turns.
Novices will often focus too much on ideas or irrelevant due diligence stuff, etc. Remember, no battle plan ever survives the test of the enemy.
Startup Angels: What’s the state of the Seattle startup ecosystem? What does it need next?
Gadre: It’s pretty strong, among the strongest. It’s among the likes of Austin and Boston, and NYC and LA to some extent. But none of those are the Valley.
Still, Seattle is good. Valuations are more reasonable here, there’s no froth, but there’s enough capital that good deals still get funded. Once you get to Series B raises, then you’re getting funded on a national basis and location matters a bit less. There’s not a ton of Series A capital in town — that’s certainly one thing we lack — but that’s getting better.
As all these Silicon Valley startups open development shops up here in Seattle (to leverage our great engineering talent), the Valley VCs are looking at this market to expand to as well. So the capital scene is a good happy medium.
Startup Angels: I understand there’s been some recent chatter about Washington’s Non-Compete bill, or the rolling back of non-competes. You’ve got a unique situation, having seen the needs of hugely successful tech companies as well as the challenges your startups face. What’s your perspective on this bill?
Gadre: You know, it probably won’t affect investors all that much — primarily just the companies and talent. I’m personally in favor of not enforcing non-competes. They help large established companies that can afford to enforce them, sure.
The question is: do you want an ecosystem that can enforce its non competes? Or do you want an ecosystem that allows free movement of labor, which might correspond with better talent working at better up and coming businesses. I’d prefer the latter. I want to see more Amazons and Microsofts emerging in Seattle, rather than simply protecting the giant incumbents we already have.
And this is my ex lawyer hat, but the reality is, what these companies are trying to protect with non competes you could argue that a non-disclosure agreement would do the same thing. Even if your employee goes to a competitor, that employee can’t tell them your secrets under an NDA. And if they do, you can sue them for it. So, do you also need another enforcement structure on top of that?
Startup Angels: If you were to offer a potential angel investor one cinderella story and one horror story, to help them assess whether they want to get involved with startup investing, what would they be?
Gadre: There are a variety of good cinderella stories, but one good one is Uber. Anyone could have invested in Uber during their crowdfunding round. If you lucked into getting into an Uber-esque startup that’s raising on Angellist, great. You won the lottery.
I’ve seen it with some of my own deals in Seattle. The cinderella story is when you get in early, the startup takes off, you don’t get diluted too much, and hopefully you can make a good amount of a return later on.
As for a horror story — that’s probably when your angel investment negatively impacts those beyond you. So, if you bring all your friends into a deal that ultimately goes south and they blame you. The typical run-of-the-mill deal is not a nightmare; most startups will fail and you need to expect that. That’s normal. The ones that are really bad are where you brought people in and it turns out there was some fundamental misunderstanding and you’re in a pickle. You have pissed off friends, a bad relationship with founder, and you lost money on top of that.
Startup Angels: As our final question, let’s turn to the subject of secondary markets. A lot of potential angels are concerned about interim liquidity. Secondary markets have been popular in the past with select deals, and they may surge again with so many ‘unicorns’ and NASDAQ’s machinations around private markets. Have you ever considered listing your shares on the secondary market?
Gadre: It happens these days, but it has to be a pretty hot company. I haven’t yet listed any shares this way, but it’s a possibility. People have become used to the idea of early liquidity for founders and the early investors…but it must happen during later rounds and the company must be doing great. There must be buyers willing to soak up excess selling demand. That’s certainly more common now than 10 years ago. There are some deals I could do this on this year…we’ll see.