My Personal Fail Whale

Passed on Twitter, Lost $26M but learned a very important rule

Everyone in the valley, including me, spent most of the day cheering on the Twitter IPO. A small subset of those had their wealth materially change, at least on paper. Some even smaller group of people looked back and thought…I should have invested in Twitter and then there are the very few that said the same thing about Odeo…

I am one of those people.

I am not big on regret and have had plenty of success, but I am big on learning and getting better. So, here is the story of how and why I passed on Odeo, lost the opportunity to invest in twitter and how that incident changed the way I do angel investing forever. Ultimately though this experience led to me being a part of some amazing companies for which I am thankful.

In late 2005 I received an email from Ariel Poler a friend and one of the best angel investors I know. I have a rule that when Ariel introduces me to a company I drop what I am doing and go meet with the company. Some day I will do another post on why (if you have a solid intro) you always, always meet with the company, a lesson I learned from Ron Conway. I trudged over to Odeo’s office to meet with the company and of course Ariel was there to greet me. Like a great angel investor, he stayed during the entire pitch which he likely sat thru many, many times. I knew Ev from his days at Blogger and loved the story (which I will probably get wrong) of how the company almost ran into the wall so he moved it into his apartment and built it back up until it was acquired by Google. I went into this meeting a bit skeptical as my brother was in the Podcasting space partnered with Adam Curry. Having worked with both of them before it would be tough for me to invest in something so competitive and at the very least it would have made for difficult family dinners. Beyond this I wasn’t a big believer in the size of the podcasting opportunity. Suffice it to say, I patiently listened to the pitch and was blown away by the team and how how sharp and insightful they were. I left wondering “how could such a fantastic team end up working on podcasting 2.0”. I emailed Ariel and politely outlined my reasons for passing on Odeo. I am pretty sure I cc’d Ev and if he ever stumbled upon my email in later years I am sure he laughed.

A few months later I heard they changed direction (we didn’t call them pivots back then) and what they were working on was really interesting. I signed up soon thereafter which is how I ended up with the handle @karl and a stream of adoring Karl Lagerfeld fans and/or Karl Rove haters. I saw Ev a couple of years later and asked him, “Why didn’t you consider taking money from those who were astute enough to pass on Odeo?” His response surprised me, “Karl, how many times have you reached out to investors who turned you down?” I took this in and then the implication hit me.

I was doing angel investing wrong.

Being CEO/Founder/Product person I thought the most important thing I should look for is a big market, a great product and great team. In fact, that is what I should be looking for if *I* was the CEO/Founder, but it’s the exact opposite order of what I should be looking for when making an angel investment. There are so many different ways people think about investment philosophy, but this experience convinced me it’s not about your philosophy it’s about the *people* you invest in.

Great people will figure out the market, they will build a great product and yes they will change direction when necessary. Even more humorous as a founder I relentlessly focused on hiring the best people I could find and yet in my investing I focused on people last.

I would be remiss if I didn’t mention that like some others I could have invested in Odeo and not been asked to invest in Twitter. My belief is if I was helpful and had an impact I would have had the opportunity but either way I still learned a very important rule.

So, what is the important rule for investing I learned?

People above all else. Not just the founder but the team. Get to know them and let them get to know you. If you like the people and believe in them, then give them a lot of lenience when it comes to evaluating the current concept, product and the target market. Of course, this doesn’t always work, but there is an upside when you lose your money investing in a great team. They *will* do something else and if you invested and added value they *will* give you the opportunity to invest and support them again. However, if you pass on their first idea, it is very likely you will never hear from them again.

Just a couple of years ago I took this to an extreme. I gave my honest opinion of an entrepreneurs idea, the market potential etc. I didn’t pull any punches. Then to their surprise I said I would invest and later when they asked me to I even raised my investment amount. When the entrepreneur asked why I said “I am not investing in this company, I am investing in you and your next company because I know you will be a great entrepreneur”. Either this company will be great and I am wrong about the product and market, or you will fail, learn and make your next company great. If the latter happens then all I ask is you give me shares over and above my investment in your new company. Sure enough the company failed and sure enough the entrepreneur started another company and true to their word I got more than just my investment. The new company is doing fantastic.

Great entrepreneurs are rare, like Aileen Lee says “unicorns”. If you find one invest in them immediately, one day it will pay off. It did for some investors in Odeo, who bet on the team, and it has since paid off for me many times over.