Welcome to Inside the Mind of a NYC Angel Investor, a series at AlleyWatch in which we speak with New York City-based Angel Investors. Today we chat with Adam Quinton, Founder of Lucas Point Ventures. He is an ex-Wall Street professional, having served as Managing Director and sell-side analyst at a leading bulge bracket firm. Adam shifted his focus to the entrepreneurial world; investing in gender-diverse teams and serving on a number of advisory boards for organizations that champion diversity in tech including Astia, 37 Angels, and Vinetta Project. Adam sat down with AlleyWatch to discuss diversity, the current startup and funding landscapes, tips for founders, and much, much more.
If you are a NYC-based Angel interested in participating in this series, please send us an email. We’d love to chat. If you are interested in sponsoring this series that showcases the leading minds in angel investing in NYC, we’d also love to chat. Send us a note.
Inside the Mind of a New York Angel Investor: Adam Quinton of Lucas Point Ventures
Bart Clareman, AlleyWatch: Tell us about your journey into the angel business and how you came to found Lucas Point Ventures?
Adam Quinton, Lucas Point Ventures: My journey into angel investing is entirely accidental. I can claim no well thought out intentional purpose. I left big finance in late 2010; I wanted to take a bit of a breather from that crazy world.
I got into angel investing serendipitously because a former colleague of mine said “you might be interested in this angel stuff.” I’d been an investment analyst for big companies, and ultimately what works for big companies works for small companies. I joined her at an angel group meeting she was a part of at the end of 2011 and got hooked.
Something that immediately comes across from your bio is that you’ve been a champion for women in tech. In fact, most of your investees have at least one female founder. Where does your passion on this issue stem from?
When I was in the big corporate world, I was in an environment that was pretty tough for women, or basically any underrepresented group you can think of. In addition to my roles at the firm I was at, I had been involved with our diversity efforts, and had got some sense of the issues that are holding other folks back in a large organizational context.
Frankly, when I got into the early stage world I was pretty shocked to discover that early stage finance makes investment banking look pretty enlightened when it comes to diversity and promoting and recognizing the skills and abilities of pretty much any underrepresented group you can mention.
That struck two chords with me. One was, from an investment point of view, the successful investors, the Warren Buffett’s of this world on down, typically invest in things other people don’t quite get or don’t quite understand the potential for.
From that point of view I’ve always had a contrarian mindset, and in the early stage world it seemed like a case where the contrarian approach at least at the founder level was to invest in the founders that might be talented and have a great idea and a lot of energy and excitement but who, for whatever reason, weren’t getting a fair shot with the investment community. So, purely from the point of view of “how do you make money?” that seemed like an interesting lens to try and apply to make more money.
Secondly, it doesn’t take a genius to work out that if you look at the numbers, there’s something going on that’s so extreme it’s fundamentally unfair. The most recent PitchBook statistic is that something like only 2.5% of venture capital dollars go to female-founded companies. It’s somewhat higher than that – still not a big number – when it comes to the number of deals, but actually the dollars is only 2.5%. Unless you can tell me that having that extra X-chromosome makes you less smart, less committed, less creative, etc., it just seems that there’s something fundamentally wrong there.
What is it in the culture of venture capital that would produce that kind of “fundamentally wrong” outcome?
It’s a subset of the broader issues in the technology space around women, people of color and beyond. In the context of venture capital, the whole “bro-grammer” culture plays a part but there are more specific issues as well.
One is, VC is incredibly homogeneous. Something like 93% of partners are men. People tend to connect with people who look like them and remind them of their younger selves, or whatever else it is, and if you have such a homogeneous investor group there’s going to be some strong tendency for them to see in a male founder something that they recognize and perhaps be not as open to seeing in the female founder.
Another issue is the paradox of meritocracy. There’s a guy called Emilio Castilla at MIT whose research shows that the more people say that they’re meritocratic the less they actually are in practice. VC is generally very good at saying they only pick the best, that it’s all about the disruptive idea, and they would push back strenuously on the idea that there’s any sort of bias in what they do. But again, research says that when people adopt that position publicly, it actually correlates with them being biased and not being meritocratic.
Fundamentally you’ve got the issue, politely put, of unconscious bias, which is the way, going back to my first point, that “like likes like,” which is a powerful phenomenon at work with a very homogeneous group of folks.
With all of that as context, how are we doing on underrepresented groups in technology/entrepreneurship relative to five years ago?
The most recent PitchBook statistics suggest that the dollars going to female-founded companies have just bounced around, and going back five or more years is it’s been in the 2-3% range and it’s really not changed. In 2016 it tracked down. So, in terms of dollars deployed, it’s been zero change.
Something like 4.5% of all deals go to female-founded companies, that’s an increase, about double what it was 10 years ago, but 4.5% is still a rounding error in the scheme of things – it’s not anything you’d call dramatic.
If you look at the demographics of venture capital itself, there’s been a lot of talk around funds that have been started by women, which is a good thing, but they’re still pretty small in the scheme of things. If you look back over 10 years, the percentage of female partners at venture capital funds has gone down; it was something like 10%, now it’s something in the 7% range. There may have been a little bit of an inflection up in the recent past, but it’s still not really broken out of the trajectory of the last decade.
I think the two areas on the funding side where things have improved are, one, there’s definitely a higher proportion of women on the angel investing side. Something in the 20-25% of angel investors are women, which has gone up significantly over the last five to ten years.
And I think the area where there’s probably been the most change is actually in the accelerator world. That’s important because the alums of the main accelerators – Y Combinator, TechStars, 500 Startups – account for 10% of all Series A rounds.
Setting demographic composition aside, do you have a preference for companies that have come through an accelerator?
That’s a good question. I’ve invested in companies that have gone through an accelerator; the most successful company I invested in did Y Combinator – that was The Muse. But ultimately I’ve invested in more companies that haven’t gone through accelerators.
It depends more on the company and crucially the founder(s). I’m a little bit wary of companies that have done accelerators to the extent that they get a very intense level of support for a short period of time, they come out of the program able to pitch pretty damn well because they get coached on that.
That said, I’ve seen plenty of good companies that found out how to do it on their own, and in some ways those companies that have been the scrappier ones and found the mentors that they needed that were exactly right for them outside of any program, some of those companies can be successful as well.
All that said, the reality is the brand and the value that you get from the big accelerators has definitely become an important factor in the early stage ecosystem.
As 2017 ramps up, what trends or spaces are you watching closely?
Being a somewhat cynical person, I’m a bit wary of chasing trends. Also I don’t think I am smart enough to pick the next big wave myself. And from an investment point of view investing in today’s hot trends can be a little bit dangerous. I prefer to look at people who have a smart idea and a big market opportunity, where there isn’t necessarily a trend per se, but they have some sort of edge.
You say you’re not investing in core technology companies – what implications does that have for what you look for in a founding team. How important is it to you that a team has a strong technical cofounder, for example?
I’ll quote a statistic that I think is interesting. There’s a VC at Redpoint Ventures, who blogs more than is humanly possible, called Tom Tonguz. He did an interesting analysis where he took a group of successful unicorn companies, looked at their founding teams, and what he was attempting to do was validate or not the hypothesis that you need a technical cofounder.
He ended up doing an analysis of companies that were demonstrably successful in terms of the scale they’d got to, and his conclusion on founder mix was that there was really no conclusion. If you graphed the demographics of founders across technical and non-technical dimensions, it was effectively a scatterplot. The point being, you had companies that were very successful with no technical cofounder, some that were very technical, some that were 50-50, but there was no clear pattern.
Now, that doesn’t mean that if you have two non-technical cofounders you can make it, don’t worry about it. I have no doubt those non-technical cofounders Tom wrote about hired somebody to be the CTO pretty early on. But to the extent you say as an investor, that having a technical cofounder is essential, his analysis tells you that isn’t true. But having somebody on the team who has that skill as a third or fourth employee, yes, that is likely necessary.
What do you look for in a founder or a founding team?
First off, cofounding teams are more successful than solo-founder companies. They have lower failure rates and are just generally more successful, for some obvious reasons.
Starting a company is amazingly stressful; it requires you to deal with existential crises every single day. If you have a team of people who are close to each other, reliant on each other, then that balances out the stress. It means that instead of going home at night and saying “what should I do?” the founders can sit down and say, “what should we do?”
The tension there is, if you only went for the team-founded companies, you would have not invested in a solo team like Amazon or Facebook. The irony is that some of the most successful companies actually have incredibly driven solo founders. So there’s the macro statistics and then there’s reality.
Nevertheless, on average I tend to say if it’s a solo founder they have to be very strong, they’ve got to be mentally very robust to a degree that would still be true for a cofounded team, but they have to be more robust and resilient somehow.
What makes a very strong founder in your view?
What I try to do is basically see what they have got that makes them exceptional. There’s a lot of people founding companies, there’s a lot of great ideas; half of them at least are going to fail, and there’s only 1 of 10 that are going to be real winners.
Every company you invest in you go in thinking it could be a winner, obviously, but knowing that the failure rates are quite high, it’s not just have they got a good idea or have they met all the basic conditions, but is there something exceptional about them?
This isn’t a great analogy but I always think it’s a bit like tennis, where, if you look at the top 100 players tennis and you watch them, they’re all pretty damn good. There’s obviously some that come out on top pretty often, and they’re technically and mentally a bit better, but it’s a very narrow dividing line and on any given day [Novak] Djokovic of Serena [Williams] can lose or [Andy] Murray or [Angelique] Kerber can lose. The top players don’t win all the time, but they have something, some edge that carries them through more often.
In the context of the founder space, what is the exceptional thing that the founder has got that checks all the boxes, but gives them something exceptional that can offset some of the other things that you may want?
If you’re OK at 5 of 10, pretty damn good at 4 of 10, but you’re amazing at 1 of 10, if that 1 of 10 factors is off the charts, and you understand where you’re not as strong and can bring in people around you to make up for the things you don’t know so well, that can be very powerful.
Long way of saying – you’re always looking for someone extra special. They don’t have to be extra special in everything, but there has to be one thing where they’re off the charts.
You’ve been an angel investor since 2011. How is your approach today different from what it was when you started out?
It’s changed significantly. I came from a big company environment. I’d been a professional investment analyst looking at larger public companies and assessing their market opportunity, their marketing plans, their technology, operations, leadership, financial planning, balance sheet, cash flow all of that stuff which in general terms you’d look at with any company, including a startup. I came armed with all of that.
I think what I’ve done over the last five years is I’ve ended up thinking a lot of that due diligence in the early stage world, in a way that is not true in the large public market space, is in some respects not very helpful.
In the early stage, the angel stage, you’re investing in something that is incredibly uncertain. It’s a stage where the one thing that is certain is whatever you invest in today isn’t going to be the same in 6-12 months time. So, spending too much time validating to the nth degree of accuracy the market opportunity is not as helpful as I thought initially, because the market you address today may not be the market your startup is playing into in a relatively short space of time.
If you think of it like that then it puts even more weigh on assessing the founder. When the shit hits the fan, and it pretty much hits the fan every day, but when it hits the fan in a really big way, will they not give up, will they keep on pushing, will they say I’ve hit this wall so now do I blast through it, go around it, or attack a totally different wall? From that point of view, the constant between Plan A and Plan B, the constant state and the future state, if something changes en route, is the founder.
Now the hard part is, who the hell knows how someone is going to react a certain way, and who’s not? You can never know for certain, but I do think you can at least have some sense of that by spending a bit more time figuring out how they got to the point they’ve gotten to.
Stereotypically, the founder who had it easy, who didn’t have any problems and basically has had a life with a silver spoon in their mouth, superficially that individual could look set for success, but if they’ve never had to deal with the shit hitting the fan in a big way, maybe they’ll deal with it brilliantly, but maybe they won’t.
Whereas, somebody who has been in the situation of facing a major challenge and they’ve come through it OK, at least you’ve got a better sense of mental toughness and creativity.
Pivoting is easier said than done, and can have implications for founding teams and company culture. What have you observed in that direction?
I’ve invested in 15 companies, and three have failed – so they hit the wall and didn’t get through it. In each case they tried, but weren’t able to.
The other 12, maybe half have had to significantly pivot. In some cases that has led to founder stress. When you hit a pivot point you weren’t expecting, it can create a disjunction between the founders’ ambitions for the company, the founders’ skill sets, and what the business needs.
I have one company where the founding team – in this case it was one technical, one non-technical – they got to a point where they were doing an enterprise and consumer play at the same time. They realized they had to do one or the other. The CEO’s call was to go the enterprise route, which from the CTO’s perspective wasn’t that personally interesting. From a skillset point of view the CTO was not as enamored of or familiar with the enterprise space. That redirection of the strategy basically unwound the founding partner team – the founding CTO left. Which was a good thing for all concerned frankly.
The company is doing very well now, it’s got more funding, and I suspect that part of the funding story that resonates with people is, “we made that choice, this is what happened, we didn’t spend 6 months derailing the company and fighting with each other. We were responsible adults and we made a tough call.”
I have some that have pivoted and did so in a less dramatic way, though it’s never painless. Of the half that have pivoted in my portfolio, several have had significant cofounder stress and in some cases full on cofounder blow out.
Switching gears, do you ever think about going VC?
I’ve thought about it a lot, and I’ve consciously decided not to go that route.
I have the luxury of being able to do what I want. I’m later in my career than other folks and frankly would rather not have a boss again! If you go professional VC, you have more than one boss – you have your LP bosses who you have to report to on a regular basis and they can rightly put pressure on you when things go wrong.
Another piece of it is that as a VC you spend a huge amount of time raising money from prospective LPs. You have to be prepared to spend 6-12 months, perhaps considerably more, raising your first fund. You have to do that full time, you have to take it very seriously. It’s very draining, and in the end you go through all of that and you’ve got your multiple LP bosses.
Maybe I’m lazy but I’d rather not spend 12 months-plus raising the money. I accept that gives me constraints I wouldn’t otherwise have. Non-trivial constraints mind you, but it is what it is.
How has deal sourcing changed for you over the years?
The main thing now is I have visibility enough that people send stuff to me. Once you have a couple of investees and they think you’re an OK person, they will start to send you stuff. Other investors will send you stuff. From that point of view, I’ve got companies I’ve invested in because another investor referred them to me.
That said, I was pretty struck by something that came out recently, and I’ve been conscious of ever since, which was a finding from First Round Capital. They did a very interesting “what we learned in our first 10 years” analysis.
Interestingly, the first thing on that list of 10 learnings was that teams with at least one female founder did dramatically better than all-male teams. But another thing that was really interesting was they concluded that the companies that have come into them randomly over the transom did better than the ones that were referred to them.
That runs counter to the conventional wisdom. Why do you suppose that would be?
One reason might be that people are following trends, we talked about that before – that’s where there can be a group think phenomenon. The group think phenomenon is almost certainly going to result in elevated valuations, which of course has implications for your returns (i.e., pushes them down).
Another reason is geography. If we’re all New York investors, we see the same companies, we refer them to our colleagues, we put money in, but what about the company in Atlanta, GA or Westport, CT that’s doing the same thing and run by smart people but just doesn’t happen to be in the bubble? We’re not seeing that.
After reading that First Round post, I’m much less inclined to blindly take the warm introduction than I might have been, and a little bit more inclined to look at a random incoming person that gets to you in a creative way.
I’ll give you an example – and I didn’t invest in the end – but there’s one company where the founders sent me a little video, which was the two founders saying, “hey Adam, we’d love to talk to you about X. This is what we’re doing.” It was personal; it wasn’t the 225th boring email I got today. It was short, to the point, and it gave you a sense of them from a personality point of view. I thought, “good for you for doing that, I’ll talk to you and learn a bit more.” I didn’t invest in them, but I didn’t say, “this is totally random incoming referral, no thank you” – and that was partly a result of that First Round report a few months ago.
The only referral bubble I’m still resolutely in – which is probably dangerous as well – is the successful founder referral bubble. If a successful founder refers something to me, 8 times out of 10 I’ll talk to them.
The mental screen being, the successful founder is very busy, she’s only going to refer people she thinks are worthwhile. Rightly or wrongly, you think well, she went from nothing to 100 people, she knows what it takes to be a successful founder so she’s maybe quite a good judge of these things.
What would you hope your investees say about you?
I hope they would say he’s helpful when we’d like him to be helpful. If we want advice he gives advice that’s objective. And that at least at some point in our trajectory he’s added some value to us. I’m not a passive investor; I typically invest in companies where I can hopefully be a bit helpful.
If they said yes he was helpful, yes he was objective, and yes he added value along the way, I’d be very happy.