JASON E. KLEIN ‒ NYA MEMBER SPOTLIGHT
Jason E. Klein joined NYA in 2011 and is active inside and outside NYA in the investing community. Jason also is the founder of On Grid Ventures, an early-stage investment/advisory firm, and is President of the Harvard Business School Alumni Angels Association. Jason was previously CEO of Newspaper National Network, a partnership of 25 leading US newspaper companies; and CEO of Times Mirror Magazines, a leading publisher with 25 titles including Golf Magazine. He began his career as a consultant with McKinsey and was recognized by Media Magazine as one of “100 People to Know” in the media industry, and by Alley Watch as one of “25 Angels Investors in NY You Need to Know.” Jason shares why he thinks pivots are overrated, the best entrepreneurs are risk minimizers, and how new angels should pace themselves when first investing.
How did you meet New York Angels?
I joined NYA in 2011 when I transitioned from working-full-time to a portfolio career – consulting mostly for media organizations and working with startups. I originally talked to a number of people who had some experience in early-stage investing, and I found that New York Angels had the largest group of investors and the best concentration of deal flow. I knew Elaine Gilde from industry connections, so I reached out to her. Elaine was a very good advocate for joining NYA, and she has recruited many others over the years.
What has been your most memorable experience as a New York Angel?
I enjoy leading deals that I really believe in. Even though I know historically, consumer deals have not been the best segment, I do like them because of my background. I've always found consumer marketing and consumer media the most exciting.
I’ll always remember the first deal I led: Cups – an unlimited coffee subscription to a network of coffee shops based in Tel Aviv.
The most interesting deal that I have led is Tire Agent. Tire Agent is basically an e-commerce supplier of tires. The company has great traction and great sales. NYA members invested in Tire Agent when it was basically just an idea, but now they’re delivering really impressive revenues. The company also had a strong follow-on round where NYA members had a bit of a “soft glove” with the lead VC because NYA members insisted on not leaving our rights behind when the VC joined. Over the years, I have met a number of entrepreneurs who have founded niche, special interest companies. These entrepreneurs knew a subject area incredibly well and devoted their career to it. That’s what I liked about Jared, the founder of Tire Agent. He came from a tire family, but he opted out of the family business to start his own company. When I first met Jared, he had an Instagram account with a following of thousands of people who loved his G-Rated Tire porn. He was kind of “Mr. Tire,” and he's proven true to that name through his knowledge of the industry and his connections. He’s pretty extraordinary – if you tell him the make and model of any car, Jared would know exactly what the best tires would be for that specific model.
What do you look for when you are investing in a company?
I want a company that is in my zone where I have some experience from my career. By investing in my zone, I’ll have some connections who can help evaluate and help the company. I might have some independent ideas that I could bring to the company. The company also has to have a problem and a solution that I can really relate to – something that intrigues me and that I would like to see solved; something I’m happy to dig in some way; and something that will make the world a better place. That means I rule out a lot of deals in cryptocurrency and pure Fintech – things that just extract value from the economy. I like to invest in ways that make markets more efficient and bring more to consumers. I also like to invest related to digital, location-based products, hence my operating company is called On Grid Ventures.
There needs to be a clear and compelling thesis for competitive advantage and to become number one in a large market or in a well-defined segment of a market. I am a real believer in dominance by defining a market and staying very focused within it. Once a company has that focus, there needs to be a reason to believe that it can win with some competitive advantage. It could be the business model, the founder or team experience, early traction, patents or a multitude of other things. Fundamentally, the company needs a clear thesis for dominance in a well-defined market that I can relate to.
It has become harder and harder to find deals that fit my two criteria. First of all, it might be because I am getting older. The market seems to be moving a little bit away from my zone. Too many things outside of my zone are hot right now, e.g., blockchain, cryptocurrency, med devices. There are also a lot of me-too companies. There are a lot of companies and a lot of big, known problems that a lot of entrepreneurs are trying to go after. After investing for the past 12+ years, I have seen the same problem getting solved in different ways. Unless the new solution is far more compelling than the last solution I saw, it is fairly easy to pass on those deals.
What do founders like most about working with you?
You have to ask them, but I think I bring a lot of experience and know how – particularly because I try to invest in areas that I know something about.
I also give very candid and straightforward advice. I frequently say, “This is free advice. You're not paying for it. It's worth what you're paying for. You can take it or leave it.” I am a Board Advisor for one of the New York Angels companies, and I frequently see the VCs tiptoe around the entrepreneur and some of the things that the entrepreneur is doing. I admit I do a little tiptoeing in board meetings, but when I am one-on-one, I am very direct. They always can disagree with my feedback, but I think they need to hear candid feedback and realize that because I've personally invested in the company, there's a lot of alignment since I simply want the company to be successful.
What differentiates companies that you see at Screening versus those who make it through to Due Diligence?
There needs to be a strong New York Angels champion. Every company is going to have defectors, but there must be someone who gives a plausible answer to every criticism. I think the New York Angels rule about always having a deal lead (or two deal leads), with some objectivity, is an essential rule.
Second, there needs to be a strong and very trustworthy CEO. The CEO must be someone who inspires confidence and that investors can believe in. Many CEOs don't cut the mustard after just a few meetings.
Across NYA members, there are different perspectives on total addressable market. While many prefer to see a large TAM, I tend to prefer a very focused company that is targeting a clearly defined market segment. TAM is not as important to me, as I’m happy investing in smaller companies that I think have a great odds of success. In general, most NYA members do tend to like bigger markets because it gives more opportunity.
Finally, the NYA members have to buy into the investment thesis. There is typically some group think around whether the thesis is right or not, then it’s taking a leap of faith. Members want to invest in a company with an investment thesis that's pretty solid, and the ones who accept the thesis are the ones who will write checks into the round.
What advice would you give founders who are starting to fundraise?
Start with reasonable deal terms. Founders need to start the conversation with investors with reasonable deal terms. There's so much noise out there, and many founders will start off with expectations that are too high, but they are hoping the market will settle at some crazy rate. Except for the hottest deals – the top 0.25% of startups – in most cases, they will be disappointed. They also will have wasted a lot of time, because investors, certainly the discriminating investors at New York Angels, will walk away. Founders have to offer deal terms that are reasonable, and they need a trusted investor to help them as a startup. Founders will be talking to a lot of different investors, but they really need someone who they can trust and help them figure out how to handle and position things. At New York Angels, there's a lot of people who can be very helpful to founders, if the entrepreneur will let them.
Focus on traction. Founders need to focus on getting real traction true to their direction. One of the things New York Angels investors share in common is that we really are “traction investors.” We like to see good ideas and big markets. We want to see companies perform and gain traction. Sometimes the investment process can take a few months, and it’s nice to be able to see improvement and some traction being picked up over that time.
Be careful about pivots. I think pivots are overrated. They often undermine investor confidence. They're costly in time and money. They're actually more costly to the early investors than they are to the founder. Founders tend to land on their feet if things work, but what ends up happening more often is the investor can lose. If a founder is going to make a pivot, it basically means that they leave behind a bunch of the money that the angels sunk in, and it becomes wasted capital. With pivots, there usually was some learning, which of course there's some value in learning, but the company really didn't progress forward – instead, it stood still during that time. If a company is going to pivot, the founder should have some candid discussions with the investors about what they're doing and why they're doing it. A lot of entrepreneurs can be “entrepreneurial” and move like the wind when they react. The best entrepreneurs have an instinct, and they're not just bouncing around off the walls and taking chances – left and right.
When you look at your past investments, what advice would you give founders to deliver a successful exit?
This is not a simple question. There are many things that contribute to the success of a company.
Entrepreneurs need to have a clear sense of the end goal: Who is going to buy the company? Earlier in my career, I worked for a large media company. I made a lot of acquisitions of entrepreneurial companies, and they were all niche publishing companies or information companies. We made a lot of entrepreneurs rich. Every one of those entrepreneurs knew they were building a business that could succeed as a standalone company, but ideally one of the bigger publishers had some overlap and could acquire the startup.
One of my best exits was exactly like that: it was a biomedical company, very clearly in a niche. They had three companies that they were targeting, and one of them ended up buying the company for a great exit. Three companies is a good target because your acquirer can't be everyone. Also, Google, Microsoft, and Facebook can't be on that list because that's pretty rare to be acquired by them. You always should have a plan B and C.
You need to have a clear strategy and great execution. I like to see entrepreneurs who hone in their thesis over time. Many diversify too quickly by going into a second product or a second market, but they should wait until they have the first market pretty well locked up. For too many entrepreneurs, their first thesis doesn't quite work, and they hit obstacles, so they go to a bigger and broader market. In my experience, that's really, really hard to pull off. Typically, you want to fine tune as you test and narrow, and you don't want to go bigger – if you go bigger, you're kind of running in a different direction because your initial solution isn’t working. I do tell founders what I think, and sometimes they'll still pivot or go in a different direction, and that's their prerogative because it's their company. They've certainly put more time and effort into it than I have. Time will tell who's right, and as an investor I'm happy. I'm probably happier to be wrong than to be right.
I like founders who build their business in chunks and plan their financing in chunks. They may have a milestone that is, maybe a year out, to reach a certain revenue level or improve a certain product line up to a certain performance, and then they have a plan for what they want to do after that milestone. Building a business is not a random walk over time where you keep getting better. Their fundraising is geared around thinking about the business in chunks, getting something done, achieving a milestone, and knowing what other investors will be excited about. The company with milestones will generally receive more capital.
Twenty years ago or so, I started working with a couple dozen entrepreneurs and watched them build and sell their companies. The most common thing that really surprised me was that they were not really risk takers, in the common sense of the word. They are not people who gambled, raced fast cars, or lived their life with a lot of risk. They did not run the “Elon Musk” model of constantly doing crazy things.
I think the best entrepreneurs are actually really good risk minimizers, because they know how to take a big risk in certain areas, and they'll minimize risk everywhere else. Most of the successful ones bet their whole family future on the company, and there's a lot of unknown risk in that. There's market risk. There's product risk. There’s operational risk. There’s all sorts of risk when you own and start a small company.
What the best entrepreneurs are very good at is minimizing all the other risks that they can focus on growing the company efficiently. They are actually great risk minimizers because they're taking such a big risk on so many dimensions. They don't want to deal with other things coming up and biting them when they could have proactively taken care of them more easily. The best entrepreneurs tend to be conservative financially and carefully manage cash flow. They're very conservative about expansion and not expanding too quickly, which I think that's something you don't hear very much.
Communicate with your investors. It's very simple. You really should be giving your investors quarterly financials and write-ups, whether you need to or don't need to, particularly when you have a group of angels as active as New York Angels. There are so many people who are so well connected, who are so thoughtful, and we can really be very helpful. Also, don't wait until the company is going down the tubes to communicate with investors. Bring them along; let them see what's going on; and let them try to help. Some entrepreneurs do that, but some just get very lazy and don't ask for help.
What advice do you have for newer NYA members?
I think working with startups can be intoxicating – there are so many new things: you're seeing new technology, and you're meeting outgoing, bright, interesting investors and entrepreneurs. It can be really fun, but you have to pace yourself. You don't want to invest too much too quickly. I think a lot of people are turned off by investing too much, too quickly. You need to build a balanced portfolio. New York Angels allows you to get involved quickly with really strong dealmakers and angel investors. The experience base of our group is tremendous. There are a handful of other angel networks around the country that are as strong as NYA, but we’re clearly the strongest group in New York, in terms of dollars invested, deal flow, and sophistication. Also, new investors should consider joining multiple angel investing groups and other affinity groups, e.g., McKinsey or university alumni investing groups.
