STEVE SHWARTZ ‒ NYA MEMBER SPOTLIGHT
Steve Shwartz has been a New York Angels member for 10 years and is recognized as an expert on our team for AI, SaaS and software. Steve originally joined New York Angels in 2010, but he took a 4-year break to co-found Device42, which New York Angels members invested in. Steve Shwartz began his AI career as a postdoctoral researcher in the Yale University Computer Science Department and has been a founder or co-founder of multiple companies. His Esperant product became one of the leading business intelligence products of the 1990s and, more recently, he co-founded Device42 which has won many awards as a fast-growing tech company. Steve is also the author of Evil Robots, Killer Computers, and Other Myths: The Truth About AI and the Future of Humanity which was published in February, 2021 by Fast Company Press. Steve shares his stories about his first angel investment that was the 6th best-performing IPO of 2011, the incredible collaboration amongst NYA members, and the importance of 20-30x returns in angel investing.
How did you meet New York Angels?
My first angel investment was in a company named Tangoe. I made that investment on my own, and it was very successful. Tangoe grew from $0 to $200 million in revenue and was the sixth best-performing IPO of 2011. So naturally, I became interested in angel investment. I joined AIF, a Connecticut-based angel group, in 2006, but I was also interested in joining an angel group with exposure to more New York City companies. I met Paul Sciabica, the executive director of New York Angels at the time, at an investor conference. After I attended a couple of NYA meetings, I joined.
Why did you choose to join New York Angels?
I love hearing new company ideas. I love discussing them with my colleagues at New York Angels, and I really enjoy making friends within the group. I have also enjoyed delivering a 5-6x return to NYA investors with that Device42 startup and seeing successful exits for myself in my portfolio companies like Biorez, which will return 25x if it meets its earn-out milestones.
What have you enjoyed most about being a New York Angel Member?
Since NYA members individually invest in each deal, I didn’t really expect the incredible willingness to collaborate within the group. There are people who have expertise, and they are willing to share their expertise and their time, even if they're not particularly interested in a company. I found that very surprising and welcoming. Working with NYA, I’ve been able to build relationships that will last for many years to come.
What do you look for when you are investing in a company?
Nearly all my unsuccessful investments have been due to falling in love with the technology and the founders failing to execute. Failure usually means failure to generate meaningful sales numbers. Ability to execute is key, and that usually means both previous experience with startups and strong sales and marketing skills somewhere on the founding team. We don't see a lot of second-time successful founders because once they're successful, they don't necessarily need our money for their second startup. When I invest, I try to understand whether the management team has good business common sense and the ability to sell. Sales is probably the most important single skill necessary to succeed. A lot of technical founders think they can just hire a chief marketing officer and chief revenue officer and expect them to sell, but that doesn't really work. A CEO really has to make early sales and stay heavily involved in both the marketing and sales processes until they create a repeatable process. Then they can turn it over and just look at the numbers.
What do founders like most about working with you?
I've done startups my whole career, so I can put myself in the founders' shoes. I know what it takes to go from a 2-person company to a 200-person company and from $0 to hundreds of millions in revenue and all the stages in between. I also have a strong technical background, so it's easier for technical software founders to be comfortable that I understand what they're doing.
What differentiates companies that you see at Screening versus those who make it through to Due Diligence?
The pitch is just a 10-minute presentation. It provides a very high-level overview of the company and the opportunity, but most pitches raise more questions than they answer. That's what we dig into in Due Diligence. We discover the real opportunity and assess the various risks.
What advice would you give founders who are starting to fundraise?
It's important that founders understand that angel investors need companies that can provide a 20-30x return. When founders first hear that, they might think it's greedy, but it's really just math. If you have a portfolio of 10 companies, most of your return will come from only one company. If that company only returns 10x, then as an investor, I would have been better off putting my money into a bank CD. That's why 10x isn't enough; we have to believe every company can generate a 20x return, or it doesn't make sense to invest. For example, if a startup has a $10 million post-money valuation, investors need to see a path to a $200 million valuation, considering future rounds and stock options. If you assume a 4x to 8x ARR multiple, the company needs to generate $25-50 million in ARR. Unrealistic financial projections generally turn off investors. Founders should also focus on the valuation at their next round. For example, if you've raised $10 million and want a $20 million valuation in the next round, you need to get to $3-5 million of ARR in less than 24 months, since you need six months to raise the next round. Those are some numbers to consider when putting together a pitch.
When you look at your past investments, what advice would you give founders to deliver a successful exit?
My expertise is in business-to-business software and SaaS, so this answer is specific to founders of software and SaaS companies. The most important skill is strong experience marketing a product, identifying potential customers, and turning those leads into sales. The founding team has to take full responsibility for the marketing and sales effort; they can't just hire marketing and salespeople and delegate. If they can't do that, they should think about bringing in a CEO with sales and marketing skills.
