Confessions of an Angel Investor

Yun-Fang Juan, an angel investor and a former FaceBook lead engineer learns a hard lesson about math.

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Yun-Fang Juan, Silicon Valley insider, angel investor and a former FaceBook lead engineer, has seen some questionable ideas turn into gold. You might have heard of them: Google, Facebook and WhatsApp.

The WhatsApp Lesson

Back in 2010, Yun-Fang Juan, a Silicon Valley insider and co-founder of Stealth Startup, was at a Mountain View taqueria with her husband Keith Chiem. The high-powered couple was sharing a meal with Brian Acton, a long-time friend, former Yahoo! colleague and best man at the couple’s wedding. Acton was working on a new messaging app on iOS that he said he could turn into a billion dollar business. The new app had a couple thousand users, a steadily growing user base, and the company wanted to hire more engineers. Acton was trying to recruit Chiem, and Chiem was interested. But with a background in statistics, Juan ran the numbers—doing a back-of-the-envelope analysis. Maybe Acton would be able to build a $100 million company, but she gave his chance of turning it into a billion company a multiple of 0.1%. After taxes, she estimated, her husband’s equity in the company might be one or two million dollars.

Now that might sound like a lot of money to most of us, but Juan who had worked at Yahoo! and Facebook and her husband had already cleaned up with Yahoo! stock and would do so with FaceBook holdings. So Juan told her husband: “If you want to work with Brian because he is a brilliant guy, do it. But it makes no sense to do it for the financial rewards.”

Juan’s husband passed on the offer.

Two months ago, Acton’s little messaging app, WhatsApp, sold to Facebook for $19 billion.

Juan called it an “expensive and humbling lesson.” It reminded her of times in the past when she had seen other business models with what at the time seemed to be limited potential—that is until they went on to become multi-billion dollar companies.

The Google Lesson 

Back in 2001, Juan was as a young software engineer at Yahoo! Search. Yahoo had decided, logically (with the information available at the time) that monetizing search was not worth the investment. So they signed a web distribution deal with Google. Google at the time was either really smart or really dumb. They were sinking money into servers and acquiring bandwith for a business that seemed like a loser, a business that only made money from cheesy banner ads at the top of search results.

Along came GoTo.com later known as Overture. [Incidentally, GoTo.com was started by one of the superachievers in our book, IdeaLab’s Bill Gross. For more on the GoTo story go to Chapter 33 “How to Start a Start-Up” in our book.] How’s this for an idea: Allow advertisers to bid to have their ads ranked at the top of search results? Google adopted the technology that Juan calls“the most lucrative business model in the history of Internet: Sponsored search.” Yahoo! went on a desperate buying frenzy to catch up. They spent cash like drunken sailors to buy search companies Inktomi, Alta Vista, AllTheWeb and Overture. But it was over. Google had already won. Their advertising revenue went from $67 million in 2001 to over $50 billion in 2013.

The FaceBook Lesson

In 2006, Juan felt she needed a change so she joined Facebook. Really, that’s the only reason she did it except that she also liked the people who worked there because they were hardworking and smart. But Juan didn’t have a lot of hope for Facebook, believing that, “This college social network thing sounds like a really bad idea.” Pictures of drunken people and pokes? Juan didn’t get it. She figured MySpace would bury them and they’d soon join Friendster in the social network graveyard. But Juan watched as FaceBook made some genius moves:  Allowing anyone to sign up; adding a News Feed; creating a platform so that developers could write applications using users’ friend connections.

According to Juan, a niche college social network never should have become a public utility with over a billion daily users, but it did. Who could have guessed? Not Juan. With her holdings she felt like she “won the lottery,” Why? She says, “Dumb luck.”

Giving Back

“A lot of wealth has been created in Silicon Valley. That wealth can cause guilt and a feeling of ‘I don’t deserve it,’” said Juan, who left FaceBook three years ago. “We got a lot of value out of the system,” she says, “and now we feel an obligation to give back.”

Since then Juan has become an ardent angel investor. Angel investors are a critical resource in the tech sector ecosystem. Once a startup has exhausted seed funding from family and friends, if the company is not yet big enough, venture capital firms won’t give them money. That’s where the angels come in. In 2010, angel investments equaled nearly all of venture capital combined: $20 billion vs. $23 billion. And angels invest in many more companies—61,900 companies versus 1,012 for venture capital firms in 2010.

The Metric that Matters Most

Juan told us that WhatsApp’s success (and her misread of it) has only strengthened her belief in angel investing. The experience reaffirmed something that she has observed since embarking on her Silicon Valley career at Yahoo! over a dozen years ago. What she’s learned is that it’s really hard, if not impossible, to use a data-driven approach to angel investing. Business models that seem to be headed nowhere, take off, and companies with all the advantages like Yahoo!, can completely miss the boat.

“There’s no way I could have recognized that WhatsApp would become a $19 billion company,” she says. “The signal to noise ratio is too low.”

Instead, Juan has found another metric of success. It’s something that Google, FaceBook and WhatsApp had in common from the start. People. Smart people. Hardworking people. People who will doggedly stick with their startup even when there seems no way forward.

“When making an investment, the single most important question to ask is: ‘Who is working on this?’” says Juan. “It’s like horse racing: Bet on the jockey, not the horse.”

But there is more to the people metric than how brilliant they are.

“Smart people are in demand. Smart people can write their ticket to work anywhere. So some people get distracted and are always looking for other opportunities. They become jaded, get exhausted and quit after 6 mos. In order to invest I want to know: ‘Are they going to keep their passion?’ ‘Are they going to stick it out for two years?’“

And finally, when it comes to people, Juan is a firm believer in the multiplier effect. “I haven’t seen a lot of successful startups with a single founder,” she says. “Without a cofounder it’s easier to quit. You need cofounders as brilliant as you. One smart person is not enough.”

The Ugly Duckling

Juan has invested in over two dozen companies and reviews over a hundred proposals a year. “I had no idea founding a company was so hard, starting from zero with tech operations, acquiring users, sales organization, customer support. It takes a lot of heavy lifting in the beginning to launch a product with a small amount of equity. It’s a race and a lot of people drop out. Only .1 percent really go big. The surest way for a startup to fail though is to quit.”

But as an angel investor, Juan remains hopeful: “The ugly duckling I stumbled on a few months after the first launch, can, in a few years, become a beautiful swan.”

A version of this story first appeared in Fast Company here.

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