Series Tea

May 5, 2020

Brad Flora:
Angel Investing In Global Markets

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Brad Flora: Angel Investing In Global Markets
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This week we’re having tea with Brad Flora, a Visiting Partner at Y Combinator. Prior to YC, Brad founded and sold Perfect Audience, an online advertising startup. He’s an active angel investor and has invested in 150 startups around the globe.

In this episode, Brad shares:

    Highlights from Series Tea with Brad Flora

    This interview has been lightly edited for length and clarity.

    You studied English and then did a Masters in Journalism. How do you go from that to starting a startup?

    It was either the CIA or journalism for me.

    You thought you’d be a spy?

    I thought I’d either be a spy or a journalist. Ultimately it came down to me realizing that I was more of a blabber mouth than a secret keeper.

    I decided to go to journalism school. While I was there I started building websites, trying to figure out what news and information could and should look like online. So Windy Citizen was crowdsourced, community-driven, kind of like a Reddit.

    This was your first startup?

    Yeah, this was my first company. It was a bootstrapped product, basically like Reddit just for Chicago. This was before all the subreddits really took off, which happened after Digg collapsed. We had 100,000 local people reading news and sharing links to cool things happening around the city. I ended up having to figure out, “How do you monetize an audience like that?” which led to my interest in online advertising.

    I spent a year showing up at newspapers around the country with a deck and news of great click-through rates. I was able to sign the Chicago Tribune, the Houston Chronicle, a bunch of newspapers to pay me $3-$5K a month for a SaaS product that would make these trafficable widgets that they could run through their ad platforms. I applied to Y Combinator for Summer ’11 with that.

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    We could keep talking about this all day but I want to change subjects a little bit. Tell us a book that you’ve read that has changed your way of thinking.

    A couple years ago the movie Ready Player One came out. I really liked the movie and thought, “Oh I’ll read the book.”

    The book was really interesting. It’s kind of like, “Snow Crash for Dummies”.

    That’s harsh. I think it’s a much more entertaining read than Snow Crash.

    It was very entertaining. But I thought it was interesting that in this weird dystopian future of Ready Player One, everyone lives very simply, they dress very simply, everything comes to them through the mail, and everything is interchangeable.

    When they’re in the game world, everything is interchangeable, and very ephemeral. All their possessions are coming and going. It was the idea of, “Oh, in the future we will own a lot fewer of the things that we’re interacting with. Maybe it’ll be renting, maybe it’ll look like something else, other models of ownership.” That led to me investing in Feather, which does furniture rental as a service.

    You sold your startup in 2014. Did you start investing right away? How did you get started?

    I started investing about a year after I sold my startup. I would go to YC Demo Day and listen to all the pitches. I was writing the smallest checks that I thought people would take at the time — 5K, $10K, $15K. I wanted to learn, and be involved, and get better at angel investing.

    I find that often investors make the sickest picks right at the start. Did you find a really great company?

    I feel like every angel investor has a couple people that really help them get into it. For me that was Tikhon from Parse. He told me about Razorpay and I liked their pitch. They’re building a really promising company. I think it started as Stripe for India, but now they’re doing so much more than that.

    That actually ties into global investments. You were one of the first investors that went super heavy into making a lot of global bets. Was that the trigger?

    I started raising a microfund for each YC batch using AngelList. The Winter ’17 batch was the first one that I did that for. That batch in particular had a slew of really strong companies building products in Africa, and India, and Latin America.

    This is after Rappi came through. But still there was always this feeling, “Are these going to be big companies? Is it risky to invest?”

    Tons of investors, now but definitely back then, had a thesis that they would not do anything outside the U.S.

    But in that demo day, there was a company making a new smoothie machine for the office. Right after it was a company building a new cable provider for Nigeria.

    If both of those companies are a hundred percent successful, one of them is going to be Comcast for the continent. The other is still going to be working in the kitchens at startup offices.

    So the opportunities seemed bigger?

    Yes. I raised half a million dollars to put to work in the Summer ’17 batch. Three of the investments that I made are up 7x or 8x over where we invested in them at. I ran funds for the U.S. focused companies too, but the international stuff has been exploding.

    I’ve noticed to be an international company and get in YC, the metrics are bigger. These companies often are further along.

    In general, there’s certainly a filter on ambition, desire, and just how bad people want to be successful. A lot of people want to do a startup for social reasons, stylistic reasons. But if you’re going to travel across the globe, uproot your life for even three months, and raise money from strangers, those are people that want it.

    I’m an investor in Rappi. They really think that someone else will take this opportunity. They have to grow as fast as freaking possible. Their hunger is kind of intimidating.

    And structurally, just being able to come to the U.S., do Y Combinator, raise a ton of money from U.S. investors, and then take that back somewhere else.

    You think that’s a major advantage?

    Yeah, absolutely. Major. Your network has grown, your understanding of things has grown. Your willpower and will to win has grown.

    Is there a mindset arbitrage as well? Like there’s a Silicon Valley mindset that they take back with them?

    If you go back into the early days of Razorpay… I love doing this by the way, if there’s a startup that you’re really impressed by today, go find their blog, go find their Twitter account. Go back to the early days and look at how they were presenting themselves then. It can be so encouraging.

    Because they sound like noobs?

    Yeah, they sound like noobs. GitHub’s a great example. Or Coinbase. I remember they had this big, long blog post early on, “We keep your Bitcoin in this closet with a really good lock on it.” At the time that was a top post on Hacker News, and now that’s a giant company. But those are the things that they were dealing with then.

    If you look at Razorpay’s early stuff, they had done so well at Demo Day that they went back to India and were able to get a beautiful office and hire all these people. If they’d stayed in San Francisco, they’d have a tiny little condo somewhere. There’s a financial arbitrage thing going on there too.

    Is there a country or region where you think, “There are great opportunities, there should be more investments.”

    The stuff that’s most exciting right now, but I don’t know if a window is closing, are the Latin America opportunities.

    I mean, SoftBank just raised a $5 billion fund.

    Right, you see the valuations going up. It’s not cheap anymore. There’s not an arbitrage thing.

    The companies raising in Africa, there are still not as many established players to lead the A, to lead the B, which has a downward effect on caps and prices when you’re investing at the angel stage. That said, even this last 12 months that’s changing. A bunch of companies I invested in years ago are now raising price rounds from funds that didn’t even exist years ago.

    When these global companies are going to the A and B, are they doing local funds or mostly coming back to Silicon Valley?

    It’s all over the place. A lot of them come back and talk to the folks. Half of that is level-setting.

    It’s a great question about fundraising in general. There’s a company talking to mostly Texas-based VCs, because they’re based in Texas. But they still want to talk to the VCs in California because it’s a great opportunity to practice your story, to get feedback on the pitch.

    But is it 50% that get done in Silicon Valley versus outside? Or is it more like 80% get done in the local region?

    I’m seeing most of them happen with local funds that are focusing on the new opportunities over there.

    When a company says ,“We’re building X for this country.” Do those companies, when they come to Silicon Valley, do better? Does that pitch resonate better?

    It depends on how much the founders buy into the mental construct itself. If the founder literally thinks that they’re building Postmates for Latin America, or Twilio for Africa, that’s a problem.

    Oh, that’s a problem?

    Yeah, because it’s a different market. There are different needs.

    Yeah, because it’s a different market. There are different needs.

    I’m skeptical of that. It’s a really useful construct for communicating with investors, communicating with people you’re hiring. So long as there’s also this extra level of sophistication. Things have to be a little different.

    There needs to be a “but.”

    We can’t just do SMS for Africa, because that’s not necessarily what they need there. Rappi does a whole bunch of stuff. It’s not just a literal adaptation of the idea.

    Let’s say you feel like you can get a seed round, you come to Silicon Valley. Can you get that done without being at YC or some other accelerator to introduce you to the network?

    I meet with a lot of early stage companies inside/outside YC. It’s not so much about the metrics so much as, “Is there a good founder-market fit? Does it seem like these founders are a good fit for this thing that they’re going after? Can I see them working on this for a long time? Can I see their passion growing for this as hopefully it gets more interesting and complicated?”

    And are they earnestly trying to prove out the basic hypothesis, or disprove the hypothesis of the business? Or does it feel like it’s startup kabuki, and they thought this was a good idea, or someone suggested it to them, and they’re kind of playing at startup. Those are kind of my first pass filters that I look for.

    Do you think the metrics required for the exact same company in the U.S. versus in a global startup are slightly higher?

    I think it shouldn’t matter, but I think it does. If you’re an investor based in the Bay Area and you’re talking to a company that is going to be focused on Mexico as their initial market, you don’t know that much about that market.

    The founders have to be that much more impressive. The attraction has to be that much more detailed and impressive, because you’re not going to feel the same familiarity with the market.

    So you did this investing thing, then you joined YC as a Visiting Partner. How different is that?

    As an angel investor going to Demo Day, your job is to hear pitches, identify the best ones, and invest in those. You’re totally a front-runner, bandwagon type person. Whereas YC, you invest in all these companies and no matter what, we work with them.

    So alignment is a bit better.

    Yeah. I’m not just in it to win it. I’m in it, we’ve already made the commitment. Now let’s find out what’s really going on with this company. The application’s imperfect, the interview process isn’t perfect, and let’s help you figure out how to get to the next milestone.

    What’s the one bit of value that YC provides now that they didn’t do when you went through?

    The group office hours are pretty amazing.

    What is the structure for group office hours? I’ve actually never done it either. Back in ’09 they had nothing.

    It’s a handful of companies that are in a small group, and they meet every couple of weeks.

    You get to know about what the other companies are going through, but also how the partners talk to the other companies about what they’re going through. I can see the scales falling from people’s eyes as they realize, “Oh my gosh, they have the same problem I have, I’ll go talk to them about that.”

    It’s also like a competitive process, right? They’re like, “Oh, that person was this far ahead. I really need to work harder.”

    I know I felt some of that when I did YC. It’s easy to get lured into a competitive feeling, but that doesn’t yield great outcomes in the big picture.

    I don’t know. I probably can’t think of one founder that’s not competitive.

    But competitive in their market. Absolutely the best founders are competitors. They compete hard, but it’s targeted. It’s targeted competition.

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