The Future of Angel Investing with NYA Chair Cindy Cook and David S. Rose, Chairman Emeritus

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Today on this special New York Angels edition of the Angel Nest, board chair Cindy Cook joins me to interview the founder of the New York Angels, David S. Rose. He’s updated his famous book, Angel Investing, The Gust Guide to Making Money and Having Fun in Startups. We’ll learn what’s new and how angel investing has changed since he came to be known as the father of angel investing in New York.

Welcome back. I’m David Hemingway. I’m a member of the New York Angels where we fund and mentor great young companies.

Cindy Cook is our board chair. Cindy, it’s great to have you back. Thanks.

Great to be here. We welcome David S. Rose once again to these microphones. We’ve spoken before in the Angel Nest, of course, but never strictly about the New York Angels and his Angel Investing book.

So I’m really looking forward to this with both the original and current leaders here of the New York Angels. It’s a wonderful opportunity to explore how N.Y.A. and angel investing have evolved over the years. So thanks to you both.

Our pleasure. So, Cindy, when you started angel investing, were you influenced by David Rose’s example? Yes. Actually, I had no idea what angel investing was.

I came from corporate marketing and I really wasn’t at all actively involved in the investments I made personally. So when I considered doing this, seeing David’s book and reading his book was really foundational to even understanding what angel investing was and how to approach it. Yeah.

So it’s changed so much, of course. David, what would you say has changed the most about angel investing since you’ve been doing it? It is fascinating how fast the world is moving. One of the things that we talk about frequently is the exponential growth of technology and how that in turn is changing all of society and everything we do based on technology that’s available.

And so things today like angel investing, if you are a kid coming out of school, you’re a bright eyed young entrepreneur, as far as you’re concerned, angels have been around forever. Angel investing, this is the way companies get funded. But in reality, when we started New York Angels, it was not an industry.

Nobody had ever heard about it. I mean, the very first angel groups realistically were started in the 1990s and they didn’t really get professionalized until we were really one of the very first professional angel groups, along with Band of Angels and Common Angels in Boston, to actually take a ragtag frontier universe of people throwing money at startups willy-nilly and turning it into a professional thing. And that was in the 2000s.

So we’re only talking about an entire industry that has officially come of age within the last 20 to 30 years. Although, I must say, I’m actually a third generation angel investor. And my great uncle, after whom I was named, the first David Rose, was the angel investor behind the portable kidney dialysis unit, vascular stapling, hyperbaric operating chambers, concrete boats, through the wall air conditioners, all that kind of stuff.

And that was in the 1950s and 60s. But back then, everybody thought he was like nuts. And when I went, I found his stories fascinating.

I would love to have lunch with him and hear these things. And everybody thought literally I was like, there was a senile crazy old guy who was like doing this weird stuff. And why are you talking to him? That kind of stuff, right? But now, New York Angels has been really instrumental as one of the major groups in making this a mainstream thing.

But to get back to your question, what has changed in the last 30 years since we started is it has gone from a random part-time activity with barely a name to a serious way of funding that is expected to be the way that you fund a high growth startup company on the founder side and as a known asset class that people can invest in on the investor side. So, Cindy, I’m betting that the array of companies that we have to choose from now is much bigger than it was when David started New York Angels, and maybe even bigger than it was a few years ago. Yeah, I mean, it has been steadily growing.

We see about 100 applications a month come in, and you’re right. There are really broad range of things from technology to med tech to B2B SaaS to consumer, and a lot of AI, an awful lot of AI. So, we are seeing, I think we’re on the pulse of what’s new and what’s happening.

And I think that’s one of the exciting things, which was probably true from the very start, but that we are on the pulse of things that are new and happening and people who are looking to do things differently. Well, one fascinating thing is that founders often say, or investors say, what’s the next big area? What’s the next thing I should do or I should invest in? And my response to all of them is that anything, I mean, literally, if 20 years ago we had said, oh, the cool thing to invest in is taxi dispatch software, you would have said, what are you talking about, right? No, it’s not that. It’s actually software to let you rent out your spare bedroom.

So, whether you’re talking about Uber or you’re talking about Airbnb or you’re talking about a bookstore, I mean, just think of the biggest, highest flying companies that we are looking at now, and they happen to be applying technology and interesting new business models and things that you can do today to virtually anything. Right. And one of the things about COVID that has changed the game is that now we see companies from all over the world.

And when you started, David, it was the New York Angels. Oh, it was very much New York Angels, although we’ve always been sort of eclectic in where we’ve invested. But the interesting thing about that is I do a fair amount of international speaking and traveling to angel groups around the world.

EBON, the European Business Angel Association, named me Angel Inspirator of the Year, whatever that means. But what’s fascinating is we’re seeing a lot of companies, but in terms of cross-border investing, I don’t think we’re actually investing in companies outside the U.S. We’re investing in companies that are coming into the U.S. that have been successful elsewhere, established a U.S. entity, and we invest in that. But cross-border investing has always been a challenge, a little bit more interesting now, but it’s still not a mainstream thing.

I agree with that. I think that’s because the companies have to come to the U.S., right? They have to come to the U.S. and sort of legally and for accounting and other things. It’s just much harder to do it if it’s not a U.S.-based company.

So that is certainly true. One thing David said, though, that I think rings true from the examples he gave is that you have to invest in the founder because so many things are going to pivot. And that is the case now that we’re seeing companies, some are with their original premise, and many of them pivot one or two times until something really happens.

And so that’s the other part of it that I think there’s a lot of change, but a lot of things have stayed constant that you really need to be investing in the founder. And a good idea only goes so far. I think you’ll have a great founder and an okay idea and not a great idea and an okay founder.

So that still holds true. We call it betting the jockey, not the horse. Right.

What are some of the other criteria, David, that may have changed since you started angel investing? It’s interesting. I mean, I have a very clear hierarchy. And somebody asked a question on Facebook or LinkedIn recently.

And, you know, what are the most important things you look for in a startup founder? And they’re going through all these things. And I’m looking at this and I’m reading. And my eyes are wide because to me, the first, most absolutely essential, number one, most important thing is integrity.

Because when you’re talking about investing in a founder, they’re building something that doesn’t yet exist. That’s why we make the money. That’s why I invest.

And so for them to be creating something out of somewhere, if you can’t trust the person who’s doing this because they have to make decisions every minute of every day of every week. And if you can’t totally trust them, then you don’t know whether they’re making decisions for them or for the company or whatever is. And it’s not just a pure business decision.

So integrity is the number one thing. Second thing I found in and this goes to the definition of the entrepreneur, capital T, capital E. And that’s what Cindy was saying. You’re betting on the founder.

And it’s the founder. It’s not just a combination of skill sets, right, of, you know, how to build a product or code or you understand technology or you’re a salesperson or whatever. The entrepreneur is somebody who has a very special mindset, which is this weird, abnormal, you know, you know, thing that drives you to create a company and pushes you through all of the sturm und drang that exists along the way to getting it going.

And that’s one of the biggest and one of the things there is passion, by the way. So every entrepreneur that I know of was passionate about what they were doing, not necessarily the technology, the market, but about the business they were building. And if you don’t have that kind of passion, you will never have the drive and the energy and the stick-to-itiveness to get through what you’re trying to do.

So for me, you know, integrity and passion. And then you have all the things like domain experience and expertise and so on and so forth. One of the hard things about investing in new technologies is there often aren’t a lot of people with the domain expertise, right? Because they’re kind of inventing a new model.

Well, but domain expertise is not the technology necessarily, right? Unless you’re doing a very pure heavy-duty, you know, hard tech, you know, chip design or something. Domain expertise to us means the market domain, the domain in which you are selling. You know, one of the examples that I joke about with founders is, you know, somebody comes to me and says, oh, I got this great idea for a new apartment building in Manhattan.

And boy, have I got it nailed. It’s in the middle of 842 acres of parkland. It’s got amazing views of the skyline.

There’s a lake right in front of it. You know, there’s a reason that nobody has built an apartment building in the middle of Central Park before, right? But if you don’t know about real estate, you don’t know that, right? And so people who come in and say, hey, all those people in industry X have no idea what they’re doing. I’m from the outside and I have a great idea why they’re all doing it wrong.

That usually doesn’t work. I would much rather have somebody who says, I have been in this industry for the last 20 years. I have been seeing this real challenge.

And oh, I see a problem and I see a solution over here. And because I know the market, I know the industry, I know the challenges, that’s why I can create an answer to that. And that’s really, so that’s what we mean by domain expertise.

I feel like one of the other things that may have changed in the last few years is our relationship to other investors, right? Now there are more VCs in our space now, and there’s kind of a blurring of the lines. So yes, there is definitely more activity in early stage investing. And what we’ve become even more active in is to look to build relationships across the ecosystem.

So that means accelerators like Techstars or Plug and Play. That means other angel groups. David mentioned Band of Angels and TechCoast Angels and New World Angels, you know, across the country.

So we have gotten more active in connecting with other angel groups with the goal of seeing better and better deals and better founders. So we are working more across the ecosystem to find not so much the VCs, but more other angel groups and accelerators to be more connected to. But Cindy makes a very good point, which is, and you raised that the, you know, we’re seeing more and more VCs here.

But that’s because when we started, when New York Angels started, there was no such thing as a seed VC. These typical venture capital would start at series A. And a series A, you know, for a company would typically mean you’ve got product market fit or you’re close to it, you’ve got an operating company, you’ve got revenue, maybe you’re, you know, borderline profitable at that point. And a VC would come in and put in millions of dollars.

And the problem was, you know, because back in the day, you’d have a business plan and it would take millions of dollars to get going. And so that had to come from VCs because nobody wrote that kind of check. But over from the dot-com boom on, all of a sudden, it became possible to start a company with less money than millions of bucks out of the box.

But these VCs were all set up to invest millions of bucks into a few companies. And that’s why there was nothing at the end. So one of the very, very earliest of the seed VCs actually came out of New York Angels.

It was first round capital, which is on every, you know, Midas list as one of the top, whatever, five, 10, 15 VCs consistently since they were founded. And Josh Koppelman and Howard Morgan, who founded it, were both board members of New York Angels back in the early days. And so they figured that there was a market for an interstitial fund, for a VC fund to invest it just over where the Angels would invest.

And they, and Charles River Ventures and a couple of others, were the very first of the seed funds. Now you’ve gone completely the opposite way. If you’re starting a venture fund today, the odds are you’re starting a seed fund with, and there are a number of platforms, VC Lab and others, that are training almost random people with domain expertise to be a VC.

And they are spitting out literally hundreds of seed stage VCs every year. And those are interesting co-investors for us. But as Cindy said, you know, we are typically the first stop, one of the first stops, and you know, playing in a much larger ecosystem with accelerators who didn’t exist, by the way, when we started.

There were, you know, Y Combinator was founded after us and they were the first accelerator. So the industry has changed quite a bit. So I have a question about that.

Now, with all of the support for entrepreneurs and all the ecosystems, not only all over the country, but all over the world, and so many applications coming in and so many entrepreneurs, is it easier or is it harder to pick winners than it was when you started? Picking winners for an Angel is almost impossible. You know, I love it when we have a new bright-eyed and bushy-tailed Angel who comes in and says, oh, yeah, I’m really ready to invest, but I really only want to invest in the good companies. You know.

The ones that are going to be unicorns. I only want to invest in unicorns. Well, that’s great.

We’d love to invest in unicorns too. Finding a new unicorn is the tricky piece, right? And so the earlier you invest, obviously, you know, the tougher it is. And that’s one of the real challenges with the economics of this space.

And that’s why a majority, the vast majority, vast majority of all startups fail. And the ones, the majority of ones that get Angel financing fail. And the majority of ones that get VC financing fail.

So if your goal is to hit Apple or Uber, you know, and there are, you know, 300,000 companies that get started up a year or whatever, high-growth companies, you know, good luck getting into, you know, Apple if they want. So, you know, a large part of it is faith. You try and do some experience testing.

You try and figure out, you know, not to be locked in and bound so you don’t miss something that’s really interesting. But, you know, is this entrepreneur, you know, are they straight? Are they passionate? Is this an area that really has a challenge that this is solving? Is the business that would result out of this a scalable business? Often we see products and there was like things on Shark Tank. You see cool products I’d love to have, but it’s not a business.

We’ve seen a lot of those. Whereas if you want a business that as it gets bigger, it gets better and its costs get cheaper and it makes more profit and that’s a scalable business. And so finding a business with a passionate entrepreneur that’s solving a new problem with a potentially enormous market that gets bigger as it gets better, ain’t so easy.

Yeah. It’s hard to find things that are scalable. There’s always a market for something and people say, oh, well, people are buying it.

Well, you have to make sure they’re going to be enough of those people, you know, and you’re going to be able to grow them over time. And when we’re talking about how you look at them and David mentioned a couple of times domain expertise. I mean, that is one of our big advantages at New York Angels over the 140 members.

We have a tremendous amount of domain expertise and even areas like AI, we have a number of members, some newer members actually, who are very active in the AI space. So they can really opine and contribute when we’re looking at companies. And we see so many now that have AI in their name or AI in the first thing they tell us.

And we’re getting smarter by the day of kind of understanding which ones really have AI, how meaningful is it with that AI and how much others can copy that AI easily given all the tools out there. And that’s the other thing we’re seeing is companies are going to need less people to develop because of all the AI tools and things that are out there. So there’ll be smaller teams who are able to stand things up, but then there’ll be more of them for us to sort through.

So it’s a, you know, a double-edged sword there. There’ll be less people doing it and but we’ll have to, you know, but as I say, that’s one of the exciting parts. We’re getting smarter by the day and many are using being angel members to use their skills and bring things in from either jobs they have, jobs they’ve had or, you know, general market experience.

That really brings me to something about angel investing that I see more and more and the more of these episodes that we do and the more founders we talk to, more investors we talk to, the clearer it is, which is that while we all are in this hoping for a great return, we’re not only in this for the money because so much of it is being a part of this incredible ecosystem and helping founders realize their dreams and being involved and making a contribution. And David, no one’s done more of that than you. Well, but that’s why my book, you know, the title is Angel Investing and the subtitle is the Guest Guide to Making Money and Having Fun Investing in Startups, right? And so- In that order? Oh, absolutely.

Absolutely. Specifically, right? And I’ll tell you why. Because if you don’t go in saying, this is about making money, you’re screwed.

I mean, I don’t care how altruistic you are, how wonderful it is. If you’re helping to get a business started, a business definitionally is based on making money. If a business doesn’t make money, it goes bankrupt, right? If you don’t want to make money, but just want to save the world, great, start a charity, give to a charity, right? Be a not-for-profit.

That’s the whole point of that. But if you’re talking about a business, investing in it, starting it, the essence of a business is making money. So you first and foremost have to go in saying, okay, if this is going to exist, it has to make money.

Number one, first, that’s why it’s first in the title. But as you pointed out, because the vast majority of companies in general and the vast majority of companies we invest in don’t make money. And matter of fact, they lose money.

Matter of fact, they go out of business and crash and burn. There better be something else in there because if you were just doing it to make money, there are a lot easier ways in the world to make money than being an angel investor, like pick any other one. So whether you’re talking about clipping coupons or private equity or stocks, bonds, whatever, right? So this is really a tough way to make money.

But that’s where the second half of the subtitle comes in. Because for those of us who do this, and the three of us have all been doing this for a while, it is an enormous amount of fun. And it’s not fun like going to a roller coaster.

It’s fun like working with people. To me, the idea of mentoring and seeing other people like me, younger versions of me, people who have aspirations and energy and are entrepreneurial and see a vision to change the world, and being able to help them and take the experience that we have and share it, that really is priceless. And that’s where the fun part comes in.

I often say that New York Angels was my MBA. I started my first company right out of college, so I skipped grad school. And New York Angels made up for that.

So I have a friend I brought into New York Angels, and he’s about four years in. And he said he’s there to make money and have fun. And after four years, he’s happy to report that he’s about halfway there.

I don’t know if I want to ask what half. David, tell us what else is new in the updated version of your book. It was really interesting.

I started writing it, and I thought that typically for a second edition, you’ll update 10% to 20% that are clearly references to books that now are in second editions or new books that I wanted to point people to and so on and so forth. But as I started rewriting it, I realized that holy moly, AI has completely changed the world. I mean, it is absolutely fascinating because everything that a company is doing now, as Cindy pointed out, whatever company you’re doing has to be based on AI.

And AI in our universe, in the world of Angels and people who are in tech and looking at new stuff, we all take it for granted. I mean, we all probably use, you know, ChatGPT or Cloud or Gemini, you know, several times a day to answer everything from what should I have for breakfast to, you know, how do I get to wherever I’m going, anything, right? The things you used to ask Google, but now, you know, you have your assistant doing it and a lot more. What’s fascinating is that if you’re an entrepreneur starting a business, you are using AI for literally all the things you would bring on a team for.

You need a CTO, you need a CMO, you want to do a market analysis of X, Y, or Z, you want to figure out how to structure things, boom, boom, boom, three and a half seconds, hit it, and away you go with something that would be better than typically you would bring on, you know, whatever you could afford, a kid out of school to be your CMO or something with no real background, but now you have all the wisdom of the world in AI doing it, and so it required a pretty serious rewrite. The metrics sort of stay the same in terms of what we’re investing in, how many companies fail, but as you pointed out before, David, we have a real acceleration and a compression in the speed with which things are happening. It used to take a long time to build a company.

I mean, now it takes such a short time. By the time you turn your head, the company is here or gone. It’s either a unicorn or it’s out of business, and so that affects how we look at companies and how you analyze it in due diligence on a company.

We don’t invest in ideas, and angels rarely, rarely invest in ideas because there are a gazillion ideas out there. You’re investing in execution, and today, with the rapid access to markets, to materials, to inputs, to the tools to make a company go via AI, to people, you know, there is so much access and everything is so connected that there is a wonderful, wonderful science fiction story called Slow Tuesday Night by R.A. Lafferty that has been on my mandatory reading list for founders and my Singularity University classes for 15, 20 years, and it’s a short story about a world in which scientists have figured out how to take out the little piece in your brain that makes you move slowly, and everything now moves at warp speed, so people live a life, but, you know, businesses go up and down, and, you know, two or three times a day, you can go bankrupt and make a fortune, and yet, you know, and so within 24 hours, life is happening at this insane pace, and we are rapidly approaching that. I have to ask you both about the future of angel investing.

Well, I think the future, you know, is bright. I mean, I think there is so much new going on, and there is so many, you know, sort of potential, as David said, the rate of change is increasing, so I think there’s so many opportunities to invest in early stage companies and great founders, and people are really enthusiastic. I feel like since I joined in 2018, the crowd, the fellow, my fellow angels have become even more enthusiastic about investing.

Seems like there’s more and more opportunity. I feel there’s more opportunity. I think more people are involved with the deals.

I feel the diligence has improved. We have more expertise, as I said, against the diligence, and I feel like people are really see it as another asset class. I mean, it’s another way to invest, and they, you know, have read David’s book and know that you need to put a number of bets on the table, so people are, you know, understanding, if not happy with the idea that no one person is a your crowd, you have to be willing, you individually, to put down a number of bets.

David Boaz So it is very interesting, because I believed back then, when I started this thing, and I believe even more so now, that angel investing really is the future, right? On the one hand, technology is exploding exponentially, and we as a society have not yet grokked that. We really, regular, rational people don’t understand what exponential growth means. We’re all best when the next three to five years, we’re going to have artificial general intelligence.

You’ll have, you know, infinite life expectancy within seven to ten years, according to Ray Kurzweil. You’ll have the singularity within less than 20 years, 2045, and all bets are off. And so, what that means is our society is changing, and everything, every business is up for grabs, and people now, with entrepreneurship and books and everything else, and tutorials and training, can see how to change things.

And so, angel investing, at the earliest stages, I think, is going to be fundamental to how this world gets changed. Reid Hoffman wrote a new forward for the new edition of the book, and he points out that this is absolutely fundamental to the future of development. Deirdre McCloskey That’s fabulous.

Let’s just hope that when all of the positions get eliminated from AI, that our companies still have enough consumers. David Boaz Well, that gets into the economics of exponential growth, which probably is the subject of another podcast, because it’s a little long to go into here. But the answer is, AI is eliminating jobs, absolutely.

And if anybody doesn’t think that’s happening, they should have a reset. I think I have on record as saying, you’ll have 75% economic unemployment within the next 10 years, which is very, very scary, right? But what that means is it’s not that we’re not creating things. AI and technology will be creating more and more things, more cars, more food, more houses.

More value is being created, but fewer humans are creating it. And so therefore, what you have to do is effectively figure out a way by society to take the value that’s being created by technology and spread it across the human population. And whether that’s guaranteed income or something else, and I believe we will get there.

It’s the only way. I think it’s inevitable, and I think you will see people, the world over the next 10 to 20 years changing dramatically. And I believe, because I’m an optimist, for the better.

There’ll be room for more and more angel investors, right? Yeah, absolutely. There’s going to be more and more and more. Absolutely.

I mean, frankly, the whole purpose behind Gust was to figure out how to get everybody of a certain income level or whatever it is around the world to do it. So instead of having 100 people in the country who do this weird thing, like my great uncle, to have let everybody do this, not on a crowdfunding basis, but everybody on a mass affluent basis, be able to take their experience and their willingness to gamble, which is what part of this is, and help to fund these new things and change the world. Cindy Cook, board chair at New York Angels.

Thanks so much for joining us. Thank you, David. And David S. Rose, the father of angel investing, founder of the New York Angels.

Thank you for doing that, or we probably wouldn’t be sitting here today. Oh, it’s my pleasure. I mean, basically making money and having fun, been successful in the making money side relative to some of these angel investors, some people you’ve had in here and on the podcast of New York Angels, big hit companies.

But more than that, for, you know, 25 years now, right? Whatever is close to that. We’ve had the pleasure, you know, that’s how I met Cindy. That’s how I met, you know, the 100, we have 140 members and they’re good people and they’re people, all of whom are doing this to give back, to help nurture and to get into the excitement of this new world.

And that’s a lot of fun. Excellent. And you can get in touch and learn more about becoming a member of the New York Angels or apply for funding for your startup at newyorkangels.com. You can hear more episodes of this podcast at theangelnest.com, where you can also reach me if you know of an interesting company or a topic we should talk about.

We produce the Angel Nest with help from Rob Higley. And today it’s Charles DiMantebello back at the controls of CDM studios in the historic Art Deco Film Center building, just West of Times Square in New York. I’m David Hemingway.

Thanks for listening. And here’s hoping my fellow angels and the founders they support find their next great venture. So long until next time.