Catch the full episode: https://www.wealthformula.com/podcast/280-angel-investing-and-shiny-objects/
Buck: Welcome back to show everybody. Today my guest on Wealth Formula podcast is Jonathan Hung. Jonathan is a co-managing partner of East West Ventures. He’s an angel investor and venture capital partner who believes in a bright future for businesses seeking to broaden their horizons in North America and Asia. And so part of that mission, he serves as co managing partner as he talked about Unicorn Venture Partners and a senior venture partner and head of Due Diligence at Expert Dojo, providing a hands-on approach supporting companies by offering a strategic expertise and operations management. Jonathan has a lot of degrees and a lot of schools, one of the University of Southern California, London School of Economics, MIT, and the Wharton School at the University of Pennsylvania. Jonathan, welcome to the program.
Jonathan: Thank you, Buck. Yeah. Happy to be here.
Buck: Yeah. There’s probably the only podcast you’re going to do where people will be like, yeah, I’ve been there. I’ve been there with all those schools, with all these doctors and stuff like that just to be interesting. So you might know my ex wife was an alumnus of the School of Economics and we’ve got a few Wharton guys. We definitely have a bunch of people here. Good. Well, let’s start here. What we’re going to talk about, Jonathan, is something that’s different for us. And we’re going to dive into the concepts of angel and venture capital. We’ll talk a little bit about some startups that you’re involved with yourself and all that. But let’s start out. We talked a little bit offline and kind of let you know that we generally are a group that focuses on real estate and what we consider sort of these real assets, stable assets, whatever. And certainly there is a subset in our group who are looking for other opportunities. And we hear about angel investing in venture capital. Can you kindly give us a very basic one on one. What exactly is angel investing? And what exactly is venture capital?
Jonathan: Yeah, definitely. You know, the funniest thing I’m gonna tell you, Buck, is that’s the only asset class I do not personally own at this present moment. I do not own any real estate.
Buck: Oh, you better join us.
Jonathan: Well, you know, I mean, my family has a couple homes, but I personally do not because I have dedicated my life to being an angel investor and venture capitalist. So I would say the biggest difference between the two is, listen, it’s you, it’s your money. You get to decide. Obviously, you’re not writing a big check as a venture capitalist because, you know, you probably have other partners along the way. Other limited partners, right. Because you want to have more bang for your buck. And so there’s more diligence involved. There’s more of a time crunch in the sense, you have to invest in a three year horizon period for a fund. But as an angel investor, I can write a check at any time at any point. And I’ve done that since 2012, done over 80 plus deals, a Muslim LP and 25 different funds and venture funds along the way. So it gives the trends now deal flow and just meeting great people who just like why I got all those degrees. You want to make sure you can make the pie bigger and find greater things by working with other people.
Buck: Yeah. Well, it’s curious. You sort of reference it a little bit on how the schools that you want to and stuff help with this. But obviously deal flow is going to be critically important when you as an angel investor and now as an angel investor, you’re not necessarily looking at it. You’re not coming at it as a fund or something like that, or are you? Are you coming at as an individual?
Jonathan: It just depends. I wear many hats along the way. I’m also part of a family office known as True Adventures, where their check sizes are a little bit bigger. They like a preset to pre IPO deals. Their side could be anywhere from 50,000 to 50 million on one deal. So it’s a different hat like angel investing. I would say the best angel investors should be looking at companies worth under 20 million. Right? That’s really where you get your most bang for your buck. And you’re taking a lot of risks along the way. I mean, an angel investor can get into a Series C deal. It’s just hard because I know one company of mine that I got in because of my network. They’re raising 320,000,001. 8 billion. And the three biggest check writers are like 100 and 6140 and 20 million. No one investor is going to put that kind of money behind one deal.
Buck: So as an individual angel investor, first of all, your deal flow is again, just your schools, your background. Tell us a little bit more about how you’re getting that deal flow and what kind of deal flow you typically get personally.
Jonathan: It’s everywhere. It’s the schools I’ve been to. I’ve done a tremendous amount of networking, brand building as well, having a wonderful marketing team that I help scour LinkedIn, finding great companies, great entrepreneurs to set up meetings, get times. Honestly, one of my best tools is Cally without calling. I don’t even know how to. I have so many emails like, you always have to have meetings every day and it’s a life saver for me, but really, especially being part of so many funds as well. You see that there’s great winners out of those funds and they’re going to create SVV opportunities. And maybe they can’t go do more than one SPV. And I fortunately have the capability and the firepower because of my network of friends and investors that we can put in bigger check sizes. Right. And they make the interest to me because we’re fast, we’re quick, we’re easy to work with once I have East West Ventures, which is going to be fun. We’re going to start in the beginning of 2022. It’s going to be different because that’s going to have an investment committee. There’s going to be memos that we have to write, there’s going to have to have issues like, well, does that feed our strategy? Is it too late stage? Sometimes it sucks because I’m going to have to pass on deals. Well, I personally think it’s going to make money, but it just isn’t right for the fun. And those are the things you have to consider.
Buck: Right. So as an angel investor, your typical checks that you’re writing, or are they typically 50 grand? Hundred grand?
Jonathan: I’ll give you the range, the lowest check I’ve ever written for an angel deal with through a friend from business school. I give them five K, but usually my typical is 25 to 50, and I’ve written up to 8000. Sure, for something I believe in. Yeah. It just depends. I’m actually right now I got an exit. And instead of buying a car or a bunch of Richard Mille watches or something, I’m going to put it back into work. Because that’s what I love helping the next generation of great entrepreneurs and other companies up.
Buck: So one of the things that in your bio that you mentioned that I thought was interesting is really your focus on or your specialist. Ization on due diligence into these companies. I’m curious if you can kind of give us a sense of what that looks like, because this is something that we’ve actually even within our network, talked about quite a bit. My background and what I’m equipped for very much is we’ve got a 100 million dollar apartment building. I know what to do. I know what to look for, and I feel not secure at all.
Jonathan: Yeah. the real estate terms. The commercial versus residential. Yeah.
Buck: And it’s also for guys like me. There’s something concrete about this. Maybe for me, it seems like, gosh, it seems like a lot easier to do the due diligence on these companies. So tell me a little bit about what goes into due diligence of companies that you’re thinking about investing as an angel.
Jonathan: It’s definitely different than when you’re investing in growth equity. When you’re a Series C or Series B investor. From my perspective, it’s all about the team. From my point, there’s more art than there is science right now. Listen, I know a tremendous amount of smart people who are great with numbers at Warden and MIT. And you know what? That’s not what it is here at this point. When your company has zero revenue or you don’t even have close to anywhere money from other great big time institutional investors, you’re going to have to see the person and who he or she is. Like what their background is, their experience, how gritty they are, how relentless they are. Are they willing to go the extra mile to work? They don’t have it’s not like, look, I tell people, being an entrepreneur, it’s not nine to five. You’re not working nine to five. It’s 24/7. I’ve fortunately run my family’s business. And listen, I have to deal with my staff in China. That’s 15 to 16 hours difference depending on daylight savings or not. Just because you go to bed doesn’t mean workshop. So when I look at an angel deal or a VC deal for C stage investing, it’s really about the team. Obviously, you want to know what the idea is. If it’s like a software as a business software, SAS versus direct consumer or a consumer product. Good. But really, it’s the team I focus on more. Then we’re gonna go into the metrics of, hey, customer growth and revenue growth. And how do you expect to get there? Because my job when it’s this early, I’m trying to figure out how you go from zero to 100,000 and then from 100,000 to a million and then maybe a million plus. With that, I always tell people is for the next round investors I want, my goal is to get you the series A as a seed investor, I’m going to invest in your Series A, but that’s it. It’s done. After that, you’re going to College. I get you through high school. Just because you graduate high school doesn’t mean you’re ready for success. The next noun of professors and advisors help you along the way.
Buck: As an angel investor, how much do you actually participate in helping to I guess mentor, help these companies or is it pretty hands off?
Jonathan: It just depends on what company it is, right. Listen, if it’s just cash, I totally understand we have a quarterly call or an annual letter. I’m totally fine with that, because my check side is not that big. 25, 50,000 is not that big. But like, I would caution every entrepreneur to know this, not all money is good money. It might be a headache to have somebody give you 250 calls every day. You don’t want that money. You gotta have somebody who’s beneficial and also finding your expertise. I know I’m good at supply chain. I know I’m good at international business and doing manufacturing. That’s my business. I’ve done that with my family’s business for the last ten plus years. So it’s like if you have issues with that or working with Walmart Costco, Amazon. I’ve done that. Come to me for those things, right? I’m not gonna be the best, or I could point to you where you should find a great front end developer, a back end developer. But I’m not a front end developer, right?
Buck: So for you yourself, what kinds of companies are there? Health or tech or whatever are you focused on, or are you kind of all over the board?
Jonathan: Honestly, I’m industry agnostic. But if I said I would have a specialty, especially with something like East West, I think we’re great at these things. Consumer and consumer, tech and really entertainment as well. We have the right context and influence in Los Angeles to get you the right person to invest, right? Celebrity understanding the supply chain, understanding. How do we get you a rate? For example, if you’re a new beverage company or new sugar free cookie, right? How can we get you in Target? How do we get you the cost to get the steps of getting in front of the right buyers? So I think my background is better as a consumer. Now, that doesn’t necessarily mean, I don’t know, understanding B to B or enterprise or software development. I do because I made these investments. Sometimes here’s the perfect. I’ll be an angel investor. And you’re being a venture thapis. Last year, I was presented the opportunity to invest in DocSend series B, and I had a great meeting with the CEO of DocSend. But you know what? The valuation is getting too high for the VC for the firm I was with, so we pass. But I still did it. And then six months later, Dropbox bought DocSend. I look like a hero on the IRR, but as an annual investor, I could do it as a venture cops. I couldn’t because the metrics just weren’t there to justify the return, the risk and reward scenario. So that’s why I was like, hey, I get it. And now I can understand. And the next investor or next entrepreneur I look at I say, Look, I have this relationship. I could possibly make that intro for you if you’re in that business as well, or your enterprise sales, and how you should focus more on B to be customers and not B to C because for someone like Docs, and they have, hey, everybody uses it in my world in venture capital. But that doesn’t mean they have a lot of great enterprise value customers. They have a lot of one off individual customers, but they don’t have enough enterprise that’s like they weren’t going to necessary scale to get to the unicorn valuation and getting bought by Dropbox or 165,000,000 made perfect sense. It integrates so well with their platform.
Buck: Right. So if somebody is looking into these kinds of investment vehicles mean either they individually become Angels, or maybe there’s angel funds.
Jonathan: Yeah, there are mountains and like, SPVs, listen, you’re certainly the unicorns, and certainly you hit the home runs and all that sort of thing. But in terms of investing in a number of companies and the returns that you are hoping to get with the addition of the failures you’re going to have, what kind of projections would you typically see from a fund, an angel fund?
Jonathan: Angel fund, honestly, there’s past performance is not indicative of future results that into me for being a financial advisor back in the day, I would say, as an angel investor, always like, going to Vegas, always be prepared to lose everything, right? You know, that’s how I see it. You know, every time I put a 25K check, it’s like I’m prepared to lose this. Because I’m prepared to lose, because I’m making the bet early to see if we can get to product market fit. Most angel investments are not ready for product market fit yet, but the next check I write for that company, then the risk reward now is totally different, and I can model it a little better. We’re saying, oh, no, no, this is it like, perfect example is I invest in a company called Bear Flag Robotics. It’s basically the idea is autonomous tractors. That company got bought by John Deere about two weeks ago for 250,000,000. I got in at three and a half million dollar evaluation. I went to business school with the founder and CEO, and I was one of the first check bringers, and I invested in him, not to the idea that he didn’t have the coding ready for tractors. And he needs more money now from John here to get there to make it even more commercialized. But I was prepared to say, Listen, this is my friend, I trust him as a founder and a CEO. And let’s see what happens. And then later on, like, three years later, I have the opportunity to put more money in. I solve this tremendous amount of traction, and I knew that my back was much safer, and I put even more money in. And so and then that money that I could do for my friends network. Listen, that ten X. Obviously, the first check you get a much higher multiple, because from three and a half to 250, that second check, I was so much comfortable with putting in more. And that’s just like when you double up on your winners. That’s a real true strategy on how you go look at it. When you look at a fun, most fun investments, they allocate most of your funds to their second bet, not to the first set. Sure, they’ll put a lot of seed investments, like, maybe 40% of their fun, but they’ll scatter it through more different breath, seeing which one will be the overall winner and then load up on their series A.
Buck: Got it. So do you have a sense from your own investments and the amount you’ve put in and what your yield has been?
Jonathan: I was actually doing this for my fund recently because I had to take a look at it. Let’s think, what are the numbers I’m tracking right now? Pretty well. It’s funny to say, because, like, do you say versus unrealized versus realized? Like no, like, I’m going to have a couple of markups soon and they’re going to look like, wow, right. But they weren’t wow. A year ago, you know, because you just didn’t raise the money. So it’s tough to say sometimes I don’t even care about IRR. You know, I care about money return. I know you have to like, I’m an engineer and I’ve been to war, and so like, hey, they’d be like, what are you talking about? But for me, it’s like multiple on invested capital. MIC means more to me because it’s like, okay, I started off with 2 million now is it worth 20? That’s what I care about. I care about the time horizon, you know, cause I mean, you do it in a certain sense. Like, yeah, it’s like, after 100 years. Sure. Like I’ve started since 2012, and I’m about to realize a lot of winners right now because I’ve got ten year peak. Now I constantly keep putting in money, because here’s the thing. Every year, even if there’s a recession or not, there’s going to be winners. Inventor, there’s gonna be those unicorns that are life, career defining investments you make. And that’s the thing you just have to keep going to keep getting on the ride. Don’t get off at the amusement park. So for me, I know that my MIC is much greater than it was when I started in 2012. Look, here’s a perfect example. But, I mean, if I invested in my third investment that I ever saw in the Indo investor, it’d be outrageous because I got this picture this company at a $20 million evaluation where it was like, you pretend to buy and sell stock and you get a four every week and you compare yourself couldn’t actually buy the star. And I was thinking, Why is this company called Robin Hood?. It’s like if I invested 25 and Robin Hood 20 million, it’d probably be worth 30, 40 million right now. Sure. And my IRR will be ridiculous. But you can’t count that you guys like, yeah, there was other losers along the way, but that cleans up everything. One Uber. That one Airbnb.
Buck: And that’s the fundamental idea here, right. For people who are interested in this, to me, it goes into I would call sort of an asymmetric bucket. It’s the money that you don’t worry about too much if you’re going to lose it. And you hope that you hit a Grand Slam at some point. And that’s really what to me. That’s what it seems. But correct me if I’m wrong.
Jonathan: I think yes, as an angel investor, but not when you’re a fund manager, because you’re selling the belief. And the fact not necessarily the fact that you’re selling the people that you are a good investor and you know that you can return better than the S Amp P 500. I mean, look who they brought on right now to run the Yale endowment. He’s under the age of 40, and he learned under David Swensen, who ran the Yale on down for 36 years. What did David do, which was amazing and enforce passed away this year was that he allocated a lot into private investments, not like the stock market. And he believed because we didn’t have to use it that long. And Endowments had a longer time period in investment horizon. I mean, he’s being the SMP every year because of these vets that you make. So when you invest in a fund manager, your belief is that, look, overall, they’re going to find great winners that are going to be just investing in Apple, which is great. Apple is an amazing company. I own Apple on Amazon, right. But that you’re trying to outdo the SMP 500, because whether Reiners Shine or there’s a recession or not, these companies in the long run will be worth and more because of how little they are worth when you first got it.
Buck: Tell us a little bit about, you kind of put an entrepreneurial hat on yourself as of late. How’s that transition going for you and tell us what you’re doing?
Jonathan: Yeah. For me, it’s just like if you’re going to sell dog food, you better eat it. And it’s like for me, it’s like I’ve been an entrepreneur nor before it didn’t work out. And somehow this is a sense for this is a third time I’m investing in this CEO, and we become really good friends along that process. And I fortunately, have the time to be an operator right now as I raised my fun. And really, it’s one of the core investment. I want to say core. But one of our investments we’re making out of the fund is going to kitchen and data systems. And so it’s great. It’s not great, like dealing with the paperwork of HR and trying to find an office space. But just like building up the team is so fun in this stage, and it gives me great experience. Again. You talked about the school I went to. Every time I went back to school, I learned something new. And if I would go back now, you can learn something new every day to help your business grow, because if you’re doing the same thing you’re doing a year or two years ago, you’re doing something wrong because everything changes. Like, great CEOs, great executives. They’re always trying to find out what’s the blind side, what’s missing. What can I do to improve my revenue? What can I do to make things meaner better? So I love working as an entrepreneur now, too. And it’s funny I have to take off my investing hat and put on my fundraising hat. And it’s a totally different world. Right. And I go to people who I like a co invest on deals, and it’s like, wow, is this how you react to the entrepreneurs? Like, I’m going to learn how to be a better investor, too. And that’s the right question to be like, you’re not asking this question, which is so much more important to understand. So it’s going to make me a better investor, too.
Buck: Yeah. What’s your company do?
Jonathan: So Kitchen Data Systems is basically a restaurant as a service model. And those kitchens find ways of scaling much faster, right. Because good luck. It’s great to work with cloud kitchens to a certain extent. But the problem is it’s a huge capital expenditure. Why not find small, medium kitchens or restaurants who have extra capacity to make food for somebody else, someone else’s brand? And it’s not indoor dining. Or it’s more about takeout and deliveries and then really scaling, like, if you had a virtual brand, for example, let’s say a salad that was so great. Like, how do you get to all 50 States? It’s hard. It’s really hard, but we can help you to do that. We scrape the Internet. We know the 1.6 million restaurants that make sense. We’re going to find the people who are already doing your food and then can scale because you know, why do you have only four or 5% if you work with, like, a next fight or let’s see a virtual dining concept. Right. Or more of your company.
Buck: Yeah. Good, good. Maybe you could give us a sense of, hey, how to get in touch with you, but also in general, like, advice to anybody who’s interested in exploring angel investing in general and how to get involved with that.
Jonathan: Sure. I have my website. JonathanHung.com. There’s a lot of great blog posts we do sometimes daily, sometimes weekly. Also find me on LinkedIn. I think LinkedIn is a great source to find the right connections and people see if there’s, like, a warm introduction, you find somebody who you work with. We’re connected this way. Let’s find ways of getting involved in I don’t mind helping people make money. You don’t have to put money in my fun. I love talking about being an investor and getting more people excited. So find me on my website or my LinkedIn.
Buck: Fantastic. Jonathan, great to meet you. Good luck to you. And hopefully we’ll have you back once you find the next Robin Hood.
Jonathan: Hey, probably already somewhere in the portfolio. Thank you, Buck.
Buck: We’ll be right back.