Angel Investor & Rockstar Founder: Andrew Arruda

Andrew is easily one of the most passionate angel investors I’ve spoken to. He is super dedicated to helping founders and being involved in the company-building process. For him, investing is not just about the money, but more about the learning experience and the minds he gets to interact with.

Highlights:

• Andrew began angel investing after being asked if he wanted to invest by one of the handful of startups he was advising
• Andrew mainly invests in legal technology, health, and space companies
• He looks for founders who can clearly communicate their vision
• His advice for aspiring angels is to start small, start early, and start learning

We’re all aware of angel investing as a high-risk, high-reward game. Andrew  is pretty straightforward about his expectations and the reality of angel investing: many of his investments will not pan out, and patience is the name of the game. You have to be patient and wait for those one or two big ones that will pay off in the end.

Andrew also happens to invest in some really interesting verticals, such as legal, health and space tech. But let me not give it all away in the intro, so, Andrew…

How did your first angel investment happen?

First and foremost, I’m a founder. I started my first company about a decade ago. I grew up in Canada and then moved to the Bay Area for Y Combinator back in 2015 (for my first company).

Because of that, I was meeting other great founders all the time. My angel investing journey started off more as an advisor. I would just help people out with things that I really liked doing.

One of the areas that I help a lot of founders with is fundraising. I had made some introductions for a particular founder to some really great funds, and they ended up getting multiple term sheets from really well-known funds in Silicon Valley. After that, they were like, “you should jump in too if you want.” I thought to myself, I'd be silly not to. So it really started off with me helping out a founder, and when they saw the value I was delivering, they asked me to jump in.

Up until that point, I had never even considered it. I thought you had to write very large checks, but now with rolling funds and such, you can write check sizes that you feel comfortable with. My check size is usually $5-15k, although, with scout funds, I can do up to $50k.

As a founder, do you find it time consuming to also be angel investing? How involved are you with the founders you invest in?

It depends on how you look at it. For me, it’s my hobby, and what I love to do outside of work is help other people.

So it might look like I don't have a good work-life balance because in my work time, I’m a founder, and then in my spare time, I angel invest. But I just love it.

Another thing is that different founders require different levels of help at different times. Most of the time, when people ask me questions, it's something that I can instantly refer them to. For example, a piece of software that can help with a particular task, I can refer them to the right one instantly.

Or if someone asks me about the best practices for investor updates, I know what to say. So I think my base as a founder really cuts down the time that I need as an angel investor because I don't have to do any research or think about things because I'm living their life.

Most of the time, I'm just a few steps ahead, or I've just seen a lot more patterns. If you're starting from scratch and you're not a founder, I can see how it could take up more time.

What’s the most interesting way you’ve met a founder, something unusual?

I meet founders all the time in all different places because I live in San Francisco, so I’m living right in the middle of it all. I've even been pitched by an Uber driver!

Twitter has been, I would say, my most serendipitous place to meet amazing founders. I put out my thoughts there and get a lot of people who I've never met before cold outbound to me.

So you don't do any outbound yourself?

I've been lucky to build out through word of mouth. I will outbound if there's a particular company or space that I want to learn more about, but I would say out bounding makes up less than 5% of my deal flow.

Do you invest in one vertical or are you more of a generalist?

I have made investments outside the spaces I usually focus on, but I mainly focus areas I know well, like legal technology, because that was my first company’s niche. It was a legal technology company, and I used to be a lawyer.

The other space is health tech, and I'm currently building in health tech. My company, Flexpa, is building Plaid for health insurance claims data. The other area is space tech, an area of interest since I was a kid.

I invest in what I know, not what I wish I know. I have made some investments outside of my strengths, but that's usually because the founder was super amazing, I knew the founder, they came highly recommended, or they had a product that was built, and I could just see that they were really a great builder. So there are exceptions, but those are more the exceptions rather than the rule.

What do you look for when deciding whether or not to invest in a company?

Ultimately what I look for is what's the company's “secret”. For example, when you think about Apple, their secret was that they thought that everyone would eventually have a computer on their desk. It was a contrarian idea because computers were very expensive at the time, and it didn't make sense that everyone was going to have one. Same thing in many ways with the software revolution with Microsoft. So I often look for ideas that straddle the line between sounding like a bad idea and sounding like a good idea.

I also look for clear communication from the founders. I think being able to clearly communicate what you're doing and why you're doing it is really important for everything you do as a founder.

What are your deal breakers?

A deal breaker for me is rude people. Just because you’re smart or onto something big, doesn’t make it ok to have a Steve Jobs-type of complex. I think Steve was successful despite his behavior and attitude, but not because of it.

Ultimately, founders need to be able to convince a large number of amazing people to follow along in what they're doing and make the product a reality and build the company. So it's not enough just to have a great idea. Being a good person is something that I think is oftentimes underrated.

Another big red flag for me is folks who aren't really connected to the reality of their users. Sometimes people come up with an idea, they start building it, and they try to raise money. But if I ask them how many users they’ve spoken to and what they've said, and they don’t really have an answer - that’s a deal breaker.

Top 3 angel investments that come to mind that you're proud of.

Harvey. They're building in the legal space, and they're doing some really exciting things at the intersection of artificial intelligence and helping out lawyers do much more. Titan Space Technologies, an amazing space company whose founder Ashley, is awesome. And I would say another I can’t announce yet but should be announced soon, but maybe that’s because of recency bias.

Any company that you wish you had invested in but you didn't?

Not yet. I would say I'm sure there are, but I've only been at it for a small amount of time, and you need a good ten-year period to really see how a company will perform.

The reason I’ve turned down some companies was because I felt like I could not actually be helpful to them and participate and learn as much as I would want to. I see angel investing as a learning experience, it’s my primary motivation, and I want to be as involved as possible. Angel investing is like tuition money that I sometimes get back, plus more money.

Any VCs or angels that you look up to?

Two investors that are certainly inspiring are Ron Conway and Paul Graham. I got to meet Ron and hear him speak at Y Combinator when I was part of the Summer 2015 batch.

Ron had a thesis, and at the time, that was investing in internet applications, which to us now sounds like a no-brainer, but back then, it was not necessarily what others were thinking about.

Paul Graham is just an example of a really clear communicator. I think of him as the Yoda of startups. His essays are incredible, and a big reason for Y Combinator’s existence is the insights from his essays.

If you could say something to aspiring angel investors, what would it be?

Start small, start early, and start learning. You can find a lot of great deals where sometimes the minimum size checks are actually quite affordable.

Part of what makes me excited about angel investing is the learning and the interaction with founders. The monetary gain is always something that's great if it occurs, but that's not my primary motivation, and that's been a pretty good recipe for me.

The sooner you start, the better because you need to invest in a lot of companies and get exposure to them, so you can learn about what you want and what you don't want. Just start learning by doing.

Angel investing is a journey, not a destination, and it requires a lot of patience, persistence, and passion. At the end of the day, I believe most of my returns will come off of one or two investments, and so to have that attitude and to go in knowing that is important. Plus, what’s better than helping amazing founders realize their product visions?

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