😇 Angel interview #11: Yu Chen

"I prefer technology companies versus technology-enabled service companies. In my mind, the biggest difference is their ability to scale."

All the Angels is a newsletter about angel investing. By subscribing, you will receive an interview with an angel investor in your inbox every two weeks to learn about their motivations, their process, and their experience.

If you’re reading this but haven’t subscribed, join other angel investors, venture investors, and founders by subscribing here.

Yu Chen is an angel investor and advisor based in New York and is a part of the angel group, TBD Angels. She built her career in tech, spending the majority of her time at Google focused on building social impact products tools in areas such as crisis response and Internet access for emerging markets.

Can you give a quick introduction of yourself?

My career has always been in tech, in one form or another. I did my undergrad in Electrical Engineering and Computer Science ("EECS"). I started work in research, then I started moving downstream into the application and sales of that technology. I went back to business school and then I went to Google where I worked on several different product areas. I've mostly tried to focus on technology for some kind of social impact.

I left Google about two years ago to join an education startup. At around the same time, I looked into angel investing. That was a point in my life where I did some introspection on how I wanted to make an impact. I felt that I'd built up a lot of experience and a solid network in tech, and was ready to pay it back in various ways and invest in others who are starting out. I could provide my financial resources, my network, and my domain expertise towards helping them.

I felt that I'd built up a lot of experience and a solid network in tech, and was ready to pay it back in various ways and invest in others who are starting out.

When did you start angel investing?

It was at some point when I was living in the Bay Area and working at Google. It's a cultural norm for people to invest on the side in tech. I don't even remember when I heard about it. It didn't seem like a big deal. It just seemed like something that people did at some point in their lives. So I started learning about the area. I didn't make my first investment until I had moved to NYC.

How much experience have you had in angel investing so far?

I wrote my first check a year and a half ago, and I only seriously started putting a significant mindshare towards it about one year ago. I've learned a lot in the last year, and have invested more frequently as well.

What changed a year ago?

I went on sabbatical from work and had a lot more free time. When I was working, it was difficult to do everything that I needed to do to get to a place where I felt comfortable investing: sourcing deals, doing research, understanding domains, and learning from other investors. It was around the same time that I knew it would help if I went through one of those angel investing boot camps. I hadn't had time to do that until I took a sabbatical. That's when all those things started falling into place.

It sounds like now you're juggling an operator role and angel investing on the side.

I don't have a full-time operator role at the moment. I am an operator part-time and angel investing part-time. I think of it as the same thing, because I'm on the operating team for this new angel group. It's a natural evolution of how I looked at the best way to approach angel investing. It's much more effective doing it as part of a group especially where the other group members have a lot more expertise and a bigger network than myself.

What's the angel group called?

It's called TBD Angels. Funny story when they created it, that "TBD" was supposed to be a placeholder and then we could never decide what was a good acronym for us so now it's permanently "TBD".

How many investments have you made so far?

I have a spreadsheet that I use to track everything I invested in and the things I passed on. I've made 20 investments, half direct, half through syndicates.

Do you have an average check size?

For direct investments, I generally invest ~$10k. For syndicates, the amount varies but the minimums are generally lower. That's the benefit of investing through syndicates - you're able to diversify your investments across more deals.

That's the benefit of investing through syndicates - you're able to diversify your investments across more deals.

Do you have an aim for the number of investments you make a year and how much you save for follow-on rounds?

I looked at my net worth and how much I was willing to risk, and I currently allocate between 2-3% of my net worth per year towards angel investing. This is obviously a ballpark number based on how my assets are doing and what kind of deals I see. I haven't thought as deeply about what to reserve for follow-on but theoretically, it's part of the allocation. It hasn't come to a head where I have to address that question in a big way.

How much time are you spending angel investing now?

About 20% of my time. It's hard to count because the activity is varied and lumpy.

How would you typically break down your time that you are spending on angel investing?

90% of the time is spent reviewing deal flow. That funnel is so vast: there are so many different sources of deal flow that you can tap into if you have the time. Those different channels are helpful if they can help percolate the most viable investments to the top for you.

The remaining 10% probably is an actual investment and helping the founders post-investment if they need any support.

Do you have an investment strategy?

I started with a strategy in mind, but I'm adjusting it as I gain experience. I want to stay within what I know - so the tech space broadly. I actually built both software and hardware, so I'm okay with both. Ideally, I want to support underrepresented founders and/or domains that I understand: SaaS, Education, Future of Work, etc.

Over the last year, my investment strategy has become more clear. I prefer technology companies versus technology-enabled service companies. I generally stay away from DTC or e-commerce. I'm still figuring out the balance of supporting female founders and investing in technology-focused companies. A lot of the female-founded startups that I see are in the e-commerce, health and wellness, and beauty spaces.

Lastly - I think it's important to take a portfolio strategy, so I want to take my bets across several industries and technology trends. It's been interesting trying to strike the right balance as my thinking evolves.

I prefer technology companies versus technology-enabled service companies.

What's an example of a tech company versus a tech-enabled service company?

In my mind, the biggest difference between tech and tech-enabled service companies is their ability to scale.

One example of a tech company that I invested in is Tracy Chou's Block Party, which is her effort to combat online harassment starting with Twitter. It's a consumer-facing UI for managing your Twitter experience, built on a strong technology foundation. They have a super lean team, a couple of engineers and designers, yet the product can theoretically easily scale up to millions of users. In these days of cloud services, the marginal cost and effort to service each additional user is near zero.

Tech-enabled service companies are where the product is still significantly delivered by people, even though the technology is making that service better and more efficient. So a few examples would be Uber (each ride still requires a driver and a car), or WeWork (their coworking space experience requires building services, community services, etc). Those can still be amazing businesses, and I definitely wish I had angel invested in Uber, but their margins are much thinner and it takes more effort to scale to new geographies.

That's helpful. You mentioned portfolio support after you've invested in a company. How often do you stay in touch with the founder and how involved are you?

It depends on what the founder needs. There's one situation where I was an informal product mentor and we used to meet every month as they were ramping up to build their product and getting to beta. Some, I've helped introduce to other investors. Many of them, I haven't kept in contact with other than read their updates. It's driven by what the founder wants.

For those that you potentially don't stay in touch with, how often do you touch base with them?

I don't proactively reach out in any systematic way. Given my check size and the number of investments I've made, I don't think it's worth it. Also, giving founders an investment is a vote of confidence in their ability to grow the business without me "helicopter investor"ing in.

There are a few that I reached out to for random reasons. For example, I knew one of their co-founders and we were just chatting about something. But I don't generally make it a rule to reach out.

Giving founders an investment is a vote of confidence in their ability to grow the business without me "helicopter investor"ing in.

How do you find deal flow?

It's evolved to a diverse set of channels, from ad hoc to more structured. The ad hoc ways would be from someone I know, a former co-worker, or a VC that I met and kept in touch with. On the more structured side, through angel investor bootcamps, angel groups, accelerators, and syndicates.

The investing deal flow scene is actually pretty vibrant, especially on the early stage side. For example, I see new angel bootcamps and angel groups created every few months. I've also met a few female founders who are creating startups that improve the matching process between founders and investors. There are new funds raising money and I'm now considering being a fund LP, in addition to directly investing.

How have you worked with companies to pivot or adjust their products during the pandemic?

Of the founders in my portfolio, the pandemic has hit them in different ways. Some have been hit pretty hard, especially if their business depends on people moving about. Some of them seem to be surviving a little better.

I've seen them adjust to extend their runway: cut burn rate, look for other sources of funding. If they do need funding, such as bridge funding, I helped with that. They've also asked for help pivoting some of their go-to market strategy in this new environment with introductions.

How do you get your information around industry trends?

I don't have much time to read about a lot of trends. In general, this is why I focus on industries that I understand, where I already have a lot of experience directly, which gives me some insider knowledge.

Trends without more in-depth knowledge are also not super helpful for me in making a decision. All it tells me is that the market is growing this way but then what? How do I pick the startup that is addressing that problem better?

Interestingly in Silicon Valley, one of the prevailing pieces of advice is to invest in a growing market. Whatever the hottest trend is right now, all the investors jump on it. But that's not necessarily my strategy. The benefit of a startup is that you can grow really well, even if it's attacking a pain point within an existing space because the time has come to address it through technology.

The benefit of a startup is that you can grow really well, even if it's attacking a pain point within an existing space because the time has come to address it through technology.

How would you do due diligence?

Because I'm investing early at the seed or pre-seed stage, my biggest criteria are the founders themselves. I've got to believe they can survive all the ups and downs. Aside from diligence in the founders, where I look at their background, I talk to connections, etc. I will look at the product and the market. Hopefully, I can rely on others who are experts in the field to help, that's where the angel group is helpful. Otherwise, I'll do my own diligence as well, researching their competitors, their market, and their users.

What was the last investment that you made?

My last investment was in Scrimba, it's a YC company. I like them because they're in a space that I am familiar with. I previously was the product lead at a coding boot camp. They're trying to create a more product-driven boot camp that is much more scalable and accessible. One of the hardest parts of scaling up a school is hiring high-quality teachers - Scrimba's learning platform is based on interactive recordings of the most famous coding instructors online, so that every student can learn from the best teachers in a 1:1 setting.

What's the number one piece of advice you want to share with aspiring angel investors?

Just try to get out there and start gaining experience as soon as you can. Your effectiveness as an investor grows as you start building up that network and that experience. Just start doing it as early as you can, whether it's super, super tiny checks and syndicates, or it's chatting with other investors and growing your network. You might have a personal network of potential founders already. Talk to them and figuring out how you can support them.

There's friction, especially for female and underrepresented investors because we might not have as much capital, but this whole industry is constantly getting more and more democratized. There are even platforms for equity crowdfunding like Republic where you can start writing very small checks, just to start practicing and figuring out your thesis and why you're doing this.

Where can people follow you or reach out?

yuchen.page or on twitter @yoyothesheep.

Reading corner 📚

The case for and against pro-rata rights by Christoph Janz

As an angel investor, you’re the earliest check into a start-up and will be given a certain % of the company based on how much you’ve invested. As an early-stage investor, you want pro-rata rights because the company will be going through multiple rounds of financing and over time your stake will be diluted as they issue more shares. Every shareholder can decide to invest more money to partially or completely offset the dilution or not invest and be diluted accordingly with pro-rata rights. However, there’s constant friction between early stage investors who want pro-rata, later stage investors who want a bigger percentage of the company, and founders being diluted throughout it all. Christoph suggests a solution to this tough situation.

The 3 Metrics That Matter to Raise Your Series-A by Lars Kamp

If you’re investing in a seed-stage company that is at the beginning of their journey, you might be looking at whether they can become a billion-dollar company but you also want to see whether they can reach the next milestone, a Series A. This article offers some critical advice on what metrics to look at to see whether they can reach that next milestone.

There are only three startup stages by Gil Dibner

As an angel investor, it can be quite confusing as the stages of investing have changed slightly: what was originally seed, Series A, Series B, now we’re starting to see the landscape morph where today I’ll see preseed, seed, seed +, A, A+, etc. Gil makes a point that there are only three stages of venture. For angel investors, you’ll mainly be looking at the early venture stage where the phase is “defined by an effort to de-risk the question of whether or not the company could scale”.