SETH MASTERS ‒ NYA VICE CHAIRMAN SPOTLIGHT
Since joining New York Angels nine years ago, Seth Masters has been one of our most active and influential members, including serving as Vice Chairman on the NYA Board today. Along the way, Seth has built a remarkable collection of stories and insights spanning exits, portfolio company pivots, NYA Forums and Screenings, and countless member events. In this exclusive interview, Seth shares some of the lessons, perspectives, and investment advice that he has gained throughout his journey with New York Angels:
- How to work together successfully when investors and founders are often sitting in very different situations emotionally and financially;
- How to diversify investments when 2/3rds of startups fail; and
- Why startups need a motivated buyer since acquisitions are often much more about emotional FOMO than pure logic.
How did you meet New York Angels, and why did you decide to join?
I came from an asset management background, but I really wanted to learn more about the early-stage ecosystem. I wanted to be closer to the entrepreneurial side of building companies vs. venture capital in the traditional sense.
I quickly realized that being a solo angel investor is really tough, so I started exploring groups. New York Angels resonated with me because there were very active members with a wide variety of backgrounds and experiences. NYA had a good operational model, and I liked the people I met. The rest is history.
What has been your most memorable experience as a New York Angel?
It has been a collection of enjoyable memories, not just one. My favorite experiences are talking with founders about how they are solving big problems, while collaborating with other NYA members who bring their intelligence, experience, and subject matter expertise that broadens your own perspective. I learn something new at every meeting.Exits are always exciting, especially the big ones, and that is probably what most people expect to hear. But honestly, the experiences that have touched me the most are when founders reached out to me, or to groups of New York Angels, asking for help solving problems they were facing.
There have been a number of situations where we were able to help founders overcome obstacles, or at least help them frame the risks and opportunities in a different way than they might have otherwise considered. While it is not always obvious what a founder is missing, sometimes having a little distance and perspective allows an angel investor to help frame the situation differently in a way that can help the founder move forward.
What do founders like most about working with you?
I hope that when I am working with founders, and all people, they find that I try to be very thoughtful and very transparent with my perspectives.
One thing I am very aware of is that angels are investing in companies hoping they succeed, but also recognizing that statistically, many of them will not. Therefore, I take the rational approach to diversifying across dozens of companies.
For founders, though, it is the exact opposite where are “lashed to the mast” to one company for six, ten, sometimes twelve years of incredibly hard work. I try to be very sensitive and very clear about the fact that investors and founders are often sitting in very different situations emotionally and financially.
By being transparent about that dynamic, I think it becomes easier to put difficult issues on the table. For example, how do you handle failure in a way that does not prevent future fundraising opportunities? Or, when a company is successful, how do you make the right decisions about an exit?
There is an entire ecosystem built around acquiring and scaling startups, and everyone involved will naturally have their own story about why their offer or network is best for the founder. The advantage of experienced angels is that we have been on the other side of the table before. We understand that not every promise will necessarily be kept, and that alignment can change after an investment.
This can be an emotional process for founders, especially after spending ten years building a company. After years of incubating a “baby”, postpartum can be really difficult and it can leave a hole for entrepreneurs. I think that is one reason we are seeing more successful founders join New York Angels. They have so much experience to offer other founders and investors, but it also gives them the opportunity to step back, think more broadly, and prepare for whatever they want to build next.
What is the biggest difference between companies you see at screening and those that make it through to due diligence?
That is really, really, really hard question to answer. There have been a number of companies that crushed it at Screening with their amazing 10-minute pitch. Investors left the room thinking, “this is the best thing we have seen in a year” …but then the company totally blows it in Due Diligence.
I have also seen the opposite where the Screening pitch was really mediocre, but the referring angel worked closely with the team afterward. They coached the founders on what they missed, where the presentation fell short, and what additional material they needed to deliver before bringing them to Forum, which ultimately led to investments from several New York Angels members.
There is not a single recipe for success at Due Diligence, but the more engagement that a company can have with NYA Members, the more likely members may invest.
One of the beauties of New York Angels is that we have multiple tracks for companies to pitch in front of the membership. We also have a systematic process to make sure that we are evaluating the companies with the greatest likelihood of success.
What advice would you give founders who are starting to fundraise?
Fundraising is never that easy. Sometimes there is more money being thrown at specific types of projects. Recently, we have seen a ton of money going to AI, and for companies that know how to play that game, it can be a little bit easier. Timing is important, and if you happen to be in a space that is hot, that can help.
It is certainly true, that there are some times when a given area is so out of favor that it is almost not worth trying. I hate to say it, but that happens too. Founders should just be aware of that reality if that is happening. But no matter what, there are always going to be more people asking for money than there is money to be had. Like any competition, you just have to work harder and come up with something better.
I also think founders need to have a roadmap that is very realistic. Way too few companies actually do a serious, thoughtful business plan. Part of the reason is because it is a lot of work, and, most importantly, there is zero chance that your business plan will actually be what happens in the end. A lot of founders think, “What is this? It is a bunch of numbers that will be wrong.” But the whole point of having a business plan is that you learn from the things you got wrong.
There are quite a few companies New York Angels has seen where, because of the business model they built and the financial models they created off of that, you could really see this is a company that knows how to think about success. They understand the relationships they are going to have to generate to get to the next stage, where they can raise the money to get to the stage after that.
Unfortunately, one thing that has happened with most accelerators and incubators is that they sometimes create almost like a template, but they are not actually teaching people how to think about the problem. That is just my view, but I do think it is an issue that continues to grow.
What advice would you give angel investors who are interested in joining New York Angels?
Ideally, every interested person should come to both a Screening and a Forum. Like everything else, you learn by talking to people, both experienced and newer NYA members.
I also think it is important to be very clear that New York Angels is a serious commitment. Not everybody wants to do everything, and almost nobody has time to do everything New York Angels offers, but people generally have some range of interests. You should reserve a fairly significant chunk of your week for New York Angels companies, companies you have already invested in, or companies you are considering investing in now.
We also spend a lot of time in the orientation process and in Angel Intelligence reiterating what the more senior members of New York Angels have learned, sometimes the hard way. One of the most important lessons is that it is critical to make a lot of different investments. There is roughly a two-out-of-three chance that any startup will fail, if you only invest in one or two companies, there is a very high likelihood you will get nothing. That is frustrating and not terribly good for anybody.
When you embark on becoming an angel investor, you should think about the total amount you want to invest in startups and then ask yourself how many startups you can realistically become interested in and invest in over a given period of time. That will drive both your success as an angel and help you identify how angel investing fits into your life.
New York Angels also has a sidecar fund. It allows angels who are investing in specific companies to participate in a more diversified portfolio. If there is enough interest across New York Angels Members in a company, it can also become an investment of the sidecar fund. So, if you invest in the sidecar fund, you end up with a very diversified portfolio that can complement the other investments you have made.
When you look at your past investments, what is most critical for founders to deliver a successful exit?
There is never a guaranteed formula, but the most critical element about exits is having a buyer. Founders want to have a buyer who for some reason is very highly motivated and worried about either 1) someone else buying the company before they do, or 2) losing IP or some other key element that the company can bring them that does not exist in the market.
I always ask founders who are seriously thinking about selling is: “Do you actually have an excited buyer?” Not just a logical buyer or a potential buyer. At the end of the day, acquisitions are often much more about emotional FOMO than pure logic.
The other important thing founders need to remember is that everyone focuses on the headline price tag of a sale, but that is not always the most important part of the deal.
A lot of acquisitions are actually very complicated and include contingencies, earnouts, and different structures that may not translate into the bright, shiny number founders initially see when an offer is presented. Especially for first-time founders, it can be easy to assume the announced number is exactly what they are receiving, when in reality the actual economics can look very different once the deal closes.
Therefore, it is incredibly important for founders to seek strong advice from specialists who are truly on their side. At that stage, it is usually not angels anymore, but experienced law firms and advisory firms who understand how these deals work and can help founders fully understand exactly what they are signing before they move forward.
What is something about you that has been helpful in your career?
I started my career being much more focused on just being an analyst, and then over time, I became more and more engaged with the quantitative teams I was responsible for. Over the almost 30 years I spent managing portfolios of many kinds, I learned that it was really important to have a balance between the fundamental understanding of what a given company is and does, and the quantitative aspect of things, which was mostly about risk and how you trade that off against potential upside or downside.
What I found in the startup world is that there is almost no data. It is really difficult to come up with anything quantitative that seems to make sense. In my investing career with liquid assets, it was probably 60% fundamental and 40% quantitative, and maybe that quantitative percentage was rising over time. Then I landed in this early-stage startup space, which feels like 120% fundamental and -20% quantitative.
But over the last nine years, I have started to see that there actually are some interesting things you can do using quantitative techniques, even in a space where there is almost no reliable data and where the degree of uncertainty is orders of magnitude bigger than almost any other market I know of.
That has been both an interesting challenge and something very gratifying for me. There are a few places where applying quantitative techniques can actually help you think better about both the companies you invest in and how you put a portfolio together.
What motivates you?
I want to keep learning as long as I can, and that is really what early-stage investing is all about. The vast majority of these ideas are interesting because they are new. They are trying to do something that has not been done before.
Over the nine years I have been with New York Angels, I have talked with hundreds and hundreds of companies that are thinking about things I knew nothing about, and probably most other people did not know about either.
Obviously, some of those ideas are hopefully going to change the world, or at least some part of it. It is incredibly exciting to be learning alongside that process. While I am not in the coal mine itself, that is what the entrepreneurs are doing, being able to look right over their shoulders is really exciting.
