From NYPD To VC: The Story Of A Successful Angel Investor With Sunny Singh, Part 2

 

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Welcome to another episode of The 7 in 7 Show with Zack Ellison, which features full length interviews with the world’s leading investors in innovation.

The guest this week is Digvijay “Sunny” Singh, an entrepreneur, investor, academic and technologist. After serving in the New York Police Department, Sunny earned two Master’s degrees and Ph.D. in Electrical Engineering and Computer Science from UCLA. He then founded, operated and successfully exited two startups and later became a very active startup and real-estate investor.

Sunny was past president of Tech Coast Angels, the largest angel investing network in the United States that has been running for nearly 25 years. He is currently Managing Partner at Alleyway Capital, which acquires e-commerce software startups.

In this episode, Zack Ellison and Sunny Singh discuss:

1. Evolving with the Times: Navigating the Changing VC Landscape
2. Beyond Tech Hubs: The Power of Geographical Diversity
3. Uncovering VC Gaps: Underserved Sectors and Founders
4. Down Rounds Dissected: Signals to Investors
5. Strategic Venture Debt: A Shield Against Down Rounds
6. Protracted Funding Challenges: Surviving the Startup Journey
7. Investor’s Toolkit: The Art of Diversified Innovation Investing

From NYPD To VC: The Story Of A Successful Angel Investor With Sunny Singh, Part 2

The things I say probably in every episode is founders should be thinking a lot about their liquidity also as much as they’re thinking about their product at this stage. Folks that have ample liquidity and the ability to withstand this downturn that could last for years, as you just said. Those folks are going to wind up being at the top of the heap because there are other competitors are going to wind up running out of juice and they’re just going to fall off.

The analogy that I’ve used many times is if you’re in the woods with your friend and you see a bear, you don’t have to outrun the bear. You just have to outrun your friend. I say it every time because it’s so true. You don’t have to have the best product. You could be number 4 or 5 in your category, but if you go out and strengthen your balance sheet and make sure that you have ample liquidity. Your competitors that are above you in some cases are going to run out of runway. They’re simply going to run out of cash.

That’s the number one reason startups go out of business, they run out of cash or they lack funding options. If you can negate that risk, you’re going to probably wind up better than almost anybody else in your space in the next 3 to 5 years, just because you have more money. Not because you’re necessarily the best product. I keep harping on that and people who read the episodes consistently probably are like, “Zack, you’re like a broken record.” I’m like, “I am because that’s the message.”

That message needs to get out there because people are going to come back in 3 or 4 years and they’re going to say, “I wish I would have listened to you and raised capital when I had the ability to.” If you think you’re going to raise when you need it, I think you’re dead wrong. When you need it, it’s not there. You can speak from the equity perspective. How many months of runway are people typically going to be looking for in series A, B, and C at this point? It’s not twelve months. At this point, it’s usually three years of runway.

It’s like trying to assemble a plane while you’re trying to take off. It doesn’t work. You should have the plane ready long before you want to take off. If they don’t have the connections done, not already having conversations, and don’t have term sheets. Be ready to be in it for another 6 to 12 months before you get any money in the bank.

 

 

Founders, Funding, And Ego

Have you seen a shift in how founders are approaching funding options in terms of their own ego? I noticed that this is starting to change, finally, where folks realize, “I’m no longer able to fund at any price whenever I want. I need to basically take the options that are given to me.” What have you seen in terms of the mentality shift?

The founders have become a lot more coachable when it comes to discussion. I remember there were cases in 2021. That was the worst year, honestly, for investors because everyone thought they were hotshots. Everything was overpriced. We had a term sheet negotiation where we weren’t even asking for anything ridiculous. All we were asking for were information rights. We said, “We’ll put the money in. All we want is a quarterly report on how the company is doing.” Can you believe that the founder said no and raised to someone else who didn’t even want information on the company?

I bet they’re not doing so well now.

I believe so, but it is ridiculous because a quarterly report isn’t a big deal if you’re monitoring your company and growing it the way you should. All you do is take some of those metrics and send it over to us. Can you believe that’s what we lost the deal on? That was an ego thing because I don’t think practically it made any sense that we asked them for information rights and they said no but that’s going away and pretty ridiculous. It’s one of the most ridiculous things I’ve seen in all the investing I’ve done.

Would you say that folks are more realistic now and have more humility?

I believe so. A lot of people are back down to earth. That includes investors too, who made these ridiculous bets in 2021 and suddenly feel like, “I should have been more thorough with what I invested in.” It’s on both sides. People are back down to earth a little bit.

I’ve got a good story from the investor side. I was at a conference. I cannot remember where it was. It was probably in Miami. It could have been somewhere else, though. This was in late 2021. I ran into a guy from a family office that I know. We were talking about investment opportunities. He was looking at venture debt and he said, “I like it but we’re looking for a 10X return on any investment we make.” I said, “You must have a long-time horizon.” He said, “No. We have a one-year horizon.”

I almost spit up my drink because I’m thinking to myself, “Nobody’s that good where they’re going to get a 10X return in a year and think they can do it consistently,” but he was dead serious. He thought that they could do that. Now he’s nowhere to be found. That’s the type of ego that people had in 2021. It’s because they thought they could invest in crypto and it went from a dollar to thousands of dollars. That was like a reasonable rate of return that they could expect perpetuity.

The oldest adage in statistics. Don’t use the exception to prove the rule. That’s what they all keep doing. It’s ridiculous sometimes, but the human mind is weird. We keep coming by like, “Crypto went from 6,000 to 60,000. Bitcoins up 10X in a year. That means everything else will be 10X.” That’s not how it works.

If people take the past and they extrapolate into the future without thinking about the mechanisms.

An economy that can consistently produce 10X year after year means that our GDP has to be 10Xing year after year, which I don’t think is happening, is it? Where’s all this produce or value coming from? On a macroeconomic scale, it doesn’t make any sense. Maybe in a small little microcosm, you could have exceptions where you see those then you start extrapolating to everything else. That is insane. This was a family office, you said? I would expect a family office to have a professional manager.

In 2021, people they were off the rails. I don’t think they were tied to reality at all. I still think a lot of people are not fully connected with reality. I haven’t seen a real bear market in many years.

When you are a beginner, the things you start with are what you end up with. Share on X

That is true. This has been the longest bull market in a while. That’s true. A lot of people who started in that period have never seen a bear market.

They think whatever you throw money into. It goes up and you don’t even need to do any work on it and voila. You’re just going to sit there and order Amazon and watch Netflix while your investment portfolio doubles every year.

A true money tree. Plant it and it grows. The leaves are just dollar bills.

Investment Principles

You’ve been very successful investing in a lot of different types of companies. What are the investment principles that you live by?

Two major things that I’ve always look at and angels in general. Any smart angel will do due diligence for major items that I’ll talk about. The two biggest things I look at is, I take the time to understand the team. For me, if the team rubs me the wrong way and I feel like I don’t think that this is the team to execute. It doesn’t matter if they have the greatest product in the world. It doesn’t matter to me. The team is very important to me.

The second thing is the market. It’s very important. The team and the size of the market are the two big things I look at. I’m not so interested in what product they’re creating because products change so drastically over the life cycle of a company. The product’s not a constant, but I’m hoping the teams are constant. The market typically is a constant. Those two things are the most important to me. After the product and market, I’ll look at traction. That would be the third variable. The product doesn’t show up until the fourth step, so team, market, traction, and then product. Those are the four things I’ll look at.

Let me put some numbers to it. For team, I’m looking at three major things. What’s the background of the founders? Have they done something like this before? Do they understand what they’re doing? Do they have the ability to execute? Are they coachable? For market, I’m typically looking at the size. I’m looking at real market size. There are tons of these like of Google analysis that you can get. It’s like, “This is my total addressable market.”

I don’t care about your total addressable market. How much of that market can you actually reach? If you had a go-to-market strategy in your head, I’m going to go to this, and this store, or this and this retailer. I’ll be on the shelves of this, and this retailer. This is the volume that they’re able to sell for this particular category. If I were to dominate all that volume, that would be my market size. Not like, “This is the value of all goods and services in that industry around the world. That’s my market size.” It’s a ridiculous overestimation. You’re never going to have that.

You look at that as the potential market size. If that’s over a certain value, we would say a few billion dollars. The reason I say a few billion dollars is because of the way the economics and the of angel investing work. We get one home run in every 30 to 50 investments we make. By one home run, I mean like $1 billion exit in every 30 to 50 decent investments we make. If you look at most of the others going to zero, you realize the market size for each company has to be at least a few billion dollars for them to get anywhere near a billion-dollar exit.

If they were at like say $100 million or $200 million in revenue, there’s a potential they’ll exit at a billion dollars like 5X to 10X. For them to capture a hundred million dollars of a $10 billion market, it’s in the realm of reality. For them to capture a hundred million dollars of a hundred-million-dollar market is like good luck with that. The market size is very important because the exit value is very much based on how big the company gets.

That decides the economics and return for the portfolio of an angel investor. The market size is important. After that, I’ll look at traction. Traction is an indication as to, you’ve got a great market size and a great team, but does anyone even want what you’re building? You might think that you’re disrupting the market, but others might have a different opinion. Do you have any early indicators of traction?

Is this thing even going to take off the ground? Are you still stuck on the runway or is the plane taking off? I don’t know how you’re going to make it, but you should at least be able to take off the landing pad or you’re stuck there. Finally, I’ll look at the product because if you’ve got some traction and the market is big. You got a great team. The product doesn’t matter because I think the product’s good enough. You wouldn’t have traction otherwise.

 

To your point that you made earlier is spot on but overlooked, there’s going to be multiple pivots and shifts in any product from the angel stage to connect. Unequivocally, I don’t think there’s ever been a company in history that the day one angel stage product was what they eventually ended up with.

Unless, they’re mining gold or something. I get that.

It’s team, market, traction, and then product, less important at that stage, but making sure that they’ve got the big three in place.

That will be what I would look at. It sounds like a very basic answer, but when you’re a beginner, the stuff you start with is what you end up with when you’re very advanced to. It’s weird in this investing industry. The basics are what make good investors.

I agree with that. When I worked on Wall Street, I worked for Deutsche Bank when we were number one in the world. The biggest bank in the world and number one in fixed-income trading. I worked with the top traders and salespeople in the world at 60 Wall Street. One of the things I did everywhere I worked as I went and built relationships with the top producers and got to know what made them successful. Basically, the takeaway, as simple as it was, is that it all boils down to execution.

I would go to producers that were making $10 million to $15 million a year and say, “How are you so good? What has made you such a great producer for so many years?” I’m also across the board in slightly different languages, but the theme was always the exact same. It’s all about blocking and tackling. The number of times I’ve heard that term verbatim is in the dozens. Coming from producers making eight figures annually.

Blocking, tackling and outworking people. The top people at Deutsche Bank were there the latest every night. The only people who were there at 8:00 at night and 5:00 in the morning were me and the guys who were making eight figures. That’s how it worked. I’ve modelled my career after those that came before me. What I learned was it’s not as complicated as one might think.

It is about working your ass off, executing, and figuring out how to be helpful and add value to those around you. If you can add value to the other people on your team and add value for customers, you’re always going to make money. It’s not that complicated. Find a problem that nobody else has solved effectively and then work your ass off to solve it. People overcomplicate it. They want something that’s super fancy and hard to understand. It’s not that hard to understand.

There’s no big secret, honestly. It’s the same with everything with investing too. There’s no big secret. It’s all the basics over and over. Practice diligently for long periods of time.

Team Success

One of the things I want to ask you, though, about the team, which I think is fascinating. How does one quantify, to some degree, how that team is going to perform over the next 10 or 15 years? How do you think about one’s track record or footprint? What signals do you look for that demonstrate that they’re going to be successful going forward?

I would divide that into objective and subjective metrics. Objective being how I feel, which every investor has their own little flavor to how they feel about particular people, and teams, how they’re interacting, and how they present. That’s something everyone can take away from this. It’s looking at the backgrounds of the members. Do they have similar experiences? Have they done this before? Have they existed before? Have they been through the funding life cycle before?

Have they faced challenges in their lives before that they’ve overcome? Whether it’s in business or other areas. Those are objectively quantifiable things that you can look at and you should dig into. That’s what I would say everyone should do. Now, there are subjective measures like, how do you feel about the presentation? Can this person sell you? Can they sell the product? If they cannot sell you, can they sell any other customer?

Determining a person's ability to execute something, how they overcome adverse circumstances, and how they interact with other people is the key to building a successful team. Share on X

Those become subjective because different people can perceive things differently, but I do think determining the ability of a person to execute the grit that they have the ability to overcome adverse circumstances, having the ability to execute in a similar scenario previously, their cohesion between the team, and how they interact with each other, and their backgrounds. You can look at all of this and comb through it with a very fine-tooth comb. Look at it and think about what these qualities going to do for the business.

That’s the idea. Some of it is obviously subjective as I said. The idea is to take what they’ve given you and see how applicable it is to the business that they’re creating. If there’s a close enough fit, then you say, “There’s a good team.” That calibration will continue as you start looking at tens of startups, hundreds of startups, or thousands of startups. You’ll start meeting all types of teams and then you’ll calibrate your mind on how that’s done.

If you wanted to do it very scientifically and formally, there are frameworks for evaluating founders out there, which is crazy. There are actual frameworks out there for how you would evaluate a team. You can search for those. A lot of good startup incubators and accelerators have those frameworks. Everyone has their own framework for evaluating founders, but there are certain scientific frameworks out there.

There are a couple of groups of founders that are worth investing in and overweighting assets to. One is veterans. Military veterans have a lot of those characteristics that you mentioned, leadership, grit, persistence, and the ability to work in a complex large organization but as part of a smaller team, and the ability to adapt under pressure, which is huge. That flexibility and ability to make tough decisions under pressure is valuable.

It’s also why I like ex-athletes quite a bit. They don’t need to be ex-pro athletes. Although, they make great founders too. A couple of my good friends are ex-NFL players who have great businesses. A lot of the lessons you learn as an athlete, even at the high school or college level, are things that make you a better business builder. You talked about this idea of coachability. Coachability is huge and being able to take criticism, take rejection, and lose and handle it and come back stronger.

I’m a founder. I built ARI from nothing. It’s just an idea in my mind. You’re a two-time successful founder and now onto your third endeavor with Alleyway. The reality is even when you’re successful, you hear no 99% of the time. I tell all the folks that are looking for capital and advice for me. I tell them, “I’ve been in your shoes and I’m still in them because I have to raise a lot more money than you do actually.”

I probably have tougher standards because I’m trying to raise money from large institutional investors that have really rigorous diligence processes and a lot of machinery that you have to work your way through. My thinking is that athletes have handled adversity in the past and they’ve been able to come back stronger typically. You can learn a lot from one’s athletic track record as well as their business track record.

Underserved Founders

The other group of founders that I like are underrepresented founders that have overcome other challenges in their lives. Being a woman, for instance, in the startup ecosystem makes it more difficult to raise capital. If you’re able to succeed when there aren’t as many folks helping you, that, to me is a huge signal of future success.

If you’re from an underrepresented group and you’ve done this successfully previously, the indications that you’ll be successful again are a lot stronger. I completely agree.

I think there needs to be more capital that’s allocated to veterans, women, and minorities. That’s a big gap in the market. It’s a huge inequality, but it also means there’s a huge economic opportunity by making the funding market more efficient. There’s going to be a lot of opportunity there to make money for whether you’re a founder or a VC.

There are also unique problems that they bring to the market. They might be underserved in terms of capital for just allocation. As far as being consumers, women are the major consumers in the household. They’re the ones who are buying most of the stuff. They understand the problems of those consumers a lot better. It’s the same with veterans.

They understand the problems that other veterans face a lot better. They can build innovative solutions and products that no one else can build for that particular segment. It’s a large market segment. It’s not inequality and trying to be fair. There’s a large market opportunity that we’re missing out on by not giving these diverse founders the capital that they should get.

 

Building products for one’s community that maybe, to your point, is underserved in terms of capital allocation, but there are huge groups of people out there that want these products. Their needs aren’t being met until the founder comes along and builds that company. Think about you’ve got women that are half the population.

You’ve got a huge segment of the population that’s Black and Hispanic. You’ve got massive segments of the population that historically have not been served that efficiently by the venture ecosystem. There’s a lot of money there. There are a lot of consumers and a lot of demand for products. Those products aren’t being delivered as efficiently as they could be because the allocation of capital isn’t there.

There have been some good exits in this space where there’ve been women-founded companies that are serving women’s needs. That’s why there’s a new category called Femtech, which is female technology. It’s because there’s so much innovation needed in these areas. These founders haven’t been given the capital. Now there’s a complete industry around that. There’s a lot of market opportunity.

Only these particular founders understand the problems well enough to come up with good solutions. Someone has to tell me, “Solve a Femtech problem.” How am I going to understand that? I can try to read about it, but with an inherent deep understanding of the problem and the types of features and products that need to be built and the type of team that needs to be put together for something like this. I wouldn’t be able to comprehend it.

Not Diversifying Enough

We’re almost out of time, but I have a couple of more key questions that I want to get your insights on. One is, what mistakes do you see investors making in terms of LPs that are investing potentially into VC funds, but also the VCs themselves? Where do you see mistakes? What have you learned from those mistakes?

One of the big mistakes with LPs I’m seeing is that they’re not diversifying enough when they invest in ventures. They think the venture is one big silo. Put your money into a venture. There are many categories under the venture. There’s early stage, late stage, and venture debt. A bunch of things. There are secondaries. That’s a whole different area. I’m not going to get too much into it but remember that there’s a secondary market that exists in venture capital just like in public equity.

The interesting part is venture by itself is not a silo. It has multiple classes in it just like you diversify between different asset classes. If you’re a family officer in LP, try to diversify between the different subcategories of venture. That’s a big mistake. If you don’t do that, you’ll never learn what works for you. You’ll never learn what jives with your investment thesis. You’re just going to waste your money.

You nailed it. I think about investing in innovation as an asset class. When people talk about VC, to your point, that’s a huge category. What they’re saying, even though they don’t realize it, is they want to invest in innovation because innovation creates value, which makes them money. To your point, innovation is so broad. You could be investing in Apple or Microsoft. Those are innovative companies but those are large mega-cap companies.

You’ve got stuff on the other side of the spectrum, which is where you specialize, angel stage then everything in between. You’ve got all types of flavors. You’ve got equity and venture debt, but then you’ve got different stages of equity and debt. You’ve also got hybrid products like convertible notes, for instance, and all different types of hybrids. I’ve talked about this in the past with other investors on the show, you need to diversify across multiple levels. We always say diversification within diversification.

You think, “First, I want to move into alternative investments. Within alternatives, I need to diversify within that. I want some real estate, private credit, venture capital, and commodities.” With each of those categories, you have to diversify. That’s great advice to give to people. You don’t have to pick the one winner.

That’s the other thing I say to people. When they say, “Why should I invest in just your fund?” You shouldn’t. What you should do, if you like venture debt, which you should because it’s a great product and probably will be for the next decade. You should go diversify within venture debt. There are different types of companies.

There are public companies that are doing $200 million venture debt loans and companies doing loans as small as a couple hundred thousand. There’s everybody in between. You should find 3 to 5 managers that you like that have complimentary non-competing strategies then you’ve got that segment covered. That’s where a lot of folks go wrong. I’m echoing what you just said.

I agree. Diversification in the venture silo is important rather than taking it as one big thing.

Diversification will help you survive in a market downturn. If you stick to everything you have been doing for the last three years, it will not work very well. Share on X

Raising Capital

I want to ask you too on the founder’s side. If you were to give advice to a founder, and it could be angel stage or later, what do they need to do to maximize their chances of raising capital in the right size and the right price?

In this environment, I would say go in with expectations that are in line with the market. You shouldn’t go in with a valuation that’s ridiculously high because then you’re never going to make it to the point where you end up pitching the investors and that kills it. Don’t go in with a valuation that’s so low that you have no way out. You’ve got to find that sweet spot where you’re at a valuation where it’s a little uncomfortable for the investor, but you can negotiate to a point where it’s fair to vote.

You come in a little higher than what you think is fair and then you go from there. If I were the founder, that’s what I would be doing. I wouldn’t be so high that they think, “This guy’s crazy. I don’t even want to deal with him.” You don’t want to get to that point. You don’t want to go in solo and so timid that you get rolled over. You don’t want that either. You don’t want the investors to wreck your company by taking all of it.

There’s a sweet spot there. That’s one piece of advice, how you value your company and the terms you set. You should be at a point where there’s some level of negotiation that’s needed. If there’s no negotiation going on and they’re like, “This makes sense. This is great. Your valuation is perfect.” You’re like, “I’m leaving money on the table.” There should be a little bit of negotiation there. Go in with some flexibility and the ability to negotiate both terms and valuation.

The second thing you should be doing is you should hammer your metrics and your productivity to the max. Have everything crystal clear, have your growth numbers in place, and know everything inside out. When people ask you questions, you should come across as a confident founder who understands the market and the business. Whether you’re the CTO or the CFO.

The CFO should know all the product stuff, and the CTO should know all the financial stuff. You should know everything. In a small company, everyone should know everything. When you’re asked the question that comes out of left field, you have an answer. It should be a genuine answer. Not a made-up salesperson-type of answer.

That’s important. That’s the other thing in this market. Being confident about what you’re doing is important because many people are hesitating. If you have flexibility in your terms and valuation, being a good negotiator, knowing exactly what you’re doing in your company and understanding it inside out. Those two things will help you with investors a lot in this type of market.

I’m always amazed at how many founders don’t know all the details of their company. To me, that’s a huge red flag. On the investing side, I always think it’s funny if I’m talking to a portfolio manager about their portfolio and they don’t know every position. My view is if you are the PM, you put that risk on and you need to know that risk. You don’t need to look at a spreadsheet to know what that risk is there.

I had like 4,000-line items when I was at Sun Life and I knew all of them. I didn’t need to look because I know. If I had it there, it was there for a reason. If I moved out of it, I would know that I moved out of it and why. I feel like a lot of folks don’t have that attention to detail, which is a big red flag.

Especially in early stage. It’s a small team, a small company. How don’t you know what the business is doing or how the products are being created?

Diversification

What are the big themes that you want to leave everybody with, mainly themes for investors in VC to think about? Also, themes for founders to think about over the next like 3 to 5 years.

I would leave it with one major theme is diversification on both sides. Venture capitalists should look at alternative industries, alternative geographies, and alternative types of founders because the main stuff, the hot stuff isn’t doing so well. The hot stuff isn’t very hot. You got to look at the stuff that you typically don’t consider. I think VCs should do that. Founders should do that as well. The fundraisers aren’t going so well.

 

The typical main street VCs aren’t giving you the money. You should look at alternative sources of capital. Whether that’s venture debt or something else. You need to look at alternatives and start diversifying both in terms of your fundraising strategy and for investors in terms of your investing strategy. Diversification will help people survive in this downturn in this market. If you don’t do that and continue to stick to everything that you’ve been doing for the last few years, it’s not going to work very well.

Episode Wrap-up

Sunny, thanks again for coming on. I love talking to you. You always have such great insights on so many things. I think people who read this will learn a lot in terms of how to prepare for or invest in the angel stage.

I appreciate that. Thank you, Zack. It’s always good to be on. I’m just another guy. Whatever I know, anyone else can learn.

What’s the best way for people to reach out to you if they want to learn more about Alleyway Capital and what you and Mahesh are doing over there?

The website AlleywayCapital.com is the best way.

Thanks again for coming on and thanks, everybody for reading. We featured Sunny Singh and this will be a two-part episode because we talked about so many things for over an hour. Thanks again.

Thank you again, Zack.

 

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About Sunny Singh

My background is in business and computer/electrical engineering. I have been on the founding team of two startups in the medtech and IT/cybersecurity spaces. I now focus on acquiring software as a service (SaaS) companies at Alleyway Capital along with startup (Angel/VC) investing and real-estate.

As an angel/venture investor, my venture investment portfolio consists of a few dozen North American companies in the technology space with a few $1B+ startup exits. I was also the founder and the managing member for the first Tech Coast Angels LA venture fund and President then Chairman of the TCA Venture Group.

My real estate projects are based in Southern California (Los Angeles, Orange and Kern Counties). I still have strong connections to my Indian roots with a substantial IT and real estate presence there.

For hobbies, I like PC gaming, lifting weights and mixed martial arts. I also swam competitively, hunted and debated during my younger years.