This article originally ran in Term Sheet, Fortune’s newsletter about deals and dealmakers. Sign up here.
Jeff Fagnan believes that if you’re a startup founder, you have a social responsibility to become an angel investor — whether you want to or not. “We feel like if someone helped you, you need to pay it forward as well,” he told Term Sheet.
Fagnan, the founder and general partner of seed-stage venture capital firm Accomplice, is well known in the Boston startup ecosystem. The firm’s portfolio companies include AngelList, Carbon Black, DraftKings, Hopper, PillPack, Veracode, and Zoopla.
But he recently noticed something — startup founders are typically the ones who have the best deal flow and the best access to the hottest early-stage companies. The problem is that they often lack the capital necessary to be successful angel investors. Fagnan partnered with Naval Ravikant’s AngelList and formed Spearhead, a program that gives founders a $200,000 fund so they can start investing.
Fagnan spoke with Term Sheet about founders-turned-angel investors, his time working at a SoftBank affiliate fund, and how DraftKings is faring after its failed merger with rival FanDuel.
Accomplice is one of the most active early-stage firms in New England. You like to invest in companies based in Boston, New York, and Montreal. Why?
Over the last three years, we’ve been involved in 80 projects. New England has been the majority of our market with 50% of our activity there (primarily Boston and Cambridge). Eastern Canada has been a real hotbed, too. We are really impressed with the technical skillset coming out of the university system there, and we’ve invested in 16 companies across Montreal, Ottawa, Toronto, and Waterloo. That’s been surprisingly our No. 2 market.
Boston rivaled San Francisco early on as far as venture capital dollars, and then it missed out on the initial phase of the Internet as that gap was filled by San Francisco. There are a lot of great stories about companies like Facebook and Dropbox starting out here and moving out there.
We just saw this presentation recently that said, “Can you build consumer tech in Boston?” And we are investors in DraftKings, PillPack, and Hopper. Those are three incredibly strong consumer brands. Boston is on a resurgence right now. It needs several big tech companies that stand alone like an IBM or a Microsoft or a Google. And you need these mafias to come out of these types of companies and then be the next-generation angel investors, and next-generation entrepreneurs.
You invested in DraftKings’ seed round. Last year, the company’s proposed merger with rival daily fantasy sports site FanDuel unraveled over antitrust concerns. How is DraftKings doing now, and is it true they are considering an IPO?
They’re considering a bunch of things, and right now, I think they’re focused on continuing to grow market share. That’s one where we led the initial seed investment a long time ago. We were the very first investor, and we believed before anybody else. It’s an example of entrepreneur resilience and what [DraftKings CEO] Jason Robins has done is remarkable. They’ve matured a lot, and I think you’ll see DraftKings as a public company. One hundred percent.
I’m always wrong when I give answers about timing, so I won’t do that. [TS NOTE: Robins recently said an IPO won’t happen “for at least a couple of years.”]
You recently announced Spearhead, a program to fund and mentor new angel investors. What was the motivation behind turning founders into angel investors?
Naval [Ravikant] and I frequently have dinner and wine and talk about what’s going on, and then one day we had an observation. The observation was: It is not the celebrity angel investor who had the best deal flow and the best access. It was founders who wanted to back their close friends and people they felt were truly talented.
A lot of them contribute personal capital and mentorship despite the fact that they don’t have a whole lot in their bank account. So we looked at it as — the best people to be angel investors may not have the capital to be an angel investor. And we formed Spearhead to build a new subset of angel investors who don’t think of themselves as angel investors today because they don’t have the net worth. Let’s take the people who have been the most helpful with their mentorship and let’s help them get paid for that mentorship by actually being able to invest in the people they believe in the most.
How does Accomplice benefit from a program like this?
Too often in venture capital, people take short-term mindsets to things like, “How do I get dealflow? Is this a scout program?”
For us, we do not look at this as a scout program. We don’t have any rights to information. We just look at this as: This should exist. Right now, we believe there is a gap in the earliest stages of funding — right after friends and family — and venture capital is not filling it. So we think the best way to fill it is for founders to back other founders. We see this as good for the startup ecosystem.
What are three big mistakes founders make when they first start angel investing?
The first thing is for anyone who starts angel investing — you can’t just do a couple investments. You really have to look at it as a portfolio approach. A lot of people tend to say, “Oh, I tried angel investing and made a few investments, and it didn’t work.” Well, yeah. The odds are stacked against you, so you need to make sure that you’ll write enough checks so you have that diversity.
Another thing is that you can talk yourself out of any investment when you start looking at market dynamics and go-to-market models. You just need to bet on people that you truly believe in and people that are truly exceptional and mission-oriented around changing something. When you have conviction in people, you just invest.
The third thing is that if you are used to succeeding, you have to realize that it’s OK to fail because so many of these things will fail and it’s beyond your control. We want people to take a lot of risk and invest in things that will truly be transformative. If your first five investments don’t work, it’s OK. It’s all about how you went about investing that matters. This is a game defined by the outliers.
You used to be a partner at Seed Capital partners, which was an early-stage SoftBank seed fund in Boston. Given your experience there, what are your thoughts on what SoftBank is doing to the tech financial landscape through its $100 billion Vision Fund?
I don’t have all that much knowledge on the Vision Fund specifically. All I can say is that Masayoshi Son and SoftBank have a history of betting big and being right. People will take pot shots at whatever they do, but when Masa says, “I’m all in,” he’s the type of person who’s truly all in. And if you look at it from a track record perspective, it’s damn impressive what they’ve pulled off. Knowing Masa and what he’s been able to do over time, I would not bet against him. I definitely think he’s shaking things up in an industry where I always appreciate anyone who comes in with a differentiated, contrarian play. I think you need that no matter what.
How will some of these macro-investing trends, such as VC firms raising mega-funds and venture-backed companies staying private longer, affect early-stage startups in the long-run?
Innovation is a continuum. The companies coming out of MIT today and the companies we’re working with that are pre-product, they’re not even going to be thought about as being players in the market for another five to seven years. It’s hard for me to look out and think of what’s the macro-economic environment in five or seven years. If I had to focus too much on that, I probably wouldn’t do a single investment right now.
Companies are definitely staying private longer. In our latest fundraise for Accomplice II, our message to our LPs was: “We invest early, we’re patient capital. We know how to deliver a multiple on investment, but this takes time.” We’ve been in projects for 10 to 12 years. We believe in not selling out early.
You’re an investor in CoinList. What are your views on what’s happening with cryptocurrency and the blockchain at the moment?
We always find things that are going to be building blocks of the future. Blockchain and cryptocurrency are exactly those things for us. We’ve been investing a lot in cybersecurity, which has to do with authentication and identity. We’ve been investing in privacy.
We believe that blockchain and crypto are here to stay, and we are looking to invest in equity-based businesses that are doing blockchain applications for the future. We recently launched a small crypto hedge fund on our platform to continue to get flow on really interesting early-stage blockchain application companies. Whether those companies are going to go raise funds through tokens or equity, we just want to be involved in the ground floor of blockchain application. This technology could affect a number of industries from supply chain to insurance to real estate, and we want to be there.