Aaron Strout:     

Hi, my name is Aaron Strout. Welcome to the We Show.

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Aaron Strout:    

Thank you for joining us on the We Show today. My name is Aaron Strout, and I’m the VP of marketing for Mzinga, a leading provider of workplace and customer community solutions.  This podcast is one in a series and can be found on the WeAreSmarter.org site, Mzinga.com, and iTunes under "We Are Smarter."

James Geshwiler:       
Thank you for having me, Aaron.

Aaron Strout: 
Happy to have you. James, I’d love to get started with a little bit of background of you and Common Angels. You know, an amazing organization. I think you’ve done a lot of good over the last several years. You’re mentioned in the [We Are Smarter] book, Chapter 6, under the “Welcome to the World Bank of We,” with some other interesting case study companies. Can you give us a little bit of background on yourself and the company – or the organization, rather?

James Geshwiler:       
Yeah. Common Angels is one of the largest investor groups in the country. It’s nine years old now. We do early-stage venture capital investing, mostly in information technology companies located around the Boston area. Common Angels got started back in 1998 by five people who were all founders and former CEOs of software companies, and that group grew to about 50 people in a year. You can imagine the chaos, a little bit of the complexity that happened with that. They asked me to come help out, and we turned Common Angels into a much more structured investing organization. We talk to about 100 companies a quarter; we’ll invest in about one of those, and over nine years we have backed 34 companies with about $34 million of our money, and have attracted over $100 million of co-investment money. We’ve had one company go public, sold several, had about a half-dozen failures. And the rest are continuing to grow and becoming what we hope will be some of the most exciting technology companies for the next several years.

Aaron Strout: 
Well, that’s great. I think one of the things that comes through in reading about you and doing a little bit of background research – both you and the organization – we picked Common Angels in the book because of this whole wisdom of crowds, basically taking the collective knowledge of the disparate backgrounds and bringing them together, and taking the best out of that. You yourself, I think, bring a lot of that to the table. I was fascinated by the fact that it looks like you’ve got a BA in liberal arts from the University of Texas, and then a master’s in poli sci at UCLA, and then an MBA from MIT Sloan School, which, if I’ve got those correct, is not only impressive but really gives you probably as diverse a background as someone can have. Talk about how you channel and sort of unleash that collective wisdom from that group of people that you work with. I think that in the book, it cites about 40 people that sit down as you’re reviewing some of those 100 companies a year to make your decisions.

James Geshwiler:       
Yeah, I think I’m one of the few people who works in venture capital who’s got a liberal arts background.

Aaron Strout: 
I’m sure you probably are.

James Geshwiler:       
Yeah, and have a master’s degree in political science and not be saying daily, “Would you like fries with that?” which is a nice alternative. Seriously, a lot of that background was in decision theory, quantitative modeling. I worked in Washington, D.C. for about 10 years before going to business school. When I met this group of Common Angels, I not only was really impressed with the talent – I mean I knew many of the names, the companies they’d help build – but also the process was fascinating. It was, as I mentioned, a bit chaotic at first. We implemented a bunch of very specific things – I’ll talk about in a second – to streamline that document and to take advantage of it.

But really the biggest thing that I think was a real invention here within this sector of the economy was breaking out of small partnerships. Most of venture capital is dominated by relatively small partnerships. Old-school venture capital firm has three, four, or five partners. Even the modern era with really big firms might have 10 or 15, but often those break up into subspecialties that work by themselves, or they’re so big they tend to be like a private equity firm. When you’re talking about early-stage venture capital, you’re talking about relatively small decision groups. The drawback with that is what the academic literature tends to call a “group thing.” People have the same view in the world – they’ve worked almost too closely together for years – and the trap they fall into is they rest their decision making on the same set of assumptions. When you’re dealing with early-stage companies, pretty much a lot of what your decision is being based on is the assumptions.

With Common Angels, when we have 40 people in the room, you’re really actively testing the assumption, because not only do people come from different backgrounds and a broader perspective, but they don’t work together on a day-to-day basis. They’re out running their own companies; they have fresh perspectives on the market. You ought to see the arguments that start. I mean some of them are 20 or 30 years old. It is not an unusual occurrence around Common Angels for the alumni of Lotus on one side and Microsoft on another and [inaudible] on a third part of the room, to kind of split like nuclear forces repelling each other and saying, “No! I told you 20 years ago that centralized architectures were the wrong thing to do, and you’re still arguing it. It’s distributed systems.”

While an argument like that may seem technically idiosyncratic at times, it can be a fundamental decision for a business. Right now in software, there’s a lot of debate over whether people should be “software as a service” like salesforce.com, or enterprise software; it’s a very different sales cycle, different process, different customer experience, and it affects whether or not your business can grow.

Aaron Strout: 
That brings up sort of a fascinating scenario where you do get, in the instance that you just cited, these three different groups, strong feelings, years of history. A) how do you overcome that? And B) how does that help, because I would think that those are three very different models? How do you pick which one works, and how do you – I’m guessing a lot of the burden falls on you, or whoever it does – how do you get to consensus with these folks so that you don’t just have a filibuster that lasts for days and days on end?

James Geshwiler:       
Yeah, and I wish sometimes there were only three, but I think that is part of the benefit of having a group that’s focused on a particular decision. I mean if we were just having an academic debate, it sure could go on forever. In fact, we’ve got a half-dozen people in Common Angels who are faculty members at MIT, and who are quite capable of having long academic discussions. But knowing that we’ve got to make an investment decision focuses people on the goal.

We have a framework to rate and rank and draw out particular points, so we don’t dwell on any one. A few of the things – those tactical specific things we did within Common Angels years ago – we had evaluation sheets that reflect the structure of our decision-making process. We’ve evolved those over the years and refined them.

We have small working groups. When we have those 40 people in the room, it’s not really a free-for-all. We break people up into tables and force each table to come to a decision or consensus viewpoint within about 10 minutes, so the clock is running and they’ve got to work very, very quickly and effectively to come to some sort of agreement on what the key issues are and what the next steps should be. Not necessarily a final decision on the investment by any means, but at least get down to those core issues that we’re going to work on, or know this isn’t going to work and we should just pass now.

There are other things we do. We keep track of everyone’s investment. We have documentary and e-mail conversations that go on about companies even before they present. I think, also, with a large group, you get a lot of reach-out into the market, so you’re able to go ask questions live from the market of people who are participating in it, instead of just sitting around a table and saying, “Well, this partner used to work in the field, and this partner worked in a related field. Guys, what do you think?” Well, you’ve been in venture capital for five years and your perspectives are a little bit dated. So we bring all this together, and you’re right – it does fall a lot on me to interpret, to coalesce, to document this, but someone’s gotta be the aggregator of the information. There’s some judgment involved with that, but there’s also a lot of give and take and pushback from the members when we do that.

Aaron Strout: 
It sounds like you must be a world-class facilitator in that regard. Quick question for you, too; this’ll be our last question. It seems, as a follow-up to what you were just saying, that some of the companies that you do invest in must have a huge resource in the diverse group of people that you bring to the table. Do those companies leverage that, and is there sort of a formal way where your portfolio companies can really sort of reach back into that crowd of experts to help their business along?

James Geshwiler:       
Well, that’s the goal, and that’s exactly one of the reasons why we have preserved Common Angels as a group of individual investors who make their own investment decisions, and become shareholders in the company. You could have the type of debate we had if we formed everyone into a fund and just had majority rule and looked like another venture capital firm, at least from the outside. But we encourage the companies to get to know the investors. We share contact information. We encourage them to give monthly updates to everyone, so their investors are aware of what’s going on and can be opportunistically seeking. Recruits, customers, business development contacts for those companies, and of course, I and my partner, Chris Sheehan, who manage the group, also act as routers in the network trying to ping people when appropriate or spotting issues. It is definitely a lot of work to make that contact beneficial, and I think we’ve done a pretty good job of making it manageable.

I think the day-to-day question is, can we make the most of it? With as many people as we have, there are 66 active people within Common Angels, but we have, again, as many people who are passive investors with us in funds we manage. So when you think about the whole network of being over 120 people, there’s a lot of resource, but you gotta keep track of everything in a database and be very organized to make the most of it.

Aaron Strout: 
I’m sure, and I would encourage folks listening on this podcast to check out the Common Angels site, because I looked at the list of some of those folks and, again, it’s quite impressive. Any company that you do invest in is quite fortunate, I’m sure, to have that as a resource. James, thank you for your time today. This was a real learning experience. I hope it’s a learning experience for those listening in, so thank you for your time today, James.

James Geshwiler:       
Thank you, Aaron.

We appreciate you listening in to this series of the We Show podcasts. To find other podcasts like this, you can check out WeAreSmarter.org, Mzinga.com, and also iTunes under "We Are Smarter."

Thanks so much for joining us. We look forward to seeing you next week.