OpenAI Upheaval: 3 Implications for Angel Investors
What does the chaos mean for angel investors?
Chaos
In case you missed it, some massive news hit the tech scene on Friday.
OpenAI, the company behind ChatGPT, fired co-founder and CEO Sam Altman.
Aaaaaand then literally a few hours ago, the company posted on X that they are reinstating him, but with a new board in place.
What a week.
Altman is, in the eyes of many, the face of the AI revolution.
Here’s my summary of the tech community’s response to the drama: everyone’s freaking out.
I have no interest in adding to the noise. If you’re looking for a solid (and humorous) summary to prep you for the inevitable Thanksgiving dinner table discussion, I recommend this very entertaining 13-minute video.
That said, I do think there’s an interesting question to consider in the midst of all this:
What does the hubbub mean for the angel investing community?
Here’s my take.
The Observer Express
Don’t have time to read the entire post right now? No worries, here are the main points:
I believe 3 topics that were largely ignored at the Pre-Seed/Seed stage will suddenly become front and center during investor diligence, Q&A, and decision-making:
Board composition. Do you have one? Who is on it? Who will be on it?
Governance structure. Simple = hot, complex = not. Don’t do anything weird.
Macro implications. If your thing becomes ubiquitous, is society better off?
Focus
I’ve learned that, regardless of what an angel investor says, in actuality, most angels tend to focus on a few consistent basics when evaluating a deal:
How is the market structured and who are the competitors?
Who is the team?
What traction does the company have so far?
What does the financial opportunity look like?
But with the salience of the OpenAI shakeup, I predict that over the next year or so the following three things will enter the decision-making matrix for many investors:
Board composition. Do you have one? Who is on it? Who will be on it?
Governance structure. Simple = hot, complex = not. Don’t do anything weird.
Macro implications. If your thing becomes ubiquitous, is society better off?
Let’s break each one down.
1. Board Composition
In the US, startups are almost always structured as a C corporation (we screen for this when companies apply to pitch).
C corporations are required to appoint and maintain a board of directors. The board plays an essential role in making critical decisions for the company. This can include, but is not limited to, management matters like stock issuance, compensation plans, authorizing fundraising, approving loans, and more.
At the beginning of a startup’s journey, the founder is often the sole member of the board. But as more investors join, the board typically grows, with the lead investor of each subsequent round of financing earning a seat.
With the public tension between Sam Altman and the (now former) members of the OpenAI board of directors including Ilya Sutskever, Tasha McCauley, and Helen Toner, I believe board composition will become a more prominent topic for early-stage investors.
At the pre-seed stage, if the board is composed of anyone other than the founder(s), that could be a yellow flag.
At the seed stage, typically one round of financing has already been completed, so it would be expected to see at least one more name on the list. However, I believe investors will be more interested than before in understanding who that person is and how well they are aligned with the mission of the company.
2. Governance Structure
Everyone is about to become an “expert” on startup governance. True experts, such as the leaders at heavyweight VCs like Sequoia or Andreessen Horowitz who have been part of building, scaling, restructuring, and operating hundreds of startups over the years, will have a megaphone on the topic.
To prepare for the onslaught of opinions, I’ve personally bookmarked this deep dive article written by Elizabeth Pollman with the University of Pennsylvania Carey Law School for reading over the holiday.
Most angel investors will develop a strong opinion regarding how startups should be governed. I believe they’ll begin asking founders about it.
At the pre-seed and seed stage, when the company is small and (relatively) simple, I believe a theme will emerge: complex governance structures will kill an investment decision. If a startup’s structure feels “weird” at this early life stage, investors may pass on the opportunity in favor of cleaner alternatives.
3. Macro Implications
“Is the world actually better off if your thing becomes the thing?”
The (purported) driver for much of OpenAI’s disunity has been the pace at which AI tech has developed and its capacity to bring harm to humanity.
For example, earlier this year, thousands of tech leaders signed an open letter to pause giant AI experiments.
Several reports over the last week cited unnamed sources suggesting that the board believed Altman was pushing new AI products to market too aggressively. This made it impossible for safety teams to install the appropriate guardrails.
Whether this is true or not, what is true is that the risks posed by AI have just been (re)catapulted into the public eye thanks to all the coverage and speculation.
As a result, I believe angel investors will begin to think more critically about the societal impact each investment could have if the company becomes a hit.
Opportunities that offer a questionable value proposition for the benefit of society or that introduce new risks may be deprioritized as a result.
Final Thoughts
I could be completely off base with these three predictions. But if I’m right, both angels and founders raising capital need to be prepared to engage each one. Only time will tell.
What do you think?
What’s your take on all this? What impact, if any, do you think this will have on the angel investing world?
Weekly Observations: 3 Lessons Learned
Ridiculous prep drives ridiculous quality.👌
This week I helped run a pitch event for a new client. Their team runs a very tight ship, and we spent weeks poring over the agenda. The final printout was extremely detailed, including minute-by-minute instructions for the entire event. Quite frankly, at first, I was intimidated by the prospect of screwing things up and getting everything off track. But you know what? It went perfectly. Sure, we had to deal with some inevitable hiccups and slight adjustments. But our intense preparation and attention to detail led to the execution of one of the cleanest, most effective, and thoughtful pitch events I’ve ever been part of.
Business hack: make friends.🤝
I’ve always been fascinated with other people’s stories. So I generally try to go out of my way to get to know the people around me. This week I find myself particularly grateful for the practical value of that quality. It almost feels like I’m cheating, but these friendships have helped solve real problems in our work. Just this week, existing friendships have opened the door to new clients, new staff members, new ideas, new expertise, and more. Wild.
Reputation is a powerful form of value.🏆
This week I’ve been struck by the value of a strong reputation. It’s difficult to quantify its literal value, but I’ve seen the evidence clearly on display. For example, one leader in my sphere specifically came up during the course of a half dozen conversations. Every single one of them involved both me AND the other person emphatically stating how much we respect and admire this individual. They’ll never know those conversations happened, yet they all served to reinforce the positive perception of the individual. The opportunity to work with/for/around someone like that plays a clear role in decision-making. Lesson learned: reputation matters.
Thanks for reading, have a great week and a blessed Thanksgiving holiday.
-Andrew
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P.S. - I recently finished creating The Angel Network Toolkit: 90 Resources for Cultivating a Thriving Community of Pre-Series B Investors, and I’m sharing it with anyone who refers a friend.
How did I do this week?
About Me
I cultivate flourishing.
I'm also the CEO of PitchFact, where our mission is to cultivate flourishing specifically through efficient and collaborative early-stage diligence. I'm a proud husband, grateful father, and honest friend. My love languages include brisket, bourbon, and espresso.