Personal Info

Hobbies and Interests: Running, weight lifting, reading, playing with sons.

Sports teams: NY Yankees.

Favourite Books:

• Out Of The Crisis by W Edwards Deming
• Only The Paranoid Survive by Andrew S. Grove

Favourite Entrepreneurs: Mark Cenedella (the ladders), Mike Lazerow (buddy media).

Twitter url:http://twitter.com/infoarbitrage

Personal blog: http://informationarbitrage.com

Company website: http://informationarbitrage.com

Adrian Bye: I’m here with Roger Ehrenberg from Information Arbitrage. He is a Wall-Street-guy-turned-tech-scene-investor. Tell us about yourself.

Roger Ehrenberg: I was on Wall Street for over 17 years, starting in 1987, right around the crash. For four years I was in M&A for the financial services sector, and then I got into capital structuring. I went to business school while working for Citi then entered derivatives.

I loved being in the derivatives markets. After the Travelers merger, I didn’t like the changes in the culture, so I went to Deutsche to run equity derivatives structuring and origination. I was asked in 2002 to run a multi-strategy hedge fund platform combining Deutsche’s own capital and $2 billion of client capital. Once it reverted to being a pure trading platform at the end of 2004, they asked me, ‘What do you want to do?’

After running a $6 billion RIA and reporting to the head of the equity division, two steps away from Joe Ackermann, I looked around. I didn’t see a role I wanted. What other job on the Street, short of running the equity division or whole firm, would’ve been exciting? It was a natural inflection point for me to consider what I want to do and to change my life. I had been fortunate to make a few bucks in my time on the Street, and had the ability to take a personal risk and reinvent myself in ways that balanced my personal and professional objectives. As my next step, I went into early-stage technology investing.

Adrian Bye: What did you learn on Wall Street that you use now?

Roger Ehrenberg: The network of relationships from Wall Street jump-started me because people took me seriously when I was first starting out as an angel investor, even if I didn’t have the domain expertise. It takes time to become viewed as somebody who understands, as opposed to somebody who’s just money. I worked hard to connect with entrepreneurs and understand the technologies underpinning the companies I invest in.

What I learned on Wall Street has been invaluable in my transition to the venture investing and startup communities. I learned how to build high-performance teams, assess talent, network, manage relationships, and analyze complex situations. I think I’ve become a pretty respected venture investor. It’s taken five years of doing good stuff, making some mistakes, learning from them, writing a blog, learning how to become an internet denizen, and immersing myself in the community to the point now where I’m part of it.

From my time in M&A, I learned the highest profile M&A bankers aren’t necessarily structuring gurus. They have an immense amount of trust and credibility with decision-makers as potential acquirers and targets. That’s something my legacy relationships with large corporates has been very helpful with, and the time I’ve spent building credibility in the entrepreneurial community and with venture firms has given me the other side of the equation.

Adrian Bye: What are you up to now? Are you an angel investor or a venture capital investor?

Roger Ehrenberg: My behavior is very much like a small venture fund. To this point, I’ve been investing using my own personal capital, not limited partner capital. I am going to start a small venture fund where I will have LP capital, which is something I’ve considered for some time.

Aside from investing, I’ve been incubating a trading company for the past 18 months. It’s at the intersection of the my past and present areas, a mix of quantitative trading, semantic analysis, natural language processing, and database architecture to solve complex problems in the analysis of text for trading. I didn’t talk or blog about the project often when I started it because there’s not a PR benefit.

Word got out quietly in the community and the composition of my personal deal flow started to change. I had principally invested in digital media, AdTech and FinTech, but I started to get interesting business plans in the sphere of big data – tools and technologies for the management and extraction of value from massive amounts of data. Database architecture, high performance computing, anomaly detection and predictive analytics directly relate to the work of my trading company.

I’ve invested in companies in the ad optimization and real-time bidding space, like Invite Media. I have also invested in digital media companies with scalable technology platforms, such as Buddy Media, who has a Facebook page management application. AdTech is a space where I can add value because I tend to invest in data-driven and quantitative companies. They either deal with data directly, by consuming meanings from massive amounts of data, or indirectly as a data exhaust. Data exhaust generates metadata that can be used in other ways or as the core strategy to the business. Analyzing and using data is the unifying theme to my investments, so AdTech is great for me.

These deals, because of their strategic nature, didn’t feel like angel deals. I decided to identify potential strategic partners who were interested in the same things as me from the standpoint of my trading company, who would want to see the filtered deal flow from the fund, and who themselves could be early betas, potential early-paying customers, and in certain cases, potential acquirers of these businesses. We’re where LPs and advisers intersect, every single one of my investors is respectively an adviser because of their domain knowledge. It’s a hands-on approach.

Adrian Bye: What happens if you lose everyone’s money? It’s okay to fail a couple of times in Silicon Valley because you dust your feet off and get going. People accept that as long as you handle things right. What might happen on Wall Street if a similar thing happened?

Roger Ehrenberg: I have no idea. My motto has always been “Failure is not an option.” Given my five years of experience, I feel I’ve learned enough to take a risk-managed approach to building a portfolio and company selection. Given the strategic nature of the companies in which I’m going to be investing, and that I’ve got an operating company that can actually perform due diligence on these companies and be a user of their IP together with the strategic LPs, it substantially de-risks the investments. I actually think the likelihood of success is very high.

I live in New York, but I’m not on Wall Street. What my fellow investors are most interested in is being on the bleeding edge of technologies they can actually use in their operating businesses, which has a much greater scale effect than the return on any investment they would be making.

Adrian Bye: Tell us your thoughts on where you see things heading.

Roger Ehrenberg: I think there is the inevitable rise of wall-less data. Managing and then making sense of data is becoming more crucial in areas like anti-terrorism in government, fraud detection in the financial services space, or data privacy in health care.

We’re focused on enabling technologies that can be applied horizontally across these different domains. It’s relevant for Wall Street in terms of trade identification. It’s relevant for government for finding patterns that could lead to potential dangerous events, and relevant for increasing financial profit and identifying data fraud. An effective idea system that moves beyond classic rules-based systems could be applied broadly across these sectors.

It’s not just the analysis. Classic relational database structures are inadequate for managing a massive and rapidly growing cohort of data in a real-time world. What new frontiers in database architecture can help manage massive amounts of data when you want to access it in real time? Then, of course, analytics. How do you extract meaning over time, not just at the packet level? How can you look for patterns in data? What are the next frontiers of language analysis? Once you have the information, what do you do with it? That part is not a technology problem, but is an organizational structure and a political problem.

In my new fund, I’m going to be backing a new database company. I’m spending a lot of time in this area because conventional solutions don’t work well in my areas of focus. With this new capital, I can finance groundbreaking work in these highly relevant areas.

Adrian Bye: The cost for starting a company overall has dropped dramatically. It’s getting to the point now where individual entrepreneurs can just go incubate a bunch of companies, see what works. Barriers are low enough now that individual entrepreneurs can do for themselves rather than bringing in investors. How does this change your role as an angel?

Roger Ehrenberg: Many of these technology-oriented businesses are inexpensive to hack together, but you still need a sales force. You need some headcount to actually get the product out there. You need more money to enter that rapid growth phase. Raising $1 million, $2 million is probably going to be necessary to become successful. I see it as an evolutionary process where a lot of businesses never need venture money but need some degree of angel money.

The cost of enabling technologies has plummeted so the barriers are low to hacking together a prototype and put it out there as an alpha. The reality is that most of the entrepreneurs I know don’t have the money to do that multiple times. Even though the cost of enabling technologies has gone down, it still costs money.

The opportunity cost of not working costs money. Working on a problem nights and weekends instead of devoting one’s self 150% leads to a slow and painful death cycle. Somebody may be passionate and decided, but with no bankroll, the opportunity cost of not working is too high. The cost of enabling technologies is unimportant most of the time.

I’ve seen angels become the first stop for many businesses that may or may not need venture capital down the road. Initial angel funding of $500,000, based on milestones or concrete metrics, puts these businesses in a position to raise additional angel capital or venture capital if needed.

Adrian Bye: If I want to raise money from you, how do I do that?

Roger Ehrenberg: If you look at my portfolio, I’ve been introduced through some channel to virtually all of my deals. It is rare for a deal submitted through my blog to be a deal that gets done. It doesn’t mean I don’t want to see it or that I don’t appreciate the opportunity, but I find my network provides powerful filtering of deal quality and domain focus.

I don’t have much time right now for mentoring outside of my existing portfolio companies. If I’m not interested in the business, I don’t have an hour for every person who wants to sit down; I wish I could. I can’t. I get dozens of e-mails from new entrepreneurs every week.

What you’d optimally do is ask a person that knows us and what we have in common to do an e-mail intro. If somebody I trust and respect says, ‘You should talk to this person,’ I will do so. You send along a business plan and an executive summary. I look through that, then we have a conversation. I will know quickly if it’s something I want to discuss and where I can add value. I like to invest in clusters where I have themes, and I like to invest around existing investments so I can solidify a position in a sector and get the network effect of my companies working together.

If I like your business, then the question is, does your plan make sense? Many times, I like a business, but the plan doesn’t make sense. Can the plan be restructured, repositioned, refined to make it more consistent with what I believe is the right plan? Are you coachable? Do you want a value-added strategic angel or do you want just money? If you just want money, you should get it from somebody else. If you want it from somebody who is going to challenge you, support you, and mentor you, I’m a good person to talk with. I’m not a meddler but you’re going to know my opinion.

As an angel, I’m not going to represent full funding. I think it’s important to have a small syndicate of strategic investors in a given domain. If you’re going to spend the time and endure the pain for angel financing, you should get the best investors. What I’ll generally do next is make some introductions. I will introduce you to three, four, five angels and VCs whose opinions I respect in this particular domain. If you have a high-profile lead angel then they’ll be able to connect you with other angels will look to this lead angel and take their recommendation very seriously.

For me, it’s data collection if I’m showing this to people whose perspective I value and are also potential investors. We’re looking at the syndicate as a Venn diagram. They’re filling out the white space. In terms of VCs, what I’m doing is getting perspective from the next-stage financing source, who can provide a sense of what needs to be achieved before this company is suitable for venture financing.

In effect, I like to pre-sell who the ultimate financing source might be. The network for relationships and the intelligence that you get by taking the business again and again to these smart people, who will sometimes modify the plan and thought process, is worth more than the money I’m investing.

In parallel, I’m talking to the entrepreneur and I’m thinking about what deal makes sense – what valuation, what structure, how big – then my associate will also be scrubbing the financial model to ensure it makes sense given the resources and the nature of the business because some businesses need more money than others. We don’t want to undercapitalize the business.

In the early-stage domain, I invest a decent chunk of change. In my investments and core companies that have done multiple rounds of financing and are in rapid-growth mode, I invest several hundred thousand dollars. My median is $100,000, but I’ve done $25,000 and I’ve done everything in between. For me, $25,000 generally reflects businesses where I like the entrepreneur, the syndicate, or the technology and I want to keep an eye on it. There’s other motivation besides pure financial return. I’m not expecting any of those payoffs to be $25,000 in the next Google, but it’s strategic to me as an investor.

Roger Ehrenberg blogs at http://www.informationarbitrage.com/