Investing 101 (SJSU - Sept 2012)

INVESTING 101IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.

PAUL SINGH

500 Startups

@paulsingh・[email protected]・angel.co/paulsingh

mailto:[email protected]


SAUSAGE &INVESTMENTS

TWO THINGS YOU DON’T WANT TO SEE MADE:

(HOWEVER, THE END RESULT CAN BE PRETTY GOOD)

500.co/challenge #moneyball4startups

500 STARTUPSGETTING TO KNOW

BECAUSE WE’RE KIND OF A BIG DEAL

PAUL SINGH




A (R)EVOLUTION IN THINKING

START WITH VENTUREHACKS.COM/ARCHIVES

VENTURE CAPITAL IS OPEN TO ATTACK BY DISRUPTIVE NEW BUSINESS MODELS AND TECHNOLOGY.

“

-- NAVAL RAVIKANT (@naval)


EARLY STAGE VCIS CHANGINGHAS CHANGED


STATE OF THE ART IN EARLY STAGE INVESTING IS NOT

VERY SOPHISTICATEDTRUST REFERRALS. MOVE FAST. KEEP LEGAL/FINANCE SIMPLE.

BUILD RELATIONSHIPS WITH OTHER INVESTORS, SYNDICATE EVERYTHING.


EARLY STAGE STARTUPS

HAVE CHANGED


STARTUP COSTS LOWER THAN EVER

BUT SCALING STILL COSTS MONEY

CLOUD, OPEN SOURCE AND ONLINE DISTRIBUTION DRIVING


WEB GETS BIGGER.WORLD GETS SMALLER.


TRACTION IS THE NEW INTELLECTUAL PROPERTYPLATFORMS (SEARCH, SOCIAL & MOBILE) PRIMARILY DRIVING THE CHANGE.

NO LONGER “GOOD ENOUGH” TO DEPEND ON TECH DIFFERENTIATION.


CAPITAL INCREASINGLY COMMODITIZED

RISE OF THE ANGELS, YO!


NEW REALITY: MONEY FOLLOWS

FOUNDERS

THE EASY STUFFFIRST

ANGEL != VC

ANGEL MONEY IN/OUT

IT’S MAH MONEY YO!

LP GP99% 1%

VC MONEY IN

LP GP80% Profit 2% Management Fee 20% Profit

VC MONEY OUT

MOST INVESTORSLOSE MONEY

(BUT HOPEFULLY EVERYTHING WILL WORK OUT)

0%

10%

20%

30%

40%

50%

60%

70%

< 1X 1X to 5X 5X to 10X 10X to 30X > 30X

Distribution of Returns by Venture Investment

Perc

ent

of T

otal

Exi

ts

Exit Multiples

Overall Multiple: 2.6X Avg. Holding Period: 3.5 years

3 years

3.3 years

4.6 years4.9 years 6 years

THE BEST WAY TO BECOME A MILLIONAIRE IS TO START OUT BEING A BILLIONAIRE AND THEN START AN AIRLINE.

“

-- SIR RICHARD BRANSON

UNDERSTAND YOUR

MOTIVATIONS

SOCIAL PROOFPATTERN RECOGNITION

RECIPROCITYCURIOSITY

||

RETURNS SCARCITY| | TRACTIONCURIOSITY

HAVE A GAME PLAN

CURIOSITY

HIGH QUALITY REFERRALS

ONE HIGH QUALITY REFERRAL > MULTIPLE LOW QUALITY REFERRALS

STICK TO WHAT YOU KNOW

(STAY TUNED... SEXY GRAPH COMING LATER...)

CURIOSITY

500 CHECKLISTProduct solves a problem for a specific target customer

Capital-efficient businesses - operational @ <$1M funding

Primarily internet-based distribution - search, social, mobile, local

Simple revenue models - transactions, subscriptions or affiliate

Functional prototype before investment (or previous success)

Small but measurable usage - some customers, early revenue

Small but cross-functional team - engineer, design/UX, marketing

I AM NOT A LAWYER

(BUT I PLAY ONE ONLINE)

DEAL FLOW

THE ODDS ARE AGAINST YOU

EVERYONE ELSE IS FUNDING COMPANIES TOO

STARTUP FOUNDERSARE YOUR FRIENDS

THOSE OTHER INVESTORS ARE YOUR FRIENDS

BUT THE GOOD NEWS IS

ANGELLISTIS YOUR FRIEND

FOLLOW OTHER INVESTORSESPECIALLY FOR YOUR FIRST FEW DEALS

BE USEFULACCESS TO CAPITAL IS NO LONGER ENOUGH

FIRST IMPRESSIONS

MATTERBE COOL. INTROS ALWAYS HELP.

ATTEND DEMO DAYS

GET TO YES OR NO

QUICKLY

REPUTATIONIS EVERYTHING

PICKING WINNERS


TRACTION IS THE NEW INTELLECTUAL PROPERTYPLATFORMS (SEARCH, SOCIAL & MOBILE) PRIMARILY DRIVING THE CHANGE.

NO LONGER “GOOD ENOUGH” TO DEPEND ON TECH DIFFERENTIATION.

STICK TO WHAT YOU KNOW

0%

10%

20%

30%

40%

50%

60%

70%

< 1X 1X to 5X 5X to 10X 10X to 30X > 30X

Relationship to Industry Expertise

Perc

ent

of E

xits

Exit Multiples

Low Expertise High Expertise

50% of deals were not relatedWhen related, they had 14 years of experience

INVESTMENT MULTIPLES WERE TWICE AS HIGH FOR INVESTMENTS IN VENTURES CONNECTED TO INVESTORS’ INDUSTRY EXPERTISE.

“

-- KAUFFMAN FOUNDATION REPORT

INFORMATION ASYMMETRY IS YOUR FRIEND

MOST DILIGENCE HAPPENS AFTER THE

FIRST CHECK

DEAL TERMSSO YOU FOUND A STARTUP YOU LOVE?

DEBT VS EQUITY

CONVERTIBLE NOTES ARE OK (REALLY!)

LOWER LEGAL FEES, LESS DOCS, QUICKER TO EXECUTE. WHEN CAPPED, THEY FUNCTION SIMILAR TO PRICED ROUNDS.

STANDARD DOCS ARE YOUR FRIENDS

WHEN IN DOUBT, DO NOT INNOVATE IN FINANCE OR LEGAL

PRO RATA & INFO RIGHTS

ALWAYS. ALWAYS. ALWAYS. ALWAYS. ALWAYS. (GET IT?)

FOCUS ON VALUATION & MULTIPLES

(OWNERSHIP % MATTERS MUCH LESS)

IT’S HARD TO MAKE MONEY ON

VALUATIONS > $5M(PRO TIP: CONSIDER MIN. RETURN REQUIREMENTS FOR DOWNSIDE SCENARIOS)

LET FOUNDERS GET BACK TO WORK

YOUR PRIMARY GOAL

THIS IS A LONG GAME: AVOID LOSING YOUR REPUTATION OVER 1%.

MAKE IT RAINI’VE THOUGHT WAYYYY TOO MUCH ABOUT THIS

TIPS, TRICKS, PLEASE DO’S, & PLEASE DON’TS


ALLOCATE FOR FOLLOW-ONS

(...OR “HOW TO AVOID GETTING SQUASHED”)

30% Capital - Initial Betstarget 10-20 deals

70% Capital - Follow Onfilter out failures, follow-on the top 20%


SIGNALS ARE EVERYWHERE

BIG DATA + OPEN SOURCE ANALYTICS = NEW TECHNIQUES FOR VC


WALL STREET BEAT US TO IT



UBS PROPRIETARY SATELLITE PARKING LOT FILL RATE ANALYSIS POINTS TO AN INTERESTING CADENCE INTRA-QUARTER AND POTENTIAL UPSIDE TO OUR VIEW.

“


WALL STREET ISN’T ALONE

THESE TECHNIQUES ALREADY USED TO UNDERWRITE IN-VITRO FERTILIZATION LENDING, PAYDAY LOANS, SUBPRIME AUTO LENDING, HOME/PERSONAL/AUTO INSURANCE AND MORE.


WE CAN DO IT, TOOSURPRISE!

IT TURNS OUT,


+ “GUT” + TRUSTED MENTORS + MUCH, MUCH MORE DATA.


SENTIMENT ANALYSIS

WHAT IS THE TEAM THINKING? WHAT DOES THE MARKET THINK? WHAT DO MY PEERS/MENTORS THINK?


NEEDLE IN THEHAYSTACK

REAL USE CASES: SIGNS THAT A FUNDING ROUND IS ABOUT TO OCCUR AND/OR SIGNS THAT A PRODUCT IS ABOUT TO EXPLODE.

VERY HARD TO DO ACCURATELY BUT PAYOFF IS BIG & FAST.


FASTER PORTFOLIO TRENDS

CURRENT SYSTEMS OF QUARTERLY/AD-HOC REPORTING IS BROKEN -- SELF REPORTED DATA IS OFTEN BIASED.

THE RAW DATA IS THERE, THE SYSTEMS TO COLLECT IT AND THE ALGORITHMS TO ANALYZE IT ARE MISSING.

AVOID BOARD SEATS

MOST BOARDS PROVIDE MINIMAL

VALUE-ADD

BEST DEALS USUALLY REQUIRE LIMITED BOARD SUPPORTSPEND YOUR TIME SOURCING NEW DEALS. LIMIT TIME ON SIDEWAYS DEALS. LET THE WINNERS KEEP ON WINNING (AND ANSWER YOUR PHONE WHEN THEY NEED YOU).

BE AN ACTIVE ANGELPORTFOLIO EFFECTS & THE LEAN STARTUP MOVEMENT ARE YOUR FRIENDS

0

1.25

2.5

3.75

5

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Monte Carlo Simulation of Angel Investing

Exit

Mul

tiple

# of Deals

mean median std dev

RISK MITIGATION THROUGH

DIVERSIFICATION

MODERN PORTFOLIO THEORY:

HIGH VOLUME INVESTING ALLOWS

FOR HIGH ERROR RATE

TRACK IRR & VALUATIONS WITHIN

YOUR PORTFOLIOAT LEAST YEARLY. RECOMMEND QUARTERLY.

BE A SMART ANGELFOCUS ON INFORMATION ASYMMETRY & PRICE.

CONTROLLED RISK:OUTSIZED RETURN

POTENTIAL

PORTFOLIO IRR QUICKLY POSITIVE

(WITH SMALLER EARLY EXITS AND PROMISING DEALS GETTING FUNDED)

EVEN “SMALLER” EXITS CAN MOVE

THE NEEDLEDON’T FORGET: YOU CAN SELL POSITIONS TO DOWNSTREAM OR SECONDARY BUYERS TOO.

DO NOT INNOVATE IN FINANCE OR LEGAL

INVESTING IS A PROCESS

BY IT’S NATURE, THE INTERNET UNDERMINED ANYONE WHOSE STATUS DEPENDED ON A PRIVILEGED ACCESS TO INFORMATION.

“

-- MICHAEL LEWIS

INVESTING 101IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.

PAUL SINGH

500 Startups




Investing 101 (SJSU - Sept 2012)

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