investing 101 (sjsu - sept 2012)
DESCRIPTION
Slides for my talk at Steve Bennet's Entrepreneurial Finance class at SJSU.TRANSCRIPT
INVESTING 101IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
PAUL SINGH
500 Startups
@paulsingh・[email protected]・angel.co/paulsingh
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
@paulsingh・[email protected]・angel.co/paulsingh
VENTURE CAPITAL IS OPEN TO ATTACK BY DISRUPTIVE NEW BUSINESS MODELS AND TECHNOLOGY.
“
-- NAVAL RAVIKANT (@naval)
500.co/challenge #moneyball4startups
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.
500.co/challenge #moneyball4startups
STARTUP COSTS LOWER THAN EVER
BUT SCALING STILL COSTS MONEY
CLOUD, OPEN SOURCE AND ONLINE DISTRIBUTION DRIVING
500.co/challenge #moneyball4startups
TRACTION IS THE NEW INTELLECTUAL PROPERTYPLATFORMS (SEARCH, SOCIAL & MOBILE) PRIMARILY DRIVING THE CHANGE.
NO LONGER “GOOD ENOUGH” TO DEPEND ON TECH DIFFERENTIATION.
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
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
500.co/challenge #moneyball4startups
TRACTION IS THE NEW INTELLECTUAL PROPERTYPLATFORMS (SEARCH, SOCIAL & MOBILE) PRIMARILY DRIVING THE CHANGE.
NO LONGER “GOOD ENOUGH” TO DEPEND ON TECH DIFFERENTIATION.
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
CONVERTIBLE NOTES ARE OK (REALLY!)
LOWER LEGAL FEES, LESS DOCS, QUICKER TO EXECUTE. WHEN CAPPED, THEY FUNCTION SIMILAR TO PRICED ROUNDS.
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%.
500.co/challenge #moneyball4startups
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%
500.co/challenge #moneyball4startups
SIGNALS ARE EVERYWHERE
BIG DATA + OPEN SOURCE ANALYTICS = NEW TECHNIQUES FOR VC
500.co/challenge #moneyball4startups
UBS PROPRIETARY SATELLITE PARKING LOT FILL RATE ANALYSIS POINTS TO AN INTERESTING CADENCE INTRA-QUARTER AND POTENTIAL UPSIDE TO OUR VIEW.
“
500.co/challenge #moneyball4startups
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.
500.co/challenge #moneyball4startups
SENTIMENT ANALYSIS
WHAT IS THE TEAM THINKING? WHAT DOES THE MARKET THINK? WHAT DO MY PEERS/MENTORS THINK?
500.co/challenge #moneyball4startups
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.
500.co/challenge #moneyball4startups
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.
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).
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
EVEN “SMALLER” EXITS CAN MOVE
THE NEEDLEDON’T FORGET: YOU CAN SELL POSITIONS TO DOWNSTREAM OR SECONDARY BUYERS TOO.
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
@paulsingh・[email protected]・angel.co/paulsingh