Moneyball: A Quantitative Approach to Angel Investing (Austin, TX - Aug 2012)

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Slides to my angel education session in Austin at Capital Factory.

Slides to my angel education session in Austin at Capital Factory.

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  • I heard Paul Singh speak at a women entrepreneurs forum at George Mason University last month. He was excellent, to the point & accurate in what he shared with both company founders & investors. The world would be a better, more innovative place if more people spent their money like 500 Startups does. Great presentation, thanks *very* much for sharing.
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  • This is kind of brilliant. Thanks.
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  • 1. 500.co/challenge #moneyball4startups MONEYBALL STARTUPS + IT’S NOT SPRAY AND PRAY. IT’S A PROCESS. PAUL SINGH 500 Startups @paulsingh・paul@500startups.com・angel.co/paulsingh
  • 2. 500.co/challenge #moneyball4startups GETTING TO KNOW 500 STARTUPS BECAUSE WE’RE KIND OF A BIG DEAL PAUL SINGH @paulsingh・paul@500startups.com・angel.co/paulsingh
  • 3. 500.co/challenge #moneyball4startups THE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING: API TO VENTURE CAPITAL & FUNCTIONAL EXPERTISE (FOR FOUNDERS. FOR INVESTORS. FOR GOVERNMENT.)
  • 4. 500.co/challenge #moneyball4startups FOUNDERS: BUILD SOMETHING PEOPLE WANT
  • 5. 500.co/challenge #moneyball4startups INVESTORS: WRITE CHECKS AND ADD VALUE
  • 6. 500.co/challenge #moneyball4startups GOVERNMENT: MAKE LIFE EASY FOR INVESTORS & FOUNDERS
  • 7. 500.co/challenge #moneyball4startups “ VENTURE CAPITAL IS OPEN TO ATTACK BY DISRUPTIVE NEW BUSINESS MODELS AND TECHNOLOGY. -- NAVAL RAVIKANT (@naval)
  • 8. 500.co/challenge #moneyball4startups (R)EVOLUTION IN THINKING
  • 9. 500.co/challenge #moneyball4startups EARLY STAGE STARTUPS HAVE CHANGED
  • 10. 500.co/challenge #moneyball4startups WEB GETS BIGGER. WORLD GETS SMALLER.
  • 11. 500.co/challenge #moneyball4startups CLOUD, OPEN SOURCE AND ONLINE DISTRIBUTION DRIVING STARTUP COSTS LOWER THAN EVERBUT SCALING STILL COSTS MONEY
  • 12. 500.co/challenge #moneyball4startups TRACTION IS THE NEW INTELLECTUAL PROPERTY PLATFORMS (SEARCH, SOCIAL & MOBILE) PRIMARILY DRIVING THE CHANGE. NO LONGER “GOOD ENOUGH” TO DEPEND ON TECH DIFFERENTIATION.
  • 13. 500.co/challenge #moneyball4startups CAPITAL INCREASINGLY COMMODITIZED RISE OF THE ANGELS, YO!
  • 14. 500.co/challenge #moneyball4startups NEW REALITY: MONEY FOLLOWS FOUNDERS
  • 15. 500.co/challenge #moneyball4startups SIGNALS ARE EVERYWHERE BIG DATA + OPEN SOURCE ANALYTICS = NEW TECHNIQUES FOR VC
  • 16. 500.co/challenge #moneyball4startups WALL STREET BEAT US TO IT
  • 17. 500.co/challenge #moneyball4startups
  • 18. 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.
  • 19. 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.
  • 20. 500.co/challenge #moneyball4startups IT TURNS OUT, WE CAN DO IT, TOO SURPRISE!
  • 21. 500.co/challenge #moneyball4startups + “GUT” + TRUSTED MENTORS + MUCH, MUCH MORE DATA.
  • 22. 500.co/challenge #moneyball4startups SENTIMENT ANALYSIS WHAT IS THE TEAM THINKING? WHAT DOES THE MARKET THINK? WHAT DO MY PEERS/MENTORS THINK?
  • 23. 500.co/challenge #moneyball4startups NEEDLE IN THE HAYSTACK 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.
  • 24. 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.
  • 25. 500.co/challenge #moneyball4startups 500 CHECKLIST Product 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
  • 26. 500.co/challenge #moneyball4startups EARLY STAGE VC IS CHANGING HAS CHANGED
  • 27. 500.co/challenge #moneyball4startups STATE OF THE ART IN EARLY STAGE INVESTING IS NOT VERY SOPHISTICATED AT THE EARLIEST STAGE, YOU HAVE LIMITED DATA TO MAKE DECISIONS WITH -- BETTER TO LOOK FOR DEAL FLOW VIA TRUSTED REFERRALS, USE A CHECKLIST, DECIDE YES/NO QUICKLY AND KEEP LEGAL/FINANCE SIMPLE.
  • 28. 500.co/challenge #moneyball4startups MONEYBALL IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
  • 29. 500.co/challenge #moneyball4startups MY PRIMARY GOAL IS TO BUY WINS NOT NECESSARILY BUYING INTO THE HOTTEST DEALS. FOCUS ON TEAM, EXECUTION, TRACTION & DATA. (STICK AROUND... I’M GOING TO SHOW YOU HOW)
  • 30. 500.co/challenge #moneyball4startups INITIAL BET DESIGNED TO GIVE US MORE DATA FOR SUBSEQUENT BETS
  • 31. 500.co/challenge #moneyball4startups QUANTITATIVE PORTFOLIO APPROACH BENEFITS: CONTROLLED RISK + OUTSIZED RETURN POTENTIAL
  • 32. 500.co/challenge #moneyball4startups Monte Carlo Simulation of Angel Investing 5 mean median std dev 3.75Exit Multiple 2.5 1.25 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 # of Deals
  • 33. 500.co/challenge #moneyball4startups MODERN PORTFOLIO THEORY: RISK MITIGATION THROUGH DIVERSIFICATION
  • 34. 500.co/challenge #moneyball4startups HIGH VOLUME INVESTING ALLOWS FOR HIGH ERROR RATE
  • 35. 500.co/challenge #moneyball4startups TRACK IRR &VALUATIONS WITHIN YOUR PORTFOLIO AT LEAST YEARLY. RECOMMEND QUARTERLY.
  • 36. 500.co/challenge #moneyball4startups CONTROLLED RISK: OUTSIZED RETURN POTENTIAL
  • 37. 500.co/challenge #moneyball4startups PORTFOLIO IRR QUICKLY POSITIVE (WITH SMALLER EARLY EXITS AND PROMISING DEALS GETTING FUNDED)
  • 38. 500.co/challenge #moneyball4startups EVEN “SMALLER” EXITS CAN MOVE THE NEEDLE DON’T FORGET: YOU CAN SELL POSITIONS TO DOWNSTREAM OR SECONDARY BUYERS TOO.
  • 39. 500.co/challenge #moneyball4startups LAW OF LARGE NUMBERS FTW!
  • 40. 500.co/challenge #moneyball4startups INDIVIDUAL BETS ARE SMALL MUCH EASIER TO RUN AN EXPERIMENT ON A $50K INITIAL CHECK INSTEAD OF $250K+
  • 41. 500.co/challenge #moneyball4startups BAD BETS FAIL FAST SMALLER CHECK SIZES FORCE COMPANIES TO PROVE THEORIES FASTER. ALLOWING INVESTORS TO QUICKLY ITERATE OUR FORECASTING/FUNDING MODEL. FEWER “LIVING DEAD” AND QUICKER RETURN ON RESULTS.
  • 42. 500.co/challenge #moneyball4startups FAILURE RATES ARE HIGH DIVERSITY OF HIGH VOLUME INVESTING ALLOWS FOR HIGH ERROR RATE. FUND IRR QUICKLY POSITIVE WITH SMALLER, EARLY EXITS AND PROMISING DEALS GETTING FUNDED. DILIGENCE HAPPENS IN THE REAR VIEW MIRROR, NOT THE CRYSTAL BALL.
  • 43. 500.co/challenge #moneyball4startups ALLOCATE FOR FOLLOW-ONS 30% Capital - Initial Bets target 10-20 deals 70% Capital - Follow On filter out failures, follow-on the top 20% (...OR “HOW TO AVOID GETTING SQUASHED”)
  • 44. 500.co/challenge #moneyball4startups DEAL TERMS SO YOU FOUND A STARTUP YOU LOVE?
  • 45. 500.co/challenge #moneyball4startups DEBT VS EQUITY
  • 46. 500.co/challenge #moneyball4startupsCONVERTIBLE NOTES ARE OK (REALLY!) LOWER LEGAL FEES, LESS DOCS, QUICKER TO EXECUTE. WHEN CAPPED, THEY FUNCTION SIMILAR TO PRICED ROUNDS.
  • 47. 500.co/challenge #moneyball4startups STANDARD DOCS ARE YOUR FRIENDS WHEN IN DOUBT, DO NOT INNOVATE IN FINANCE OR LEGAL
  • 48. 500.co/challenge #moneyball4startups PRO RATA & INFO RIGHTS ALWAYS. ALWAYS. ALWAYS. ALWAYS. ALWAYS. (GET IT?)
  • 49. 500.co/challenge #moneyball4startups FOCUS ON VALUATION & MULTIPLES OWNERSHIP % MATTERS MUCH LESS. FOCUS ON REQUIRED EXIT SIZE RATHER THAN SOME MYTHICAL OWNERSHIP TARGET.
  • 50. 500.co/challenge #moneyball4startups IT’S HARD TO MAKE MONEY ON VALUATIONS > $5M(PRO TIP: CONSIDER MIN. RETURN REQUIREMENTS FOR DOWNSIDE SCENARIOS)
  • 51. 500.co/challenge #moneyball4startups YOUR PRIMARY GOAL LET FOUNDERS GET BACK TO WORK THIS IS A LONG GAME: AVOID LOSING YOUR REPUTATION OVER 1%. WHEN IN DOUBT, LEAN TOWARDS THE ENTREPRENEUR.
  • 52. 500.co/challenge #moneyball4startupsAVOID BOARD SEATS
  • 53. 500.co/challenge #moneyball4startups MOST BOARDS PROVIDE MINIMAL VALUE-ADD
  • 54. 500.co/challenge #moneyball4startups BEST DEALS USUALLY REQUIRE LIMITED BOARD SUPPORT SPEND YOUR TIME SOURCING NEW DEALS. LIMIT TIME ON SIDEWAYS DEALS. LET THE WINNERS KEEP ON WINNING (AND ANSWER YOUR PHONE WHEN THEY NEED YOU).
  • 55. 500.co/challenge #moneyball4startupsDO NOT INNOVATE IN FINANCE OR LEGAL
  • 56. 500.co/challenge #moneyball4startups INVESTING IS A PROCESS DABBLING IN INVESTING IS (AT BEST) GAMBLING. BETTER TO WALK AWAY OR PURSUE INVESTING NEARLY FULL TIME OR FIND SOMEONE TO MANAGE YOUR MONEY
  • 57. 500.co/challenge #moneyball4startups BE AN ACTIVE INVESTORPORTFOLIO EFFECTS & THE LEAN STARTUP MOVEMENT ARE YOUR FRIENDSYOU CAN EXPECT FAVORABLE WITH 10 DEALS BUT IT TAKES 20+ TO BE SAFE
  • 58. 500.co/challenge #moneyball4startups BE A SMART INVESTOR FOCUS ON INFORMATION ASYMMETRY & PRICE/MULTIPLES.
  • 59. 500.co/challenge #moneyball4startups “ BY ITS NATURE, THE INTERNET UNDERMINES ANYONE WHOSE STATUS DEPENDS ON PRIVILEGED ACCESS TO INFORMATION. -- MICHAEL LEWIS
  • 60. 500.co/challenge #moneyball4startups THE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING: API TO VENTURE CAPITAL & FUNCTIONAL EXPERTISE (FOR FOUNDERS. FOR INVESTORS. FOR GOVERNMENT.)
  • 61. 500.co/challenge #moneyball4startups 500.co/challenge
  • 62. 500.co/challenge #moneyball4startups MONEYBALL STARTUPS + IT’S NOT SPRAY AND PRAY. IT’S A PROCESS. PAUL SINGH 500 Startups @paulsingh・paul@500startups.com・angel.co/paulsingh