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500.co/challenge                                         #moneyball4startups   MONEYBALL STARTUPS                  +      ...
500.co/challenge                                       #moneyball4startups           GETTING TO KNOW           500 STARTUP...
500.co/challenge                                   #moneyball4startups     THE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTI...
500.co/challenge   #moneyball4startups     FOUNDERS:     BUILD SOMETHING     PEOPLE WANT
500.co/challenge   #moneyball4startups     INVESTORS:     WRITE CHECKS AND     ADD VALUE
500.co/challenge   #moneyball4startups     GOVERNMENT:     MAKE LIFE EASY     FOR INVESTORS &     FOUNDERS
500.co/challenge                                #moneyball4startups           “ VENTURE CAPITAL IS                   OPEN ...
500.co/challenge               #moneyball4startups           (R)EVOLUTION IN THINKING
500.co/challenge    #moneyball4startups           EARLY STAGE            STARTUPS          HAVE CHANGED
500.co/challenge                                   #moneyball4startups         CLOUD, OPEN SOURCE AND ONLINE DISTRIBUTION ...
500.co/challenge   #moneyball4startups     WEB GETS BIGGER.    WORLD GETS SMALLER.
500.co/challenge                                  #moneyball4startups   TRACTION IS THE NEW INTELLECTUAL PROPERTY PLATFORM...
500.co/challenge                             #moneyball4startups             CAPITAL          INCREASINGLY          COMMOD...
500.co/challenge        #moneyball4startups              NEW REALITY:             MONEY FOLLOWS               FOUNDERS
500.co/challenge                                  #moneyball4startups              SIGNALS ARE              EVERYWHERE    ...
500.co/challenge        #moneyball4startups             WALL STREET             BEAT US TO IT
500.co/challenge   #moneyball4startups
500.co/challenge                     #moneyball4startups           “       UBS PROPRIETARY                   SATELLITE PAR...
500.co/challenge                                 #moneyball4startups             WALL STREET             ISN’T ALONE      ...
500.co/challenge     #moneyball4startups     IT TURNS OUT,    WE CAN DO IT, TOO   SURPRISE!
500.co/challenge                                  #moneyball4startups          + “GUT” + TRUSTED MENTORS + MUCH, MUCH MORE...
500.co/challenge                                  #moneyball4startups                   SENTIMENT                    ANALY...
500.co/challenge                                    #moneyball4startups           NEEDLE IN THE            HAYSTACK       ...
500.co/challenge                                    #moneyball4startups   FASTER PORTFOLIO       TRENDS          CURRENT S...
500.co/challenge                                      #moneyball4startups          500 CHECKLIST   Product solves a proble...
500.co/challenge   #moneyball4startups        EARLY STAGE VC         IS CHANGING         HAS CHANGED
500.co/challenge                                  #moneyball4startups  STATE OF THE ART IN EARLY   STAGE INVESTING IS NOT ...
500.co/challenge                                         #moneyball4startups                   MONEYBALL                  ...
500.co/challenge                                    #moneyball4startups                       MY PRIMARY GOAL IS TO       ...
500.co/challenge   #moneyball4startups INITIAL BET DESIGNED TO  GIVE US MORE DATA FOR     SUBSEQUENT BETS
500.co/challenge                                   #moneyball4startups            QUANTITATIVE             PORTFOLIO      ...
500.co/challenge                                                                 #moneyball4startups                      ...
500.co/challenge                              #moneyball4startups                   MODERN PORTFOLIO THEORY:      RISK MIT...
500.co/challenge   #moneyball4startups      HIGH VOLUME   INVESTING ALLOWS  FOR HIGH ERROR RATE
500.co/challenge                                     #moneyball4startups   TRACK IRR &VALUATIONS WITHIN YOUR PORTFOLIO    ...
500.co/challenge   #moneyball4startups   CONTROLLED RISK:   OUTSIZED RETURN      POTENTIAL
500.co/challenge                                 #moneyball4startups      PORTFOLIO IRR     QUICKLY POSITIVE   (WITH SMALL...
500.co/challenge                                       #moneyball4startups      EVEN “SMALLER”      EXITS CAN MOVE        ...
500.co/challenge       #moneyball4startups             LAW OF LARGE             NUMBERS FTW!
500.co/challenge                                     #moneyball4startups      INDIVIDUAL BETS         ARE SMALL           ...
500.co/challenge                                #moneyball4startups                   BAD BETS                   FAIL FAST...
500.co/challenge                                   #moneyball4startups          FAILURE RATES            ARE HIGH   DIVERS...
500.co/challenge                                                          #moneyball4startups  ALLOCATE FOR FOLLOW-ONS    ...
500.co/challenge                                      #moneyball4startups               DEAL TERMS                   SO YO...
500.co/challenge    #moneyball4startups         DEBT VS EQUITY
500.co/challenge                                 #moneyball4startupsCONVERTIBLE NOTES ARE OK (REALLY!)       LOWER LEGAL F...
500.co/challenge                                  #moneyball4startups    STANDARD DOCS   ARE YOUR FRIENDS         WHEN IN ...
500.co/challenge                                    #moneyball4startups               PRO RATA &               INFO RIGHTS...
500.co/challenge                                 #moneyball4startups               FOCUS ON              VALUATION &      ...
500.co/challenge                                  #moneyball4startups IT’S HARD TO MAKE      MONEY ON VALUATIONS > $5M(PRO...
500.co/challenge                                    #moneyball4startups                         YOUR PRIMARY GOAL   LET FO...
500.co/challenge   #moneyball4startupsAVOID BOARD SEATS
500.co/challenge   #moneyball4startups     MOST BOARDS    PROVIDE MINIMAL       VALUE-ADD
500.co/challenge                                   #moneyball4startups   BEST DEALS USUALLY     REQUIRE LIMITED     BOARD ...
500.co/challenge   #moneyball4startupsDO NOT INNOVATE IN FINANCE OR LEGAL
500.co/challenge                                     #moneyball4startups               INVESTING             IS A PROCESS ...
500.co/challenge                                  #moneyball4startups             BE AN ACTIVE              INVESTORPORTFO...
500.co/challenge                                 #moneyball4startups                   BE A SMART                    INVES...
500.co/challenge                      #moneyball4startups           “       BY ITS NATURE, THE                   INTERNET ...
500.co/challenge                                   #moneyball4startups     THE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTI...
500.co/challenge   #moneyball4startups    500.co/challenge
500.co/challenge                                         #moneyball4startups   MONEYBALL STARTUPS                  +      ...
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Moneyball: A Quantitative Approach to Angel Investing (Canada - Sept 2012)

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Transcript of "Moneyball: A Quantitative Approach to Angel Investing (Canada - Sept 2012)"

  1. 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. 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. 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. 4. 500.co/challenge #moneyball4startups FOUNDERS: BUILD SOMETHING PEOPLE WANT
  5. 5. 500.co/challenge #moneyball4startups INVESTORS: WRITE CHECKS AND ADD VALUE
  6. 6. 500.co/challenge #moneyball4startups GOVERNMENT: MAKE LIFE EASY FOR INVESTORS & FOUNDERS
  7. 7. 500.co/challenge #moneyball4startups “ VENTURE CAPITAL IS OPEN TO ATTACK BY DISRUPTIVE NEW BUSINESS MODELS AND TECHNOLOGY. -- NAVAL RAVIKANT (@naval)
  8. 8. 500.co/challenge #moneyball4startups (R)EVOLUTION IN THINKING
  9. 9. 500.co/challenge #moneyball4startups EARLY STAGE STARTUPS HAVE CHANGED
  10. 10. 500.co/challenge #moneyball4startups CLOUD, OPEN SOURCE AND ONLINE DISTRIBUTION DRIVING STARTUP COSTS LOWER THAN EVERBUT SCALING STILL COSTS MONEY
  11. 11. 500.co/challenge #moneyball4startups WEB GETS BIGGER. WORLD GETS SMALLER.
  12. 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. 13. 500.co/challenge #moneyball4startups CAPITAL INCREASINGLY COMMODITIZED RISE OF THE ANGELS, YO!
  14. 14. 500.co/challenge #moneyball4startups NEW REALITY: MONEY FOLLOWS FOUNDERS
  15. 15. 500.co/challenge #moneyball4startups SIGNALS ARE EVERYWHERE BIG DATA + OPEN SOURCE ANALYTICS = NEW TECHNIQUES FOR VC
  16. 16. 500.co/challenge #moneyball4startups WALL STREET BEAT US TO IT
  17. 17. 500.co/challenge #moneyball4startups
  18. 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. 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. 20. 500.co/challenge #moneyball4startups IT TURNS OUT, WE CAN DO IT, TOO SURPRISE!
  21. 21. 500.co/challenge #moneyball4startups + “GUT” + TRUSTED MENTORS + MUCH, MUCH MORE DATA.
  22. 22. 500.co/challenge #moneyball4startups SENTIMENT ANALYSIS WHAT IS THE TEAM THINKING? WHAT DOES THE MARKET THINK? WHAT DO MY PEERS/MENTORS THINK?
  23. 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. 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. 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. 26. 500.co/challenge #moneyball4startups EARLY STAGE VC IS CHANGING HAS CHANGED
  27. 27. 500.co/challenge #moneyball4startups STATE OF THE ART IN EARLY STAGE INVESTING IS NOT VERY SOPHISTICATED TRUST REFERRALS. MOVE FAST. KEEP LEGAL/FINANCE SIMPLE. BUILD RELATIONSHIPS WITH OTHER INVESTORS, SYNDICATE EVERYTHING.
  28. 28. 500.co/challenge #moneyball4startups MONEYBALL IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
  29. 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. 30. 500.co/challenge #moneyball4startups INITIAL BET DESIGNED TO GIVE US MORE DATA FOR SUBSEQUENT BETS
  31. 31. 500.co/challenge #moneyball4startups QUANTITATIVE PORTFOLIO APPROACH BENEFITS: CONTROLLED RISK + OUTSIZED RETURN POTENTIAL
  32. 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. 33. 500.co/challenge #moneyball4startups MODERN PORTFOLIO THEORY: RISK MITIGATION THROUGH DIVERSIFICATION
  34. 34. 500.co/challenge #moneyball4startups HIGH VOLUME INVESTING ALLOWS FOR HIGH ERROR RATE
  35. 35. 500.co/challenge #moneyball4startups TRACK IRR &VALUATIONS WITHIN YOUR PORTFOLIO AT LEAST YEARLY. RECOMMEND QUARTERLY.
  36. 36. 500.co/challenge #moneyball4startups CONTROLLED RISK: OUTSIZED RETURN POTENTIAL
  37. 37. 500.co/challenge #moneyball4startups PORTFOLIO IRR QUICKLY POSITIVE (WITH SMALLER EARLY EXITS AND PROMISING DEALS GETTING FUNDED)
  38. 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. 39. 500.co/challenge #moneyball4startups LAW OF LARGE NUMBERS FTW!
  40. 40. 500.co/challenge #moneyball4startups INDIVIDUAL BETS ARE SMALL MUCH EASIER TO RUN AN EXPERIMENT ON A $50K INITIAL CHECK INSTEAD OF $250K+
  41. 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. 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. 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. 44. 500.co/challenge #moneyball4startups DEAL TERMS SO YOU FOUND A STARTUP YOU LOVE?
  45. 45. 500.co/challenge #moneyball4startups DEBT VS EQUITY
  46. 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. 47. 500.co/challenge #moneyball4startups STANDARD DOCS ARE YOUR FRIENDS WHEN IN DOUBT, DO NOT INNOVATE IN FINANCE OR LEGAL
  48. 48. 500.co/challenge #moneyball4startups PRO RATA & INFO RIGHTS ALWAYS. ALWAYS. ALWAYS. ALWAYS. ALWAYS. (GET IT?)
  49. 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. 50. 500.co/challenge #moneyball4startups IT’S HARD TO MAKE MONEY ON VALUATIONS > $5M(PRO TIP: CONSIDER MIN. RETURN REQUIREMENTS FOR DOWNSIDE SCENARIOS)
  51. 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. 52. 500.co/challenge #moneyball4startupsAVOID BOARD SEATS
  53. 53. 500.co/challenge #moneyball4startups MOST BOARDS PROVIDE MINIMAL VALUE-ADD
  54. 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. 55. 500.co/challenge #moneyball4startupsDO NOT INNOVATE IN FINANCE OR LEGAL
  56. 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. 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. 58. 500.co/challenge #moneyball4startups BE A SMART INVESTOR FOCUS ON INFORMATION ASYMMETRY & PRICE/MULTIPLES.
  59. 59. 500.co/challenge #moneyball4startups “ BY ITS NATURE, THE INTERNET UNDERMINES ANYONE WHOSE STATUS DEPENDS ON PRIVILEGED ACCESS TO INFORMATION. -- MICHAEL LEWIS
  60. 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. 61. 500.co/challenge #moneyball4startups 500.co/challenge
  62. 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
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