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#m4sMONEYBALL STARTUPS           +        IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.                      PAUL SINGH        ...
#m4s GETTING TO KNOW500 STARTUPS       BECAUSE WE’RE KIND OF A BIG DEAL                     PAUL SINGH@paulsingh・paul@500s...
#m4sTHE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING:API TO VENTURE CAPITAL& FUNCTIONAL EXPERTISE(FOR FOUNDERS. FOR INVES...
#m4sFOUNDERS:BUILD SOMETHINGPEOPLE WANT
#m4sINVESTORS:WRITE CHECKS ANDADD VALUE
#m4sGOVERNMENT:MAKE LIFE EASYFOR INVESTORS &FOUNDERS
#m4s“ VENTURE CAPITAL IS  OPEN TO ATTACK BY  DISRUPTIVE NEW  BUSINESS MODELS AND  TECHNOLOGY.  -- NAVAL RAVIKANT (@naval)
#m4s(R)EVOLUTION IN THINKING
#m4s EARLY STAGE  STARTUPSHAVE CHANGED
#m4s CLOUD, OPEN SOURCE AND ONLINE DISTRIBUTION DRIVING STARTUP COSTSLOWER THAN EVER           BUT SCALING STILL COSTS MONEY
#m4s WEB GETS BIGGER.WORLD GETS SMALLER.
#m4s  TRACTION IS THE NEWINTELLECTUAL PROPERTYPLATFORMS (SEARCH, SOCIAL & MOBILE) PRIMARILY DRIVING THE CHANGE.  NO LONGER...
#m4s   CAPITALINCREASINGLYCOMMODITIZED   RISE OF THE ANGELS, YO!
#m4s NEW REALITY:MONEY FOLLOWS  FOUNDERS
#m4s      SIGNALS ARE      EVERYWHEREBIG DATA + OPEN SOURCE ANALYTICS = NEW TECHNIQUES FOR VC
#m4sWALL STREETBEAT US TO IT
#m4s
#m4s“   UBS PROPRIETARY    SATELLITE PARKING LOT    FILL RATE ANALYSIS    POINTS TO AN    INTERESTING CADENCE    INTRA-QUA...
#m4s
#m4s“TWICE A WEEK A SMALLHELICOPTER CIRCLESOVER CUSHING’S TANKFARMS ON AN OILINDUSTRY SPYINGMISSION.
#m4s    WALL STREET    ISN’T ALONETHESE TECHNIQUES ALREADY USED TO UNDERWRITE IN-VITRO  FERTILIZATION LENDING, PAYDAY LOAN...
#m4sIT TURNS OUT,WE CAN DO IT, TOO                SURPRISE!
#m4s+ “GUT” + TRUSTED MENTORS + MUCH, MUCH MORE DATA.
#m4s        SENTIMENT         ANALYSISWHAT IS THE TEAM THINKING? WHAT DOES THE MARKET THINK?           WHAT DO MY PEERS/ME...
#m4s   NEEDLE IN THE    HAYSTACK REAL USE CASES: SIGNS THAT A FUNDING ROUND IS ABOUT TOOCCUR AND/OR SIGNS THAT A PRODUCT I...
#m4sFASTER PORTFOLIO    TRENDS  CURRENT SYSTEMS OF QUARTERLY/AD-HOC REPORTING IS    BROKEN -- SELF REPORTED DATA IS OFTEN ...
#m4s     500 CHECKLISTProduct solves a problem for a specific target customerCapital-efficient businesses - operational @ <$...
#m4sEARLY STAGE VC IS CHANGING HAS CHANGED
#m4sSTATE OF THE ART IN EARLY STAGE INVESTING IS NOT   VERY SOPHISTICATED     TRUST REFERRALS. MOVE FAST. KEEP LEGAL/FINAN...
#m4sMONEYBALLIT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
#m4s           MY PRIMARY GOAL IS TO      BUY WINSNOT NECESSARILY BUYING INTO THE HOTTEST DEALS. FOCUS ON TEAM, EXECUTION,...
#m4sINITIAL BET DESIGNED TO GIVE US MORE DATA FOR    SUBSEQUENT BETS
#m4s   QUANTITATIVE    PORTFOLIO    APPROACHBENEFITS: CONTROLLED RISK + OUTSIZED RETURN POTENTIAL
#m4s                                   Monte Carlo Simulation of Angel Investing                  5                       ...
#m4s    MODERN PORTFOLIO THEORY:RISK MITIGATION   THROUGHDIVERSIFICATION
#m4s    HIGH VOLUME INVESTING ALLOWSFOR HIGH ERROR RATE
#m4s   TRACK IRR &VALUATIONS WITHIN YOUR PORTFOLIO   AT LEAST YEARLY. RECOMMEND QUARTERLY.
#m4sCONTROLLED RISK:OUTSIZED RETURN   POTENTIAL
#m4s  PORTFOLIO IRR QUICKLY POSITIVE(WITH SMALLER EARLY EXITS AND PROMISING DEALS GETTING FUNDED)
#m4sEVEN “SMALLER”EXITS CAN MOVE  THE NEEDLE  DON’T FORGET: YOU CAN SELL POSITIONS TO  DOWNSTREAM OR SECONDARY BUYERS TOO.
#m4sINDIVIDUAL BETS   ARE SMALL  MUCH EASIER TO RUN AN EXPERIMENT ON A   $50K INITIAL CHECK INSTEAD OF $250K+
#m4s               BAD BETS               FAIL FASTSMALLER CHECK SIZES FORCE COMPANIES TO PROVE THEORIES FASTER.ALLOWING I...
#m4s       FAILURE RATES         ARE HIGH DIVERSITY OF HIGH VOLUME INVESTING ALLOWS FOR HIGH ERROR RATE.FUND IRR QUICKLY P...
#m4sALLOCATE FOR FOLLOW-ONS            30% Capital - Initial Bets                         target 10-20 deals            70...
#m4sDEAL TERMSSO YOU FOUND A STARTUP YOU LOVE?
#m4sDEBT VS EQUITY
#m4sCONVERTIBLE NOTES ARE OK (REALLY!) LOWER LEGAL FEES, LESS DOCS, QUICKER TO EXECUTE. WHEN    CAPPED, THEY FUNCTION SIMI...
#m4s STANDARD DOCSARE YOUR FRIENDS WHEN IN DOUBT, DO NOT INNOVATE IN FINANCE OR LEGAL
#m4s   PRO RATA &   INFO RIGHTSALWAYS. ALWAYS. ALWAYS. ALWAYS. ALWAYS. (GET IT?)
#m4s      FOCUS ON     VALUATION &      MULTIPLESOWNERSHIP % MATTERS MUCH LESS. FOCUS ON REQUIRED EXIT  SIZE RATHER THAN S...
#m4s IT’S HARD TO MAKE      MONEY ON VALUATIONS > $5M(PRO TIP: CONSIDER MIN. RETURN REQUIREMENTS FOR DOWNSIDE SCENARIOS)
#m4s                   YOUR PRIMARY GOALLET FOUNDERS GET  BACK TO WORKTHIS IS A LONG GAME: AVOID LOSING YOUR REPUTATION OV...
#m4sAVOID BOARD SEATS
#m4s MOST BOARDSPROVIDE MINIMAL   VALUE-ADD
#m4sBEST DEALS USUALLY  REQUIRE LIMITED  BOARD SUPPORT SPEND YOUR TIME SOURCING NEW DEALS. LIMIT TIME ON  SIDEWAYS DEALS. ...
#m4sDO NOT INNOVATE IN FINANCE OR LEGAL
#m4s     INVESTING   IS A PROCESSDABBLING IN INVESTING IS (AT BEST) GAMBLING. BETTER TO WALK AWAY OR PURSUE INVESTING NEAR...
#m4s           BE AN ACTIVE            INVESTORPORTFOLIO EFFECTS & THE LEAN STARTUP MOVEMENT ARE YOUR FRIENDSYOU CAN EXPEC...
#m4s     BE A SMART      INVESTORFOCUS ON INFORMATION ASYMMETRY & PRICE/MULTIPLES.
#m4s“   BY ITS NATURE, THE    INTERNET UNDERMINES    ANYONE WHOSE STATUS    DEPENDS ON    PRIVILEGED ACCESS TO    INFORMAT...
#m4sTHE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING:API TO VENTURE CAPITAL& FUNCTIONAL EXPERTISE(FOR FOUNDERS. FOR INVES...
#m4sMONEYBALL STARTUPS           +        IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.                      PAUL SINGH        ...
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Moneyball: A Quantitative Approach to Angel Investing (NASSCOM Product Conclave - India - Nov 2012)

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Slides from my Moneyball talk in Bangalore, India.

Published in: Business

Transcript of "Moneyball: A Quantitative Approach to Angel Investing (NASSCOM Product Conclave - India - Nov 2012)"

  1. 1. #m4sMONEYBALL STARTUPS + IT’S NOT SPRAY AND PRAY. IT’S A PROCESS. PAUL SINGH 500 Startups @paulsingh・paul@500startups.com・resultsjunkies.com/blog
  2. 2. #m4s GETTING TO KNOW500 STARTUPS BECAUSE WE’RE KIND OF A BIG DEAL PAUL SINGH@paulsingh・paul@500startups.com・resultsjunkies.com/blog
  3. 3. #m4sTHE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING:API TO VENTURE CAPITAL& FUNCTIONAL EXPERTISE(FOR FOUNDERS. FOR INVESTORS. FOR GOVERNMENT.)
  4. 4. #m4sFOUNDERS:BUILD SOMETHINGPEOPLE WANT
  5. 5. #m4sINVESTORS:WRITE CHECKS ANDADD VALUE
  6. 6. #m4sGOVERNMENT:MAKE LIFE EASYFOR INVESTORS &FOUNDERS
  7. 7. #m4s“ VENTURE CAPITAL IS OPEN TO ATTACK BY DISRUPTIVE NEW BUSINESS MODELS AND TECHNOLOGY. -- NAVAL RAVIKANT (@naval)
  8. 8. #m4s(R)EVOLUTION IN THINKING
  9. 9. #m4s EARLY STAGE STARTUPSHAVE CHANGED
  10. 10. #m4s CLOUD, OPEN SOURCE AND ONLINE DISTRIBUTION DRIVING STARTUP COSTSLOWER THAN EVER BUT SCALING STILL COSTS MONEY
  11. 11. #m4s WEB GETS BIGGER.WORLD GETS SMALLER.
  12. 12. #m4s TRACTION IS THE NEWINTELLECTUAL PROPERTYPLATFORMS (SEARCH, SOCIAL & MOBILE) PRIMARILY DRIVING THE CHANGE. NO LONGER “GOOD ENOUGH” TO DEPEND ON TECH DIFFERENTIATION.
  13. 13. #m4s CAPITALINCREASINGLYCOMMODITIZED RISE OF THE ANGELS, YO!
  14. 14. #m4s NEW REALITY:MONEY FOLLOWS FOUNDERS
  15. 15. #m4s SIGNALS ARE EVERYWHEREBIG DATA + OPEN SOURCE ANALYTICS = NEW TECHNIQUES FOR VC
  16. 16. #m4sWALL STREETBEAT US TO IT
  17. 17. #m4s
  18. 18. #m4s“ UBS PROPRIETARY SATELLITE PARKING LOT FILL RATE ANALYSIS POINTS TO AN INTERESTING CADENCE INTRA-QUARTER AND POTENTIAL UPSIDE TO OUR VIEW.
  19. 19. #m4s
  20. 20. #m4s“TWICE A WEEK A SMALLHELICOPTER CIRCLESOVER CUSHING’S TANKFARMS ON AN OILINDUSTRY SPYINGMISSION.
  21. 21. #m4s WALL STREET ISN’T ALONETHESE TECHNIQUES ALREADY USED TO UNDERWRITE IN-VITRO FERTILIZATION LENDING, PAYDAY LOANS, SUBPRIME AUTO LENDING, HOME/PERSONAL/AUTO INSURANCE AND MORE.
  22. 22. #m4sIT TURNS OUT,WE CAN DO IT, TOO SURPRISE!
  23. 23. #m4s+ “GUT” + TRUSTED MENTORS + MUCH, MUCH MORE DATA.
  24. 24. #m4s SENTIMENT ANALYSISWHAT IS THE TEAM THINKING? WHAT DOES THE MARKET THINK? WHAT DO MY PEERS/MENTORS THINK?
  25. 25. #m4s NEEDLE IN THE HAYSTACK REAL USE CASES: SIGNS THAT A FUNDING ROUND IS ABOUT TOOCCUR AND/OR SIGNS THAT A PRODUCT IS ABOUT TO EXPLODE. VERY HARD TO DO ACCURATELY BUT PAYOFF IS BIG & FAST.
  26. 26. #m4sFASTER 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.
  27. 27. #m4s 500 CHECKLISTProduct solves a problem for a specific target customerCapital-efficient businesses - operational @ <$1M fundingPrimarily internet-based distribution - search, social, mobile, localSimple revenue models - transactions, subscriptions or affiliateFunctional prototype before investment (or previous success)Small but measurable usage - some customers, early revenueSmall but cross-functional team - engineer, design/UX, marketing
  28. 28. #m4sEARLY STAGE VC IS CHANGING HAS CHANGED
  29. 29. #m4sSTATE 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.
  30. 30. #m4sMONEYBALLIT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
  31. 31. #m4s MY PRIMARY GOAL IS TO BUY WINSNOT NECESSARILY BUYING INTO THE HOTTEST DEALS. FOCUS ON TEAM, EXECUTION, TRACTION & DATA. (STICK AROUND... I’M GOING TO SHOW YOU HOW)
  32. 32. #m4sINITIAL BET DESIGNED TO GIVE US MORE DATA FOR SUBSEQUENT BETS
  33. 33. #m4s QUANTITATIVE PORTFOLIO APPROACHBENEFITS: CONTROLLED RISK + OUTSIZED RETURN POTENTIAL
  34. 34. #m4s 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
  35. 35. #m4s MODERN PORTFOLIO THEORY:RISK MITIGATION THROUGHDIVERSIFICATION
  36. 36. #m4s HIGH VOLUME INVESTING ALLOWSFOR HIGH ERROR RATE
  37. 37. #m4s TRACK IRR &VALUATIONS WITHIN YOUR PORTFOLIO AT LEAST YEARLY. RECOMMEND QUARTERLY.
  38. 38. #m4sCONTROLLED RISK:OUTSIZED RETURN POTENTIAL
  39. 39. #m4s PORTFOLIO IRR QUICKLY POSITIVE(WITH SMALLER EARLY EXITS AND PROMISING DEALS GETTING FUNDED)
  40. 40. #m4sEVEN “SMALLER”EXITS CAN MOVE THE NEEDLE DON’T FORGET: YOU CAN SELL POSITIONS TO DOWNSTREAM OR SECONDARY BUYERS TOO.
  41. 41. #m4sINDIVIDUAL BETS ARE SMALL MUCH EASIER TO RUN AN EXPERIMENT ON A $50K INITIAL CHECK INSTEAD OF $250K+
  42. 42. #m4s BAD BETS FAIL FASTSMALLER 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.
  43. 43. #m4s 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.
  44. 44. #m4sALLOCATE 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”)
  45. 45. #m4sDEAL TERMSSO YOU FOUND A STARTUP YOU LOVE?
  46. 46. #m4sDEBT VS EQUITY
  47. 47. #m4sCONVERTIBLE NOTES ARE OK (REALLY!) LOWER LEGAL FEES, LESS DOCS, QUICKER TO EXECUTE. WHEN CAPPED, THEY FUNCTION SIMILAR TO PRICED ROUNDS.
  48. 48. #m4s STANDARD DOCSARE YOUR FRIENDS WHEN IN DOUBT, DO NOT INNOVATE IN FINANCE OR LEGAL
  49. 49. #m4s PRO RATA & INFO RIGHTSALWAYS. ALWAYS. ALWAYS. ALWAYS. ALWAYS. (GET IT?)
  50. 50. #m4s FOCUS ON VALUATION & MULTIPLESOWNERSHIP % MATTERS MUCH LESS. FOCUS ON REQUIRED EXIT SIZE RATHER THAN SOME MYTHICAL OWNERSHIP TARGET.
  51. 51. #m4s IT’S HARD TO MAKE MONEY ON VALUATIONS > $5M(PRO TIP: CONSIDER MIN. RETURN REQUIREMENTS FOR DOWNSIDE SCENARIOS)
  52. 52. #m4s YOUR PRIMARY GOALLET FOUNDERS GET BACK TO WORKTHIS IS A LONG GAME: AVOID LOSING YOUR REPUTATION OVER 1%. WHEN IN DOUBT, LEAN TOWARDS THE ENTREPRENEUR.
  53. 53. #m4sAVOID BOARD SEATS
  54. 54. #m4s MOST BOARDSPROVIDE MINIMAL VALUE-ADD
  55. 55. #m4sBEST 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).
  56. 56. #m4sDO NOT INNOVATE IN FINANCE OR LEGAL
  57. 57. #m4s INVESTING IS A PROCESSDABBLING IN INVESTING IS (AT BEST) GAMBLING. BETTER TO WALK AWAY OR PURSUE INVESTING NEARLY FULL TIME OR FIND SOMEONE TO MANAGE YOUR MONEY
  58. 58. #m4s 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
  59. 59. #m4s BE A SMART INVESTORFOCUS ON INFORMATION ASYMMETRY & PRICE/MULTIPLES.
  60. 60. #m4s“ BY ITS NATURE, THE INTERNET UNDERMINES ANYONE WHOSE STATUS DEPENDS ON PRIVILEGED ACCESS TO INFORMATION. -- MICHAEL LEWIS
  61. 61. #m4sTHE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING:API TO VENTURE CAPITAL& FUNCTIONAL EXPERTISE(FOR FOUNDERS. FOR INVESTORS. FOR GOVERNMENT.)
  62. 62. #m4sMONEYBALL STARTUPS + IT’S NOT SPRAY AND PRAY. IT’S A PROCESS. PAUL SINGH 500 Startups @paulsingh・paul@500startups.com・resultsjunkies.com/blog
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