Moneyball: A Quantitative Approach to Angel Investing (NASSCOM Product Conclave - India - Nov 2012)
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The document discusses the evolution of early stage startup investing and outlines a quantitative approach focused on diversification, small initial bets, tracking metrics, and following the top performers. It advocates for treating investing as a process rather than individual deals, and emphasizes letting founders focus on building their companies.
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Moneyball: A Quantitative Approach to Angel Investing (NASSCOM Product Conclave - India - Nov 2012)
- 1. #m4s MONEYBALL STARTUPS + ITâS NOT SPRAY AND PRAY. ITâS A PROCESS. PAUL SINGH 500 Startups @paulsinghă»paul@500startups.comă»resultsjunkies.com/blog
- 2. #m4s GETTING TO KNOW 500 STARTUPS BECAUSE WEâRE KIND OF A BIG DEAL PAUL SINGH @paulsinghă»paul@500startups.comă»resultsjunkies.com/blog
- 3. #m4s THE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING: API TO VENTURE CAPITAL & FUNCTIONAL EXPERTISE (FOR FOUNDERS. FOR INVESTORS. FOR GOVERNMENT.)
- 5. #m4s INVESTORS: WRITE CHECKS AND ADD VALUE
- 6. #m4s GOVERNMENT: MAKE LIFE EASY FOR INVESTORS & FOUNDERS
- 7. #m4s â VENTURE CAPITAL IS OPEN TO ATTACK BY DISRUPTIVE NEW BUSINESS MODELS AND TECHNOLOGY. -- NAVAL RAVIKANT (@naval)
- 9. #m4s EARLY STAGE STARTUPS HAVE CHANGED
- 10. #m4s CLOUD, OPEN SOURCE AND ONLINE DISTRIBUTION DRIVING STARTUP COSTS LOWER THAN EVER BUT SCALING STILL COSTS MONEY
- 11. #m4s WEB GETS BIGGER. WORLD GETS SMALLER.
- 12. #m4s TRACTION IS THE NEW INTELLECTUAL PROPERTY PLATFORMS (SEARCH, SOCIAL & MOBILE) PRIMARILY DRIVING THE CHANGE. NO LONGER âGOOD ENOUGHâ TO DEPEND ON TECH DIFFERENTIATION.
- 13. #m4s CAPITAL INCREASINGLY COMMODITIZED RISE OF THE ANGELS, YO!
- 14. #m4s NEW REALITY: MONEY FOLLOWS FOUNDERS
- 15. #m4s SIGNALS ARE EVERYWHERE BIG DATA + OPEN SOURCE ANALYTICS = NEW TECHNIQUES FOR VC
- 16. #m4s WALL STREET BEAT US TO IT
- 17. #m4s
- 18. #m4s â UBS PROPRIETARY SATELLITE PARKING LOT FILL RATE ANALYSIS POINTS TO AN INTERESTING CADENCE INTRA-QUARTER AND POTENTIAL UPSIDE TO OUR VIEW.
- 19. #m4s
- 20. #m4s â TWICE A WEEK A SMALL HELICOPTER CIRCLES OVER CUSHINGâS TANK FARMS ON AN OIL INDUSTRY SPYING MISSION.
- 21. #m4s WALL STREET ISNâT ALONE THESE TECHNIQUES ALREADY USED TO UNDERWRITE IN-VITRO FERTILIZATION LENDING, PAYDAY LOANS, SUBPRIME AUTO LENDING, HOME/PERSONAL/AUTO INSURANCE AND MORE.
- 22. #m4s IT TURNS OUT, WE CAN DO IT, TOO SURPRISE!
- 23. #m4s + âGUTâ + TRUSTED MENTORS + MUCH, MUCH MORE DATA.
- 24. #m4s SENTIMENT ANALYSIS WHAT IS THE TEAM THINKING? WHAT DOES THE MARKET THINK? WHAT DO MY PEERS/MENTORS THINK?
- 25. #m4s 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.
- 26. #m4s 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.
- 27. #m4s 500 CHECKLIST Product solves a problem for a speciïŹc target customer Capital-efïŹcient businesses - operational @ <$1M funding Primarily internet-based distribution - search, social, mobile, local Simple revenue models - transactions, subscriptions or afïŹliate Functional prototype before investment (or previous success) Small but measurable usage - some customers, early revenue Small but cross-functional team - engineer, design/UX, marketing
- 28. #m4s EARLY STAGE VC IS CHANGING HAS CHANGED
- 29. #m4s 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.
- 30. #m4s MONEYBALL ITâS NOT SPRAY AND PRAY. ITâS A PROCESS.
- 31. #m4s MY PRIMARY GOAL IS TO BUY WINS NOT NECESSARILY BUYING INTO THE HOTTEST DEALS. FOCUS ON TEAM, EXECUTION, TRACTION & DATA. (STICK AROUND... IâM GOING TO SHOW YOU HOW)
- 32. #m4s INITIAL BET DESIGNED TO GIVE US MORE DATA FOR SUBSEQUENT BETS
- 33. #m4s QUANTITATIVE PORTFOLIO APPROACH BENEFITS: CONTROLLED RISK + OUTSIZED RETURN POTENTIAL
- 34. #m4s Monte Carlo Simulation of Angel Investing 5 mean median std dev 3.75 Exit 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. #m4s MODERN PORTFOLIO THEORY: RISK MITIGATION THROUGH DIVERSIFICATION
- 36. #m4s HIGH VOLUME INVESTING ALLOWS FOR HIGH ERROR RATE
- 37. #m4s TRACK IRR & VALUATIONS WITHIN YOUR PORTFOLIO AT LEAST YEARLY. RECOMMEND QUARTERLY.
- 38. #m4s CONTROLLED RISK: OUTSIZED RETURN POTENTIAL
- 39. #m4s PORTFOLIO IRR QUICKLY POSITIVE (WITH SMALLER EARLY EXITS AND PROMISING DEALS GETTING FUNDED)
- 40. #m4s EVEN âSMALLERâ EXITS CAN MOVE THE NEEDLE DONâT FORGET: YOU CAN SELL POSITIONS TO DOWNSTREAM OR SECONDARY BUYERS TOO.
- 41. #m4s INDIVIDUAL BETS ARE SMALL MUCH EASIER TO RUN AN EXPERIMENT ON A $50K INITIAL CHECK INSTEAD OF $250K+
- 42. #m4s BAD BETS FAIL FAST SMALLER CHECK SIZES FORCE COMPANIES TO PROVE THEORIES FASTER. ALLOWING INVESTORS TO QUICKLY ITERATE OUR FORECASTING/FUNDING MODEL. FEWER âLIVING DEADâ AND QUICKER RETURN ON RESULTS.
- 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. #m4s 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 âHOW TO AVOID GETTING SQUASHEDâ)
- 45. #m4s DEAL TERMS SO YOU FOUND A STARTUP YOU LOVE?
- 47. #m4s CONVERTIBLE NOTES ARE OK (REALLY!) LOWER LEGAL FEES, LESS DOCS, QUICKER TO EXECUTE. WHEN CAPPED, THEY FUNCTION SIMILAR TO PRICED ROUNDS.
- 48. #m4s STANDARD DOCS ARE YOUR FRIENDS WHEN IN DOUBT, DO NOT INNOVATE IN FINANCE OR LEGAL
- 49. #m4s PRO RATA & INFO RIGHTS ALWAYS. ALWAYS. ALWAYS. ALWAYS. ALWAYS. (GET IT?)
- 50. #m4s FOCUS ON VALUATION & MULTIPLES OWNERSHIP % MATTERS MUCH LESS. FOCUS ON REQUIRED EXIT SIZE RATHER THAN SOME MYTHICAL OWNERSHIP TARGET.
- 51. #m4s ITâS HARD TO MAKE MONEY ON VALUATIONS > $5M (PRO TIP: CONSIDER MIN. RETURN REQUIREMENTS FOR DOWNSIDE SCENARIOS)
- 52. #m4s 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.
- 54. #m4s MOST BOARDS PROVIDE MINIMAL VALUE-ADD
- 55. #m4s 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).
- 56. #m4s DO NOT INNOVATE IN FINANCE OR LEGAL
- 57. #m4s 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
- 58. #m4s BE AN ACTIVE INVESTOR PORTFOLIO EFFECTS & THE LEAN STARTUP MOVEMENT ARE YOUR FRIENDS YOU CAN EXPECT FAVORABLE WITH 10 DEALS BUT IT TAKES 20+ TO BE SAFE
- 59. #m4s BE A SMART INVESTOR FOCUS ON INFORMATION ASYMMETRY & PRICE/MULTIPLES.
- 60. #m4s â BY ITS NATURE, THE INTERNET UNDERMINES ANYONE WHOSE STATUS DEPENDS ON PRIVILEGED ACCESS TO INFORMATION. -- MICHAEL LEWIS
- 61. #m4s THE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING: API TO VENTURE CAPITAL & FUNCTIONAL EXPERTISE (FOR FOUNDERS. FOR INVESTORS. FOR GOVERNMENT.)
- 62. #m4s MONEYBALL STARTUPS + ITâS NOT SPRAY AND PRAY. ITâS A PROCESS. PAUL SINGH 500 Startups @paulsinghă»paul@500startups.comă»resultsjunkies.com/blog