INVESTING 101 IT’S NOT SPRAY
AND PRAY. IT’S A PROCESS. PAUL SINGH 500 Startups@paulsingh・paul@500startups.com・angel.co/paulsingh

TWO THINGS YOU DON’T WANT
TO SEE MADE: SAUSAGE &INVESTMENTS(HOWEVER, THE END RESULT CAN BE PRETTY GOOD)

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

A (R)EVOLUTION IN THINKING START
WITH VENTUREHACKS.COM/ARCHIVES

“ VENTURE CAPITAL IS OPEN
TO ATTACK BY DISRUPTIVE NEW BUSINESS MODELS AND TECHNOLOGY. -- NAVAL RAVIKANT (@naval)

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 VERY SOPHISTICATED TRUST REFERRALS. MOVE FAST. KEEP LEGAL/FINANCE SIMPLE. BUILD RELATIONSHIPS WITH OTHER INVESTORS, SYNDICATE EVERYTHING.

500.co/challenge #moneyball4startups EARLY STAGE STARTUPS
HAVE CHANGED

500.co/challenge #moneyball4startups CLOUD, OPEN SOURCE
AND ONLINE DISTRIBUTION DRIVING STARTUP COSTS LOWER THAN EVERBUT SCALING STILL COSTS MONEY

500.co/challenge #moneyball4startups WEB GETS BIGGER.
WORLD GETS SMALLER.

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.

500.co/challenge #moneyball4startups CAPITAL INCREASINGLY COMMODITIZED
RISE OF THE ANGELS, YO!

500.co/challenge #moneyball4startups NEW REALITY: MONEY
FOLLOWS FOUNDERS

FIRSTTHE EASY STUFF

ANGEL != VC

ANGEL MONEY IN/OUTIT’S MAH MONEY
YO!

VC MONEY INLP 99% GP
1%

VC MONEY OUTLP80% Profit 2%
Management Fee GP 20% Profit

MOST INVESTORS LOSE MONEY (BUT
HOPEFULLY EVERYTHING WILL WORK OUT)

Distribution of Returns by Venture
Investment 70% Overall Multiple: 2.6X Avg. Holding Period: 3.5 years 60% 3 yearsPercent of Total Exits 50% 40% 3.3 years 30% 20% 10% 4.6 years 4.9 years 6 years 0% < 1X 1X to 5X 5X to 10X 10X to 30X > 30X Exit Multiples

“ THE BEST WAY TO
BECOME A MILLIONAIRE IS TO START OUT BEING A BILLIONAIRE AND THEN START AN AIRLINE. -- SIR RICHARD BRANSON

UNDERSTAND YOURMOTIVATIONS

SOCIAL PROOF | RECIPROCITYPATTERN RECOGNITION
| CURIOSITYRETURNS | SCARCITY | TRACTION

HAVE AGAME PLAN

HIGH QUALITY REFERRALSONE HIGH QUALITY
REFERRAL > MULTIPLE LOW QUALITY REFERRALS

STICK TO WHAT YOU KNOW
(STAY TUNED... SEXY GRAPH COMING LATER...)

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

I AM NOT A LAWYER
(BUT I PLAY ONE ONLINE)

DEAL FLOW

THE ODDS AREAGAINST YOUEVERYONE ELSE
IS FUNDING COMPANIES TOO

STARTUP FOUNDERSARE YOUR FRIENDS

BUT THE GOOD NEWS IS
THOSE OTHERINVESTORS ARE YOUR FRIENDS

ANGELLISTIS YOUR FRIEND

FOLLOW OTHER INVESTORS ESPECIALLY FOR
YOUR FIRST FEW DEALS

BE USEFULACCESS TO CAPITAL IS
NO LONGER ENOUGH

FIRSTIMPRESSIONS MATTER BE COOL. INTROS
ALWAYS HELP.

ATTEND DEMO DAYS

GET TOYES OR NO QUICKLY

REPUTATIONIS EVERYTHING

PICKING WINNERS

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.

STICK TO WHAT YOU KNOW

Relationship to Industry Expertise 70%
50% of deals were not related When related, they had 14 years of experience 60% 50%Percent of Exits 40% 30% 20% 10% 0% < 1X 1X to 5X 5X to 10X 10X to 30X > 30X Exit Multiples Low Expertise High Expertise

“ INVESTMENT MULTIPLES WERE TWICE
AS HIGH FOR INVESTMENTS IN VENTURES CONNECTED TO INVESTORS’ INDUSTRY EXPERTISE. -- KAUFFMAN FOUNDATION REPORT

INFORMATIONASYMMETRY IS YOUR FRIEND

MOST DILIGENCEHAPPENS AFTER THE FIRST
CHECK

DEAL TERMSSO YOU FOUND A
STARTUP YOU LOVE?

DEBT VS EQUITY

CONVERTIBLE NOTES ARE OK (REALLY!)
LOWER LEGAL FEES, LESS DOCS, QUICKER TO EXECUTE. WHEN CAPPED, THEY FUNCTION SIMILAR TO PRICED ROUNDS.

STANDARD DOCSARE YOUR FRIENDS WHEN
IN DOUBT, DO NOT INNOVATE IN FINANCE OR LEGAL

PRO RATA & INFO RIGHTSALWAYS.
ALWAYS. ALWAYS. ALWAYS. ALWAYS. (GET IT?)

FOCUS ONVALUATION & MULTIPLES (OWNERSHIP
% MATTERS MUCH LESS)

IT’S HARD TO MAKE MONEY
ON VALUATIONS > $5M(PRO TIP: CONSIDER MIN. RETURN REQUIREMENTS FOR DOWNSIDE SCENARIOS)

YOUR PRIMARY GOALLET FOUNDERS GET
BACK TO WORKTHIS IS A LONG GAME: AVOID LOSING YOUR REPUTATION OVER 1%.

TIPS, TRICKS, PLEASE DO’S, &
PLEASE DON’TSMAKE IT RAINI’VE THOUGHT WAYYYY TOO MUCH ABOUT THIS

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”)

500.co/challenge #moneyball4startups SIGNALS ARE EVERYWHERE
BIG DATA + OPEN SOURCE ANALYTICS = NEW TECHNIQUES FOR VC

500.co/challenge #moneyball4startups WALL STREET BEAT
US TO IT

500.co/challenge #moneyball4startups

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 IT TURNS OUT,
WE CAN DO IT, TOO SURPRISE!

500.co/challenge #moneyball4startups + “GUT” +
TRUSTED MENTORS + MUCH, MUCH MORE DATA.

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 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.

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.

AVOID BOARD SEATS

MOST BOARDSPROVIDE MINIMAL VALUE-ADD

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).

BE AN ACTIVE ANGELPORTFOLIO EFFECTS
& THE LEAN STARTUP MOVEMENT ARE YOUR FRIENDS

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

MODERN PORTFOLIO THEORY:RISK MITIGATION THROUGHDIVERSIFICATION

HIGH VOLUME INVESTING ALLOWSFOR HIGH
ERROR RATE

TRACK IRR &VALUATIONS WITHIN YOUR
PORTFOLIO AT LEAST YEARLY. RECOMMEND QUARTERLY.

BE A SMART ANGEL FOCUS
ON INFORMATION ASYMMETRY & PRICE.

CONTROLLED RISK:OUTSIZED RETURN POTENTIAL

PORTFOLIO IRR QUICKLY POSITIVE(WITH SMALLER
EARLY EXITS AND PROMISING DEALS GETTING FUNDED)

EVEN “SMALLER”EXITS CAN MOVE THE
NEEDLE DON’T FORGET: YOU CAN SELL POSITIONS TO DOWNSTREAM OR SECONDARY BUYERS TOO.

DO NOT INNOVATE IN FINANCE
OR LEGAL

INVESTINGIS A PROCESS

“ BY IT’S NATURE, THE
INTERNET UNDERMINED ANYONE WHOSE STATUS DEPENDED ON A PRIVILEGED ACCESS TO INFORMATION. -- MICHAEL LEWIS

INVESTING 101 IT’S NOT SPRAY
AND PRAY. IT’S A PROCESS. PAUL SINGH 500 Startups@paulsingh・paul@500startups.com・angel.co/paulsingh