Investing 101 (SJSU - Sept 2012)

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Slides for my talk at Steve Bennet's Entrepreneurial Finance class at SJSU.

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Investing 101 (SJSU - Sept 2012)

  1. INVESTING 101 IT’S NOT SPRAY AND PRAY. IT’S A PROCESS. PAUL SINGH 500 Startups@paulsingh・paul@500startups.com・angel.co/paulsingh
  2. TWO THINGS YOU DON’T WANT TO SEE MADE: SAUSAGE &INVESTMENTS(HOWEVER, THE END RESULT CAN BE PRETTY GOOD)
  3. 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
  4. A (R)EVOLUTION IN THINKING START WITH VENTUREHACKS.COM/ARCHIVES
  5. “ VENTURE CAPITAL IS OPEN TO ATTACK BY DISRUPTIVE NEW BUSINESS MODELS AND TECHNOLOGY. -- NAVAL RAVIKANT (@naval)
  6. 500.co/challenge #moneyball4startups EARLY STAGE VC IS CHANGING HAS CHANGED
  7. 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.
  8. 500.co/challenge #moneyball4startups EARLY STAGE STARTUPS HAVE CHANGED
  9. 500.co/challenge #moneyball4startups CLOUD, OPEN SOURCE AND ONLINE DISTRIBUTION DRIVING STARTUP COSTS LOWER THAN EVERBUT SCALING STILL COSTS MONEY
  10. 500.co/challenge #moneyball4startups WEB GETS BIGGER. WORLD GETS SMALLER.
  11. 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.
  12. 500.co/challenge #moneyball4startups CAPITAL INCREASINGLY COMMODITIZED RISE OF THE ANGELS, YO!
  13. 500.co/challenge #moneyball4startups NEW REALITY: MONEY FOLLOWS FOUNDERS
  14. FIRSTTHE EASY STUFF
  15. ANGEL != VC
  16. ANGEL MONEY IN/OUTIT’S MAH MONEY YO!
  17. VC MONEY INLP 99% GP 1%
  18. VC MONEY OUTLP80% Profit 2% Management Fee GP 20% Profit
  19. MOST INVESTORS LOSE MONEY (BUT HOPEFULLY EVERYTHING WILL WORK OUT)
  20. 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
  21. “ THE BEST WAY TO BECOME A MILLIONAIRE IS TO START OUT BEING A BILLIONAIRE AND THEN START AN AIRLINE. -- SIR RICHARD BRANSON
  22. UNDERSTAND YOURMOTIVATIONS
  23. SOCIAL PROOF | RECIPROCITYPATTERN RECOGNITION | CURIOSITYRETURNS | SCARCITY | TRACTION
  24. HAVE AGAME PLAN
  25. HIGH QUALITY REFERRALSONE HIGH QUALITY REFERRAL > MULTIPLE LOW QUALITY REFERRALS
  26. STICK TO WHAT YOU KNOW (STAY TUNED... SEXY GRAPH COMING LATER...)
  27. 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. I AM NOT A LAWYER (BUT I PLAY ONE ONLINE)
  29. DEAL FLOW
  30. THE ODDS AREAGAINST YOUEVERYONE ELSE IS FUNDING COMPANIES TOO
  31. STARTUP FOUNDERSARE YOUR FRIENDS
  32. BUT THE GOOD NEWS IS THOSE OTHERINVESTORS ARE YOUR FRIENDS
  33. ANGELLISTIS YOUR FRIEND
  34. FOLLOW OTHER INVESTORS ESPECIALLY FOR YOUR FIRST FEW DEALS
  35. BE USEFULACCESS TO CAPITAL IS NO LONGER ENOUGH
  36. FIRSTIMPRESSIONS MATTER BE COOL. INTROS ALWAYS HELP.
  37. ATTEND DEMO DAYS
  38. GET TOYES OR NO QUICKLY
  39. REPUTATIONIS EVERYTHING
  40. PICKING WINNERS
  41. 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.
  42. STICK TO WHAT YOU KNOW
  43. 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
  44. “ INVESTMENT MULTIPLES WERE TWICE AS HIGH FOR INVESTMENTS IN VENTURES CONNECTED TO INVESTORS’ INDUSTRY EXPERTISE. -- KAUFFMAN FOUNDATION REPORT
  45. INFORMATIONASYMMETRY IS YOUR FRIEND
  46. MOST DILIGENCEHAPPENS AFTER THE FIRST CHECK
  47. DEAL TERMSSO YOU FOUND A STARTUP YOU LOVE?
  48. DEBT VS EQUITY
  49. CONVERTIBLE NOTES ARE OK (REALLY!) LOWER LEGAL FEES, LESS DOCS, QUICKER TO EXECUTE. WHEN CAPPED, THEY FUNCTION SIMILAR TO PRICED ROUNDS.
  50. STANDARD DOCSARE YOUR FRIENDS WHEN IN DOUBT, DO NOT INNOVATE IN FINANCE OR LEGAL
  51. PRO RATA & INFO RIGHTSALWAYS. ALWAYS. ALWAYS. ALWAYS. ALWAYS. (GET IT?)
  52. FOCUS ONVALUATION & MULTIPLES (OWNERSHIP % MATTERS MUCH LESS)
  53. IT’S HARD TO MAKE MONEY ON VALUATIONS > $5M(PRO TIP: CONSIDER MIN. RETURN REQUIREMENTS FOR DOWNSIDE SCENARIOS)
  54. YOUR PRIMARY GOALLET FOUNDERS GET BACK TO WORKTHIS IS A LONG GAME: AVOID LOSING YOUR REPUTATION OVER 1%.
  55. TIPS, TRICKS, PLEASE DO’S, & PLEASE DON’TSMAKE IT RAINI’VE THOUGHT WAYYYY TOO MUCH ABOUT THIS
  56. 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”)
  57. 500.co/challenge #moneyball4startups SIGNALS ARE EVERYWHERE BIG DATA + OPEN SOURCE ANALYTICS = NEW TECHNIQUES FOR VC
  58. 500.co/challenge #moneyball4startups WALL STREET BEAT US TO IT
  59. 500.co/challenge #moneyball4startups
  60. 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.
  61. 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.
  62. 500.co/challenge #moneyball4startups IT TURNS OUT, WE CAN DO IT, TOO SURPRISE!
  63. 500.co/challenge #moneyball4startups + “GUT” + TRUSTED MENTORS + MUCH, MUCH MORE DATA.
  64. 500.co/challenge #moneyball4startups SENTIMENT ANALYSIS WHAT IS THE TEAM THINKING? WHAT DOES THE MARKET THINK? WHAT DO MY PEERS/MENTORS THINK?
  65. 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.
  66. 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.
  67. AVOID BOARD SEATS
  68. MOST BOARDSPROVIDE MINIMAL VALUE-ADD
  69. 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).
  70. BE AN ACTIVE ANGELPORTFOLIO EFFECTS & THE LEAN STARTUP MOVEMENT ARE YOUR FRIENDS
  71. 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
  72. MODERN PORTFOLIO THEORY:RISK MITIGATION THROUGHDIVERSIFICATION
  73. HIGH VOLUME INVESTING ALLOWSFOR HIGH ERROR RATE
  74. TRACK IRR &VALUATIONS WITHIN YOUR PORTFOLIO AT LEAST YEARLY. RECOMMEND QUARTERLY.
  75. BE A SMART ANGEL FOCUS ON INFORMATION ASYMMETRY & PRICE.
  76. CONTROLLED RISK:OUTSIZED RETURN POTENTIAL
  77. PORTFOLIO IRR QUICKLY POSITIVE(WITH SMALLER EARLY EXITS AND PROMISING DEALS GETTING FUNDED)
  78. EVEN “SMALLER”EXITS CAN MOVE THE NEEDLE DON’T FORGET: YOU CAN SELL POSITIONS TO DOWNSTREAM OR SECONDARY BUYERS TOO.
  79. DO NOT INNOVATE IN FINANCE OR LEGAL
  80. INVESTINGIS A PROCESS
  81. “ BY IT’S NATURE, THE INTERNET UNDERMINED ANYONE WHOSE STATUS DEPENDED ON A PRIVILEGED ACCESS TO INFORMATION. -- MICHAEL LEWIS
  82. INVESTING 101 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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