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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
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
20. Distribution of Returns by Venture Investment
70%
Overall Multiple: 2.6X
Avg. Holding Period: 3.5 years
60%
3 years
Percent 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
25. HIGH QUALITY
REFERRALS
ONE HIGH QUALITY REFERRAL > MULTIPLE LOW QUALITY REFERRALS
26. STICK TO WHAT
YOU KNOW
(STAY TUNED... SEXY GRAPH COMING LATER...)
27. 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
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.
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
53. IT’S HARD TO MAKE
MONEY ON
VALUATIONS > $5M
(PRO TIP: CONSIDER MIN. RETURN REQUIREMENTS FOR DOWNSIDE SCENARIOS)
54. YOUR PRIMARY GOAL
LET FOUNDERS GET
BACK TO WORK
THIS IS A LONG GAME: AVOID LOSING YOUR REPUTATION OVER 1%.
55. TIPS, TRICKS, PLEASE DO’S, & PLEASE DON’TS
MAKE IT RAIN
I’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
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.
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 ANGEL
PORTFOLIO EFFECTS & THE LEAN STARTUP MOVEMENT ARE YOUR FRIENDS
71. 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