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

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. FIRST
THE EASY STUFF

15. ANGEL != VC

16. ANGEL MONEY IN/OUT
IT’S MAH MONEY YO!

17. VC MONEY IN
LP
99%
GP
1%

18. VC MONEY OUT
LP
80% 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 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

22. UNDERSTAND
YOUR
MOTIVATIONS

23. SOCIAL PROOF | RECIPROCITY
PATTERN RECOGNITION | CURIOSITY
RETURNS | SCARCITY | TRACTION

24. HAVE A
GAME PLAN

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

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

29. DEAL FLOW

30. THE ODDS ARE
AGAINST YOU
EVERYONE ELSE IS FUNDING COMPANIES TOO

31. STARTUP FOUNDERS
ARE YOUR FRIENDS

32. BUT THE GOOD NEWS IS
THOSE OTHER
INVESTORS ARE
YOUR FRIENDS

33. ANGELLIST
IS YOUR FRIEND

34. FOLLOW OTHER
INVESTORS
ESPECIALLY FOR YOUR FIRST FEW DEALS

35. BE USEFUL
ACCESS TO CAPITAL IS NO LONGER ENOUGH

36. FIRST
IMPRESSIONS
MATTER
BE COOL. INTROS ALWAYS HELP.

37. ATTEND DEMO DAYS

38. GET TO
YES OR NO
QUICKLY

39. REPUTATION
IS 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. INFORMATION
ASYMMETRY IS
YOUR FRIEND

46. MOST DILIGENCE
HAPPENS AFTER THE
FIRST CHECK

47. DEAL TERMS
SO 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 DOCS
ARE YOUR FRIENDS
WHEN IN DOUBT, DO NOT INNOVATE IN FINANCE OR LEGAL

51. PRO RATA &
INFO RIGHTS
ALWAYS. ALWAYS. ALWAYS. ALWAYS. ALWAYS. (GET IT?)

52. FOCUS ON
VALUATION &
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 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

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 BOARDS
PROVIDE 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 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

72. MODERN PORTFOLIO THEORY:
RISK MITIGATION
THROUGH
DIVERSIFICATION

73. HIGH VOLUME
INVESTING ALLOWS
FOR 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. INVESTING
IS 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