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Delivering Outstanding VC Results with DA
The document outlines Ulu Ventures' approach to venture capital decision-making, emphasizing a disciplined process for evaluating investments that includes qualitative sorting, risk assessment, and sensitivity analysis. It highlights the importance of portfolio construction, leveraging a larger number of investments to mitigate risks and enhance returns. Ulu Ventures also discusses their unique filtering criteria and the significance of early-stage investment success probabilities, aiming for outlier returns through a diversified investment strategy.
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Delivering Outstanding VC Results with DA
- 1. Page 1 Ó2018 Ulu Ventures. All rights reserved. Delivering Outstanding VC Results with Decision Analysis MS&E 352: Decision Analysis II: Professional Decision Analysis February 27, 2018 Clint Korver: clint@uluventures.com
- 2. Page 2 Ó2018 Ulu Ventures. All rights reserved.
- 3. Page 3 Ó2018 Ulu Ventures. All rights reserved.
- 4. Page 4 Ó2018 Ulu Ventures. All rights reserved. Venture decisions are structurally difficult. Challenges Uncertainty Ego Biases
- 5. Page 5 Ó2018 Ulu Ventures. All rights reserved. Decision best practices can help. Challenges Best Practices Uncertainty Decision Analysis Ego Learning Biases Diversity
- 6. Page 6 Ó2018 Ulu Ventures. All rights reserved. Investments are the most noticeable VC decision, but they are only the “tip” of the iceberg. Decision Hierarchy • Stage • Sector • Fund Size • Geography • LP Expectations • Brand Promise to Ent’s • Size (# of investments) • Reserves ($’s held for follow-ons) • Mix (stage, sector, geo, timing, risk) • Initial investment decisions • Follow-on investment decisions Strategy Portfolio Construction Investments • Seed • Enterprise IT • $60m • Silicon Valley / Stanford • Top tier performance • Seed to series A partner Ulu Ventures • 60+ • Small • n/a • 10x PWMOIC
- 7. Page 7 Ó2018 Ulu Ventures. All rights reserved. INVESTMENT DECISIONS
- 8. Page 8 Ó2018 Ulu Ventures. All rights reserved. Ulu follows a disciplined decision making process. 1. Sort Qualitatively 2. Create Market Map 3. Assess Risks 4. Quantify Uncertainties 5. Perform Sensitivity Analysis 6. Calculate Risk/Return Team Mkt Fit TAMCust Segment Unit Sales Price • Market • Product • Team • Financial High Base Low No No Early Stage Success Cross Chasm
- 9. Page 9 Ó2018 Ulu Ventures. All rights reserved. Idea: Cheaper loans for students from low risk schools Founding team: 5 Stanford grads & 1 U Michigan Referral: Stanford Angels & Entrepreneurs Met: September 2011 Case study
- 10. Page 10 Ó2018 Ulu Ventures. All rights reserved. Ulu’s filtering criteria • Integrity • Domain expertise • Non-Consensus • Meaningful problem • Differentiated solution • Large addressable mkt Large Market Opportunity Compelling Team • Seed Stage • Enterprise IT • Stanford / Silicon Valley Strategic Fit
- 11. Page 11 Ó2018 Ulu Ventures. All rights reserved. Life stage risk assessment Early Stage Success Market Product Financial Working Product Core Tech Team Mass Market Share Differentiation Barriers to Entry Proprietary ArchitectureSwitching Costs Substitutes Team Paying Visionary Customers Compelling Reasons to Buy Viable Business Model Sufficient Runway Capable CEO Team Experience 100% 90% 100% 100% 90% Cross Chasm Market Product Team Financial 90% 70% 80% 45% 90% Healthy Gross Margins Sufficient Runway Crit Mass Pragmatic Cust’s Proven Value Prop Predictable Alumni Sales Cycle Whole Product Complete Team Healthy Team Dynamics Mass Market Success Team Market Product Financial Proven in Mult Niches Marquee Customers No Adverse Gov’t Regs Scalable Product Product Dev Continuity Healthy Net Margins Execution Track Record Board of Directors No Blow Ups 50% 80% 80% 26% 80%
- 12. Page 12 Ó2018 Ulu Ventures. All rights reserved. Life stage success probabilities 0.3 0.2 0.5 0.26 0.74 No 0.45 0.550.9 0.1 Market Share 3% 5% 2% 30% 50% 10% 100% No Early Stage Success Cross Chasm Mass Market Niche Only Challenger Market Leader Also Ran 60% chance of failure 40% chance of success
- 13. Page 13 Ó2018 Ulu Ventures. All rights reserved. Key drivers of value ROI Enterprise Exit Value Exit Multiple Ownership % Dilution Revenue Investment Amount Valuation & Terms Market Share Total Addressable Market Adjacent Markets Earnings Net Margin Alumni Acquisition Costs A Tier TAM (<1%) B Tier TAM (1 – 1.5%) Tuition Growth A Loans Addressable $ (< 1%) Gross Margin A Loan Footprint $ A Loans Addressable % Origination Fees Velocity of Capital Spread Base Spread Community Experience Delta Gain on Sales Alumni Participation (% dollars) B’s Converted to A’s Social Thesis Delta Coupon vs <1% B Loan Footprint $ B Loans Addressable $ B Loans Addressable % Int’l TAM Int’l Loans ($B) Addressable % Loan Spread Capital Needs Value Decision Uncertainty Calculation Influence Key Evocative
- 14. Page 14 Ó2018 Ulu Ventures. All rights reserved. Tablet Adoption in Higher Education by 2015 Ranges structure intuition Precisely Wrong Approximately Right High 30% Base 10% Low 3% Market share | achieve mass market success 10%
- 15. Page 15 Ó2018 Ulu Ventures. All rights reserved. Sensitivity analysis focuses due diligence Probability Weighted MOIC 0 10 20 30 40 50 Base Value Base Value = 17x Mass Market Share 3% 30% 10% Exit Multiple (Earnings) 5 20 10 Dilution 80% 50% 67% Gain on Sales 2% 9% 6% Conversion of B to A 0% 100% 30% Int'l Addressable 0% 50% 25% Net Margin 35% 65% 50% Adjacent Markets 10% 80% 40% Tuition Growth 0% 10% 5% Int'l Loan Footpring $B 10 50 30 A Addressable 40% 100% 80% Pre-money Valuation ($M) 5 3 4 Niche Market Share 3% 15% 5% Velocity of Capital turns/yr 0 3 1 B Addressable as B 0% 40% 10%
- 16. Page 16 Ó2018 Ulu Ventures. All rights reserved. SoFi passed Ulu’s 10x probability weighted multiple on invested capital (PWMOIC) threshold. 0.3 0.2 0.5 0.26 0.74 No 0.45 0.550.9 0.1 Market Share 3% 5% 2% 10% 50% 10% 100% No Early Stage Success Cross Chasm Mass Market Niche Only Challenger Market Leader Also Ran 5.2 2.6 10.4 $3012 $9035 $904 Enterprise Exit Value ($M) PWMOIC 2.4$75 $0 $0 0 0 $535 $1606 $161 Revenue ($M) $27 $0 $0 20.5PWMOIC: 164 49 492 MOIC 8 0 0
- 17. Page 17 Ó2018 Ulu Ventures. All rights reserved. Ulu invested Raised over $2B $547M Revenue, $126M Profit in 2017* – WSJ 2.9.18 $3B in refinancing / quarter* Last financing valued company at > $4B What happened *Wall Street Journal: February 2, 2018.
- 18. Page 18 Ó2018 Ulu Ventures. All rights reserved. Why we use decision analysis Proven in analogous industries Apply intuition intelligently to investment Streamline due diligence Avoid overpaying Helps entrepreneurs build their business
- 19. Page 19 Ó2018 Ulu Ventures. All rights reserved. PORTFOLIO CONSTRUCTION
- 20. Page 20 Ó2018 Ulu Ventures. All rights reserved. Ulu’s portfolio is optimized for its particular strategy. Decision Hierarchy • Stage • Sector • Geography • LP Expectations • Entrepreneur Brand Promise • Size (# of investments) • Reserves ($’s held for follow-ons) • Mix (stage, sector, geo, timing, risk) • Initial investment decisions • Follow-on investment decisions Strategy Portfolio Construction Investments • Seed • Enterprise IT • Silicon Valley / Stanford • Top tier performance • Seed to series A partner Ulu Ventures • 50+ • Small • n/a • 10x PWMOIC
- 21. Page 21 Ó2018 Ulu Ventures. All rights reserved. Ulu’s portfolio construction approach is fundamentally different than most early stage VCs. Standard Approach I can pick winners Concentrated portfolio: 10 – 20 Large reserves to “double down on winners” Ulu’s Approach No one can pick winners Large portfolio: 50+ Small reserves: aggressively buy ownership upfront Differences driven by Ulu’s analysis of returns data.
- 22. Page 22 Ó2018 Ulu Ventures. All rights reserved. Unlike most asset classes, Early Stage VC Mean and Median returns are dramatically different. Mean Median Early Stage VC 22% 5.6% Late Stage VC 12% 10.7% Burgiss Data 1983 – 2Q2017 US Courtesy of Virdis Investments Early Stage = Series B and earlier Median Early Stage VC returns lousy Mean Early Stage VC returns excellent due to outliers with huge multiples - (Google, Facebook, LinkedIn, Uber, etc.) Larger portfolios move expected returns from median to mean Maximize $s in early stage – i.e. small reserves
- 23. Page 23 Ó2018 Ulu Ventures. All rights reserved. A bottoms up analysis of returns provides specific validation for Ulu’s portfolio construction strategy. 1Cambridge Associates Research Note: The 15% Frontier. 2016. Based on data from 2004 – 2012. 2Horsley Bridge data as reported via A16Z blog post: https://a16z.com/2015/06/08/performance-data-and-the-babe-ruth-effect-in-venture-capital/ 2.5% Of venture deals generate nearly 100% of industry profits1 4.5% Of capital generates 60% of fund profits in top tier funds2 Similar to Market Leader + Challenger probability from PWMOIC exercise Every Ulu check has, on average, a 4.5% chance of outlier returns
- 24. Page 24 Ó2018 Ulu Ventures. All rights reserved. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 10 20 30 40 50 60 70 80 Chance of at Least One Oultier Portfolio Size (# of Investments) Top Tier VC (4.5%) Good VC (2%) Ulu Fund II has a 90% chance of at least one outlier with 50 investments (at a 4.5% outlier chance / investment).
- 25. Page 25 Ó2018 Ulu Ventures. All rights reserved. Consistent, strong performance across multiple funds is the goal. Investments 1 Fund with Outlier* 3 Funds with Outliers* Ability to Source Ability to Select Ability to Support 10 37% 5% A A A 50 90% 73% A A B 100 99% 97% A B C 50+ most effectively balances the issues for Ulu right now With more resources, we will push closer to 100 investments *Top Tier VC Odds
- 26. Page 26 Ó2018 Ulu Ventures. All rights reserved. Ulu’s reserve strategy of investing aggressively upfront doubles ownership vs. “Doubling Down on Winners.” Based on a $50 million model portfolio with 50 companies, 62% write offs and exits distributed between $25 million and $1.5 billion. 12.5% 8.9% 7.0% 6.1% 3.3% 3.3% 3.3% 3.3% COMPANYOWNERSHIP Investment / round ($k) Seed Series A Series B Series C Reserves Fund Mult No Pro Rata 1,000 0 0 0 0% 6.6x PR Through C 260 260 660 1,320 74% 3.4x
- 27. Page 27 Ó2018 Ulu Ventures. All rights reserved. WHAT’S NEXT?
- 28. Page 28 Ó2018 Ulu Ventures. All rights reserved. My Meaningful Purpose Map DA in VC LIVING IN POSSIBILITY LEADING BY EXAMPLE ONVALUES Ref Article