1. 500.co/challenge #m4s
MONEYBALL STARTUPS +
IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
PAUL SINGH
500 Startups
@paulsingh・paul@500startups.com・resultsjunkies.com/blog

2. 500.co/challenge #m4s
GETTING TO KNOW
500 STARTUPS BECAUSE WE’RE KIND OF A BIG DEAL
PAUL SINGH
@paulsingh・paul@500startups.com・resultsjunkies.com/blog

3. 500.co/challenge #m4s
THE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING:
API TO VENTURE CAPITAL
& FUNCTIONAL EXPERTISE
(FOR FOUNDERS. FOR INVESTORS. FOR GOVERNMENT.)

4. 500.co/challenge #m4s
FOUNDERS:
BUILD SOMETHING
PEOPLE WANT

5. 500.co/challenge #m4s
INVESTORS:
WRITE CHECKS AND
ADD VALUE

6. 500.co/challenge #m4s
GOVERNMENT:
MAKE LIFE EASY
FOR INVESTORS &
FOUNDERS

7. 500.co/challenge #m4s
“ VENTURE CAPITAL IS
OPEN TO ATTACK BY
DISRUPTIVE NEW
BUSINESS MODELS AND
TECHNOLOGY.
-- NAVAL RAVIKANT (@naval)

8. 500.co/challenge #m4s
(R)EVOLUTION IN THINKING

9. 500.co/challenge #m4s
EARLY STAGE
STARTUPS
HAVE CHANGED

10. 500.co/challenge #m4s
CLOUD, OPEN SOURCE AND ONLINE DISTRIBUTION DRIVING
STARTUP COSTS
LOWER THAN EVERBUT SCALING STILL COSTS MONEY

11. 500.co/challenge #m4s
WEB GETS BIGGER.
WORLD GETS SMALLER.

12. 500.co/challenge #m4s
TRACTION IS THE NEW
INTELLECTUAL PROPERTY
PLATFORMS (SEARCH, SOCIAL & MOBILE) PRIMARILY DRIVING THE CHANGE.
NO LONGER “GOOD ENOUGH” TO DEPEND ON TECH DIFFERENTIATION.

13. 500.co/challenge #m4s
CAPITAL
INCREASINGLY
COMMODITIZED
RISE OF THE ANGELS, YO!

14. 500.co/challenge #m4s
NEW REALITY:
MONEY FOLLOWS
FOUNDERS

15. 500.co/challenge #m4s
SIGNALS ARE
EVERYWHERE
BIG DATA + OPEN SOURCE ANALYTICS = NEW TECHNIQUES FOR VC

16. 500.co/challenge #m4s
WALL STREET
BEAT US TO IT

17. 500.co/challenge #m4s

18. 500.co/challenge #m4s
“ UBS PROPRIETARY
SATELLITE PARKING LOT
FILL RATE ANALYSIS
POINTS TO AN
INTERESTING CADENCE
INTRA-QUARTER AND
POTENTIAL UPSIDE TO
OUR VIEW.

19. 500.co/challenge #m4s

20. 500.co/challenge #m4s
“ TWICE A WEEK A SMALL
HELICOPTER CIRCLES
OVER CUSHING’S TANK
FARMS ON AN OIL
INDUSTRY SPYING
MISSION.

21. 500.co/challenge #m4s
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.

22. 500.co/challenge #m4s
IT TURNS OUT,
WE CAN DO IT, TOO SURPRISE!

23. 500.co/challenge #m4s
+ “GUT” + TRUSTED MENTORS + MUCH, MUCH MORE DATA.

24. 500.co/challenge #m4s
SENTIMENT
ANALYSIS
WHAT IS THE TEAM THINKING? WHAT DOES THE MARKET THINK?
WHAT DO MY PEERS/MENTORS THINK?

25. 500.co/challenge #m4s
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.

26. 500.co/challenge #m4s
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.

27. 500.co/challenge #m4s
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. 500.co/challenge #m4s
EARLY STAGE VC
IS CHANGING
HAS CHANGED

29. 500.co/challenge #m4s
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.

30. 500.co/challenge #m4s
MONEYBALL
IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.

31. 500.co/challenge #m4s
MY PRIMARY GOAL IS TO
BUY WINS
NOT NECESSARILY BUYING INTO THE HOTTEST DEALS.
FOCUS ON TEAM, EXECUTION, TRACTION & DATA.
(STICK AROUND... I’M GOING TO SHOW YOU HOW)

32. 500.co/challenge #m4s
INITIAL BET DESIGNED TO
GIVE US MORE DATA FOR
SUBSEQUENT BETS

33. 500.co/challenge #m4s
QUANTITATIVE
PORTFOLIO
APPROACH
BENEFITS: CONTROLLED RISK + OUTSIZED RETURN POTENTIAL

34. 500.co/challenge #m4s
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

35. 500.co/challenge #m4s
MODERN PORTFOLIO THEORY:
RISK MITIGATION
THROUGH
DIVERSIFICATION

36. 500.co/challenge #m4s
HIGH VOLUME
INVESTING ALLOWS
FOR HIGH ERROR RATE

37. 500.co/challenge #m4s
TRACK IRR &
VALUATIONS WITHIN
YOUR PORTFOLIO AT LEAST YEARLY. RECOMMEND QUARTERLY.

38. 500.co/challenge #m4s
CONTROLLED RISK:
OUTSIZED RETURN
POTENTIAL

39. 500.co/challenge #m4s
PORTFOLIO IRR
QUICKLY POSITIVE
(WITH SMALLER EARLY EXITS AND PROMISING DEALS GETTING FUNDED)

40. 500.co/challenge #m4s
EVEN “SMALLER”
EXITS CAN MOVE
THE NEEDLE DON’T FORGET: YOU CAN SELL POSITIONS TO
DOWNSTREAM OR SECONDARY BUYERS TOO.

41. 500.co/challenge #m4s
LAW OF LARGE
NUMBERS FTW!

42. 500.co/challenge #m4s
INDIVIDUAL BETS
ARE SMALL
MUCH EASIER TO RUN AN EXPERIMENT ON A
$50K INITIAL CHECK INSTEAD OF $250K+

43. 500.co/challenge #m4s
BAD BETS
FAIL FAST
SMALLER CHECK SIZES FORCE COMPANIES TO PROVE THEORIES FASTER.
ALLOWING INVESTORS TO QUICKLY ITERATE OUR FORECASTING/FUNDING
MODEL. FEWER “LIVING DEAD” AND QUICKER RETURN ON RESULTS.

44. 500.co/challenge #m4s
FAILURE RATES
ARE HIGH
DIVERSITY OF HIGH VOLUME INVESTING ALLOWS FOR HIGH ERROR RATE.
FUND IRR QUICKLY POSITIVE WITH SMALLER, EARLY EXITS AND PROMISING
DEALS GETTING FUNDED.
DILIGENCE HAPPENS IN THE REAR VIEW MIRROR, NOT THE CRYSTAL BALL.

45. 500.co/challenge #m4s
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”)

46. 500.co/challenge #m4s
DEAL TERMS
SO YOU FOUND A STARTUP YOU LOVE?

47. 500.co/challenge #m4s
DEBT VS EQUITY

48. 500.co/challenge #m4s
CONVERTIBLE NOTES
ARE OK (REALLY!)
LOWER LEGAL FEES, LESS DOCS, QUICKER TO EXECUTE. WHEN
CAPPED, THEY FUNCTION SIMILAR TO PRICED ROUNDS.

49. 500.co/challenge #m4s
STANDARD DOCS
ARE YOUR FRIENDS
WHEN IN DOUBT, DO NOT INNOVATE IN FINANCE OR LEGAL

50. 500.co/challenge #m4s
PRO RATA &
INFO RIGHTS
ALWAYS. ALWAYS. ALWAYS. ALWAYS. ALWAYS. (GET IT?)

51. 500.co/challenge #m4s
FOCUS ON
VALUATION &
MULTIPLES
OWNERSHIP % MATTERS MUCH LESS. FOCUS ON REQUIRED EXIT
SIZE RATHER THAN SOME MYTHICAL OWNERSHIP TARGET.

52. 500.co/challenge #m4s
IT’S HARD TO MAKE
MONEY ON
VALUATIONS > $5M
(PRO TIP: CONSIDER MIN. RETURN REQUIREMENTS FOR DOWNSIDE SCENARIOS)

53. 500.co/challenge #m4s
YOUR PRIMARY GOAL
LET FOUNDERS GET
BACK TO WORK
THIS IS A LONG GAME: AVOID LOSING YOUR REPUTATION OVER 1%.
WHEN IN DOUBT, LEAN TOWARDS THE ENTREPRENEUR.

54. 500.co/challenge #m4s
AVOID BOARD SEATS

55. 500.co/challenge #m4s
MOST BOARDS
PROVIDE MINIMAL
VALUE-ADD

56. 500.co/challenge #m4s
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).

57. 500.co/challenge #m4s
DO NOT INNOVATE IN
FINANCE OR LEGAL

58. 500.co/challenge #m4s
INVESTING
IS A PROCESS
DABBLING IN INVESTING IS (AT BEST) GAMBLING. BETTER TO
WALK AWAY OR PURSUE INVESTING NEARLY FULL TIME OR
FIND SOMEONE TO MANAGE YOUR MONEY

59. 500.co/challenge #m4s
BE AN ACTIVE
INVESTOR
PORTFOLIO EFFECTS & THE LEAN STARTUP MOVEMENT ARE YOUR FRIENDS
YOU CAN EXPECT FAVORABLE WITH 10 DEALS BUT IT TAKES 20+ TO BE SAFE

60. 500.co/challenge #m4s
BE A SMART
INVESTOR
FOCUS ON INFORMATION ASYMMETRY & PRICE/MULTIPLES.

61. 500.co/challenge #m4s
“ BY ITS NATURE, THE
INTERNET UNDERMINES
ANYONE WHOSE STATUS
DEPENDS ON
PRIVILEGED ACCESS TO
INFORMATION.
-- MICHAEL LEWIS

62. 500.co/challenge #m4s
THE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING:
API TO VENTURE CAPITAL
& FUNCTIONAL EXPERTISE
(FOR FOUNDERS. FOR INVESTORS. FOR GOVERNMENT.)

63. 500.co/challenge #m4s
500.co/challenge

64. 500.co/challenge #m4s
MONEYBALL STARTUPS +
IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
PAUL SINGH
500 Startups
@paulsingh・paul@500startups.com・resultsjunkies.com/blog