10 simple and effective ways to lose money in private investing - lessons learned


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This is a presentation I gave at the Regis Tech Acclerator on July 23, 2013. I review my experiences investing in private companies and provide case studies that illustrate some very effective ways to lose money by investing badly. I share 10 lessons learned (including 2 bonus lessons!).

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10 simple and effective ways to lose money in private investing - lessons learned

  1. 1. July 23, 2013 This document is solely for the presentation of confidential PNT information. No part of it may be circulated, quoted, or reproduced for distribution outside the organization to which it was presented without prior written approval from PNT Marketing Services, Inc. This material was used by PNT Marketing Services during an oral presentation; it is not a complete record of the discussion. RTA Lecture July 23, 2013 - Simple and Effective Ways to Lose Money in Private Equity Investments!
  2. 2. July 23, 2013 Today’s Goal Walking through what I’ve learned about how to lose money in PE, I hope you’ll gain a few insights on how to structure and lead your own companies to attract smart capital and succeed wildly … 1
  3. 3. July 23, 2013 Lecture Outline • Introduction and background › Me › My company (PNT Marketing Services, Inc.) • Ten ways to lose money in PE investments – guaranteed! › Plus: bonus tips! • 10-minute break • Case studies • Q&A/wrap-up 2
  4. 4. July 23, 2013 Enough About You – What About Me? • Me › Regis ‘78 › Harvard ’82 › Stanford PhD dropout ’83 › Founded PNT ‘88 with partner Phil (R’78, H’82) › Married, 2 kids › ADHD? Pianist, singer, motorcyclist, triathlete, RE investor, early-stage company investor … 3
  5. 5. July 23, 2013 PNT Marketing Services Overview 4
  6. 6. July 23, 2013 What Is PNT Marketing Services? PNT Marketing Services (PNT) is a leading provider of Customer Intelligence-based marketing services (customer databases, insights, and high-ROI marketing actions). PNT helps clients acquire, grow and keep profitable customer relationships. 5
  7. 7. July 23, 2013 Our Beginnings ??? 1988 1989 2003 Today Marketing Finance Operations IT 6
  8. 8. July 23, 2013 Our Clients 7
  9. 9. July 23, 2013 Our Methodology Step 1: • Diagnostic Step 2: • Creating the customer-centric marketing and analytic datamart Step 3: • Generating customer insights Step 4: • Implementing high-ROI marketing actions driven by customer insights Step 5: • Measure/track/improve (“virtuous spiral”) PNT engages with our customers in a simple and powerful 5- step methodology 8
  10. 10. July 23, 2013 Our Approach Our rigorous and streamlined DATA-driven approach yields pure Customer Intelligence. And that's how we help smart business partners win. 9
  11. 11. July 23, 2013 Investing in Private Equity (PE) 10
  12. 12. July 23, 2013 Enough about ME – what about PE? 11 • Perfect for someone who’s ADHD! › Lots of opportunities › Lots of moving parts › Highly risky (“Certainty of death. Small chance of success. What are we waiting for?”)  Rule of thumb: 7 of 10 failures, 2 out of 10 modest success, 1 of 10 grand slam • Track record of five years of losing money › Unfortunately, blemished by a few good deals …
  13. 13. July 23, 2013 10 Lessons: How to Ensure That You Lose Money in PE Investing! 12
  14. 14. July 23, 2013 10 Lessons on Losing Money in PE Investing 13 • Lesson 1: Invest only in companies with no revenue › In fact, the farther away they are from generating Dollar One, the better! › Best if there’s no plan to generate revenue, either (whether now or in the future) …
  15. 15. July 23, 2013 10 Lessons on Losing Money in PE Investing 14 • Lesson 2: Make sure the founder is untested and hasn’t done this before › Best if he/she has no track record whatsoever in the industry › Next best is irrelevant experience in another industry … › … and a close third is having another demanding job that prevents him or her from putting in the time needed to get the new company off the ground …
  16. 16. July 23, 2013 10 Lessons on Losing Money in PE Investing 15 • Lesson 3: Invest in companies that do not have a team in place › Make sure there’s no CMO to pay attention to brand, audience, and market › Make sure there’s no CTO to head up tech platform development
  17. 17. July 23, 2013 10 Lessons on Losing Money in PE Investing 16 • Lesson 4: Don’t attempt to determine if there’s a market for your product or service before you spend resources creating it › It’s far easier to lose money by following the Field of Dreams approach - just “build it and they will come” › Since the company will have no team in place anyway (Lesson 3), it’s a short step to not paying attention to the market!
  18. 18. July 23, 2013 10 Lessons on Losing Money in PE Investing 17 • Lesson 5: Make sure there are no investors on board who are smarter or who have deeper pockets than you do › In fact, invest alone if you can – why share success or risk with anyone else?
  19. 19. July 23, 2013 10 Lessons on Losing Money in PE Investing 18 • Lesson 6: Invest in companies with government-backed loans or lines of credit › Our federal and state governments have a terrific track record in private investments and hardly ever make decisions which negatively impact the companies they’re backing, so you’ll want to invest right alongside them!
  20. 20. July 23, 2013 10 Lessons on Losing Money in PE Investing 19 • Lesson 7: Make sure the company has really complicated technology › Preferably, this technology should be unproven › It’s a bonus if the technology requires on other suppliers to provide similarly unproven components
  21. 21. July 23, 2013 10 Lessons on Losing Money in PE Investing 20 • Lesson 8: It’s helpful if the company is high profile, has lots of media attention, and has a rockstar CEO who has never run a company before › Figureheads with completely non-operational backgrounds make the worst CEOs, so keep a special eye out for those …
  22. 22. July 23, 2013 10 Lessons on Losing Money in PE Investing 21 • Lesson 9: Don’t invest with a theme or methodology in mind › Make sure your PE investments are scattered across industries, technologies and themes › It’s best, in fact, to have a complete lack of focus
  23. 23. July 23, 2013 10 Lessons on Losing Money in PE Investing 22 • Lesson 10: Don’t invest in a company where you can add value with your industry expertise, contacts, etc. › It’s best if you know nothing whatsoever about what you’re investing in › Why would you want to help the company you’re invested in with more than money, anyway?
  24. 24. July 23, 2013 Bonus Lessons! 23 • Bonus Lesson 1: Don’t stay in close touch with other board members, senior executives, advisors, or other investors in the company › You should maintain complete radio silence for the best chance at losing money
  25. 25. July 23, 2013 Bonus Lessons! 24 • Bonus Lesson 2: Wherever possible, throw good money after bad › If your goal is to lose the most money possible, it never makes sense to cut loses – you should continue to invest money right up until the doors close!
  26. 26. July 23, 2013 25
  27. 27. July 23, 2013 Case Studies 26
  28. 28. July 23, 2013 Case Studies 27 • Social Mobile Travel App › Idea was great: let’s create a social mobile travel app to provide curated content for travelers that is there when they need it (on their smartphones) and helps them connect in-country with other like- minded travelers › Space was attracting a lot of attention and capital: intersection of social, mobile, and travel was (and is) hot
  29. 29. July 23, 2013 Case Studies 28 • Social Mobile Travel App, cont’d › Founder was also head of institutional sales for a major P2P lender going through explosive growth (Lesson #2) › Tech “team” was sub-contracted out on the fly and changed multiple times (Lesson #3) › No attention paid to understanding audience and whether app would find traction (Lesson # 4) › This idea was outside my domain expertise and I couldn’t contribute contacts or advice except of the most general kind (Lesson #10)
  30. 30. July 23, 2013 Case Studies 29 • Social Mobile Travel App, cont’d › Result: a stunning success!  The project finally resulted in an app that’s now available on the AppStore  However, since no thought was put into marketing it or building audience, it’s languishing with hardly any downloads  All the investors (5, including the founder) lost all of their seed capital since the founder decided to pack it in and get back to his day job
  31. 31. July 23, 2013 Case Studies 30 • Re-commerce site (“Mint + Kayak for re-commerce”) › Another great idea: consumers are sitting on a mountain of stuff they no longer want or need, have little inclination to deal with it (it’s a real chore to sell stuff on Craigslist, ebay, etc.), and don’t know exactly what they have or how much it’s worth. › Re-commerce channels are under-utilized, provide various choices for monetization, require a lot of effort, and vary in convenience and value › Solution was to create a platform to add an emotional trigger (getting great deals on new purchases), shifting the goal from “dealing with the stuff I don’t want anymore” to “getting great deals on stuff I really want”
  32. 32. July 23, 2013 Case Studies 31 • Re-commerce site (“Mint + Kayak for re-commerce”), cont’d › Founder was an attorney and MBA with deep experience in financial services (Lesson # 2) › CTO was in place, but no CMO and no focus on finding a market/audience for the service (Lessons # 3, 4) › Only one other investor on board (Lesson #5) and I never met them or spoke with them (Bonus Lesson #1) › There was really no theme to my investing in this start-up (Lesson #9), and I didn’t have any background in e- commerce or re-commerce or any contacts I could leverage (Lesson #10)
  33. 33. July 23, 2013 Case Studies 32 • Re-commerce site (“Mint + Kayak for re-commerce”), cont’d › Result: another money-losing success!  Founder was abandoned by CTO who couldn’t keep contributing his time and found another job  No other investors stepped up to the plate when funds ran out, and the other investor cut off further investments  Founder, too, was under financial pressure with a young family and turned to consulting to make ends meet > He is now co-founder in another startup in medical technology, which I graciously passed up  Platform/site is live in a “beta” mode, with just a few (< 50) users over the last few months; not enough funding or focus from founder to continue, so a total write-off
  34. 34. July 23, 2013 Case Studies 33 • Electric car company: Fisker Automotive › Founder was Henrik Fisker, rockstar auto designer and industry veteran (Lesson #8) › Bleeding-edge technology (Lesson #7) › Backed by US Govt (Lesson #6) › Not an area I knew (Lesson #10) › Not really part of a theme (Lesson #9) › I went back in for two additional rounds (Bonus Lesson #2)
  35. 35. July 23, 2013 Case Studies 34 • Electric car company: Fisker Automotive, cont’d › Results were really spectacular: Fisker had huge tech/engineering problems, defaulted on its government loan, laid off almost everyone, and is seeking a buyer now …
  36. 36. July 23, 2013 Case Studies 35
  37. 37. July 23, 2013 Case Studies 36 • Automated monitoring support and data analytics for distributed generation systems focusing on solar PV: LocusEnergy › Founded in 2007, company was started by a serial entrepreneur (Mike Herzig) and has experienced rapid growth and adoption of its hardware and software in the marketplace
  38. 38. July 23, 2013 Case Studies 37 • LocusEnergy, cont’d › I really violated a lot of my sure-fire, money-losing lessons on this one:  Company had revenue when I invested (Lesson #1)  Mike, Locus’ founder, had a track record as a serial entrepreneur (Lesson #2)  Locus had a great team on board already (Lesson #3)  They had a tested – and growing – market for their products and services (Lesson #4)  Many smart investors, some with deep pockets, were on board (Lesson #5)  I’ve stayed in close touch with Mike, other investors, and an IB firm who’s raised money for them (Bonus Lesson #1)
  39. 39. July 23, 2013 Case Studies 38 • LocusEnergy, cont’d › My results were therefore unfortunately not in line with my other investments; to date (after 2+ years) I’ve almost doubled the value of my investment and the company is on track for continued solid growth
  40. 40. July 23, 2013 Case Studies 39 • Responsible teen spending company: BillMyParents › This was brought to me by a boutique investment firm › I tried my best to lose money on this one, but it violated too many of my rules: in-place team, climbing revenue, tested market adoption, etc. › I couldn’t take the pressure, so I sold out after 6 months for a 40% gain on my initial investment › Epilogue: I should have held on!  Current value of shares down 50%
  41. 41. July 23, 2013 Case Studies 40 • Online social reputation scoring (FICO for sharing economy): TrustCloud › Chairman, CEO, CTO, and COO are all serial entrepreneurs (violation of Lessons #2 and #3) › Rapid adoption of platform by users (10K+ and growing) violates Lesson #4) › Chairman and co-founder is tied to large angel-investing group (Lesson #5) and this is right in the middle of my investing theme of companies leveraging social data to provide value (Lesson #9) › I’ve also got plenty of contacts who can help these guys (Lesson #10), and I’ve stayed in touch with the Chaiman, CEO, CTO, and COO (Bonus Lesson #1)
  42. 42. July 23, 2013 Case Studies 41 • TrustCloud, cont’d › It’s not too late – company is still in early stages and has little revenue, so I may still eke out a win and lose money on this one, but with the team in place the odds are against me …
  43. 43. July 23, 2013 Case Studies 42 • Career matchmaking site: Sokanu.com
  44. 44. July 23, 2013 Case Studies 43 • Sokanu, cont’d › Great team in place, including CEO/founder who has hired PhD scientists to help build his platform (flouts Lessons #2, #3) › Site has really gained traction with many thousands of users (Lesson #4 out the window) › Many investors including a UK venture fund have signed on (violates Lesson #5) › Fits theme of companies leveraging data to create value (Lesson #9, ignored) › I’ve already added value by introducing the CEO to a client of ours who is very interested in partnering with Sokanu to provide value to my client’s 4MM+ customers – this would be a big win for Sokanu (sorry, Lesson #10) › Finally, I’ve stayed in touch with other investors and with the CEO (bye bye, Bonus Lesson #1)
  45. 45. July 23, 2013 Case Studies 44 • Sokanu, cont’d › With a great team, solid investors, excellent market traction, revenues, and a great adoption curve, it’s unlikely I’ll lose money on this investment, but hope springs eternal …
  46. 46. July 23, 2013 Q&A / Wrap-Up 45
  47. 47. July 23, 2013 Q&A / Wrap-Up 46 • Any other questions, criticisms, conundrums, quibbles, concerns, or comments? • To reach me: › tony@pntmarketingservices.com › 914-588-7278