500.co/challenge #moneyball4startups
IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
MONEYBALL STARTUPS+
PAUL SINGH
500 Startups
@paulsingh・[email protected]・angel.co/paulsingh
500.co/challenge #moneyball4startups
500 STARTUPSGETTING TO KNOW
BECAUSE WE’RE KIND OF A BIG DEAL
PAUL SINGH
@paulsingh・[email protected]・angel.co/paulsingh
500.co/challenge #moneyball4startups
API TO VENTURE CAPITAL & FUNCTIONAL EXPERTISE
THE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING:
(FOR FOUNDERS. FOR INVESTORS. FOR GOVERNMENT.)
500.co/challenge #moneyball4startups
BUILD SOMETHING PEOPLE WANT
FOUNDERS:
500.co/challenge #moneyball4startups
WRITE CHECKS AND ADD VALUE
INVESTORS:
500.co/challenge #moneyball4startups
MAKE LIFE EASY FOR INVESTORS & FOUNDERS
GOVERNMENT:
500.co/challenge #moneyball4startups
VENTURE CAPITAL IS OPEN TO ATTACK BY DISRUPTIVE NEW BUSINESS MODELS AND TECHNOLOGY.
“
-- NAVAL RAVIKANT (@naval)
500.co/challenge #moneyball4startups
(R)EVOLUTION IN THINKING
500.co/challenge #moneyball4startups
EARLY STAGE STARTUPS
HAVE CHANGED
500.co/challenge #moneyball4startups
STARTUP COSTS LOWER THAN EVER
BUT SCALING STILL COSTS MONEY
CLOUD, OPEN SOURCE AND ONLINE DISTRIBUTION DRIVING
500.co/challenge #moneyball4startups
WEB GETS BIGGER.WORLD GETS SMALLER.
500.co/challenge #moneyball4startups
TRACTION IS THE NEW INTELLECTUAL PROPERTYPLATFORMS (SEARCH, SOCIAL & MOBILE) PRIMARILY DRIVING THE CHANGE.
NO LONGER “GOOD ENOUGH” TO DEPEND ON TECH DIFFERENTIATION.
500.co/challenge #moneyball4startups
CAPITAL INCREASINGLY COMMODITIZED
RISE OF THE ANGELS, YO!
500.co/challenge #moneyball4startups
NEW REALITY: MONEY FOLLOWS
FOUNDERS
500.co/challenge #moneyball4startups
SIGNALS ARE EVERYWHERE
BIG DATA + OPEN SOURCE ANALYTICS = NEW TECHNIQUES FOR VC
500.co/challenge #moneyball4startups
WALL STREET BEAT US TO IT
500.co/challenge #moneyball4startups
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.
“
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.
500.co/challenge #moneyball4startups
WE CAN DO IT, TOOSURPRISE!
IT TURNS OUT,
500.co/challenge #moneyball4startups
+ “GUT” + TRUSTED MENTORS + MUCH, MUCH MORE DATA.
500.co/challenge #moneyball4startups
SENTIMENT ANALYSIS
WHAT IS THE TEAM THINKING? WHAT DOES THE MARKET THINK? WHAT DO MY PEERS/MENTORS THINK?
500.co/challenge #moneyball4startups
NEEDLE IN THEHAYSTACK
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.
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.
500.co/challenge #moneyball4startups
CURIOSITY
500 CHECKLISTProduct 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
500.co/challenge #moneyball4startups
EARLY STAGE VCIS CHANGINGHAS CHANGED
500.co/challenge #moneyball4startups
STATE OF THE ART IN EARLY STAGE INVESTING IS NOT
VERY SOPHISTICATEDTRUST REFERRALS. MOVE FAST. KEEP LEGAL/FINANCE SIMPLE.
BUILD RELATIONSHIPS WITH OTHER INVESTORS, SYNDICATE EVERYTHING.
500.co/challenge #moneyball4startups
MONEYBALLIT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
500.co/challenge #moneyball4startups
BUY WINSMY PRIMARY GOAL IS TO
NOT NECESSARILY BUYING INTO THE HOTTEST DEALS.
FOCUS ON TEAM, EXECUTION, TRACTION & DATA.(STICK AROUND... I’M GOING TO SHOW YOU HOW)
500.co/challenge #moneyball4startups
INITIAL BET DESIGNED TO GIVE US MORE DATA FOR
SUBSEQUENT BETS
500.co/challenge #moneyball4startups
QUANTITATIVEPORTFOLIO APPROACH
BENEFITS: CONTROLLED RISK + OUTSIZED RETURN POTENTIAL
500.co/challenge #moneyball4startups
0
1.25
2.5
3.75
5
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Monte Carlo Simulation of Angel Investing
Exit
Mul
tiple
# of Deals
mean median std dev
500.co/challenge #moneyball4startups
RISK MITIGATION THROUGH
DIVERSIFICATION
MODERN PORTFOLIO THEORY:
500.co/challenge #moneyball4startups
HIGH VOLUME INVESTING ALLOWS
FOR HIGH ERROR RATE
500.co/challenge #moneyball4startups
TRACK IRR & VALUATIONS WITHIN
YOUR PORTFOLIOAT LEAST YEARLY. RECOMMEND QUARTERLY.
500.co/challenge #moneyball4startups
CONTROLLED RISK:OUTSIZED RETURN
POTENTIAL
500.co/challenge #moneyball4startups
PORTFOLIO IRR QUICKLY POSITIVE
(WITH SMALLER EARLY EXITS AND PROMISING DEALS GETTING FUNDED)
500.co/challenge #moneyball4startups
EVEN “SMALLER” EXITS CAN MOVE
THE NEEDLEDON’T FORGET: YOU CAN SELL POSITIONS TO DOWNSTREAM OR SECONDARY BUYERS TOO.
500.co/challenge #moneyball4startups
LAW OF LARGE NUMBERS FTW!
500.co/challenge #moneyball4startups
INDIVIDUAL BETS ARE SMALL
MUCH EASIER TO RUN AN EXPERIMENT ON A $50K INITIAL CHECK INSTEAD OF $250K+
500.co/challenge #moneyball4startups
BAD BETSFAIL 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.
500.co/challenge #moneyball4startups
FAILURE RATESARE 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.
500.co/challenge #moneyball4startups
ALLOCATE FOR FOLLOW-ONS
(...OR “HOW TO AVOID GETTING SQUASHED”)
30% Capital - Initial Betstarget 10-20 deals
70% Capital - Follow Onfilter out failures, follow-on the top 20%
500.co/challenge #moneyball4startups
DEAL TERMSSO YOU FOUND A STARTUP YOU LOVE?
500.co/challenge #moneyball4startups
DEBT VS EQUITY
500.co/challenge #moneyball4startups
CONVERTIBLE NOTES ARE OK (REALLY!)
LOWER LEGAL FEES, LESS DOCS, QUICKER TO EXECUTE. WHEN CAPPED, THEY FUNCTION SIMILAR TO PRICED ROUNDS.
500.co/challenge #moneyball4startups
STANDARD DOCS ARE YOUR FRIENDS
WHEN IN DOUBT, DO NOT INNOVATE IN FINANCE OR LEGAL
500.co/challenge #moneyball4startups
PRO RATA & INFO RIGHTS
ALWAYS. ALWAYS. ALWAYS. ALWAYS. ALWAYS. (GET IT?)
500.co/challenge #moneyball4startups
FOCUS ON VALUATION & MULTIPLES
OWNERSHIP % MATTERS MUCH LESS. FOCUS ON REQUIRED EXIT SIZE RATHER THAN SOME MYTHICAL OWNERSHIP TARGET.
500.co/challenge #moneyball4startups
IT’S HARD TO MAKE MONEY ON
VALUATIONS > $5M(PRO TIP: CONSIDER MIN. RETURN REQUIREMENTS FOR DOWNSIDE SCENARIOS)
500.co/challenge #moneyball4startups
LET FOUNDERS GET BACK TO WORK
YOUR PRIMARY GOAL
THIS IS A LONG GAME: AVOID LOSING YOUR REPUTATION OVER 1%. WHEN IN DOUBT, LEAN TOWARDS THE ENTREPRENEUR.
500.co/challenge #moneyball4startups
AVOID BOARD SEATS
500.co/challenge #moneyball4startups
MOST BOARDS PROVIDE MINIMAL
VALUE-ADD
500.co/challenge #moneyball4startups
BEST DEALS USUALLY REQUIRE LIMITED BOARD SUPPORTSPEND YOUR TIME SOURCING NEW DEALS. LIMIT TIME ON SIDEWAYS DEALS. LET THE WINNERS KEEP ON WINNING (AND ANSWER YOUR PHONE WHEN THEY NEED YOU).
500.co/challenge #moneyball4startups
DO NOT INNOVATE IN FINANCE OR LEGAL
500.co/challenge #moneyball4startups
INVESTINGIS 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
500.co/challenge #moneyball4startups
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
500.co/challenge #moneyball4startups
BE A SMART INVESTOR
FOCUS ON INFORMATION ASYMMETRY & PRICE/MULTIPLES.
500.co/challenge #moneyball4startups
BY ITS NATURE, THE INTERNET UNDERMINES ANYONE WHOSE STATUS DEPENDS ON PRIVILEGED ACCESS TO INFORMATION.
“
-- MICHAEL LEWIS
500.co/challenge #moneyball4startups
API TO VENTURE CAPITAL & FUNCTIONAL EXPERTISE
THE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING:
(FOR FOUNDERS. FOR INVESTORS. FOR GOVERNMENT.)
500.co/challenge #moneyball4startups
500.co/challenge
500.co/challenge #moneyball4startups
IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
MONEYBALL STARTUPS+
PAUL SINGH
500 Startups
@paulsingh・[email protected]・angel.co/paulsingh