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•  Thank  you  for  that  introduc0on!  •  Today,  let’s  talk  about  a  topic  close  to  your  heart,  for  the  people  in  this  room  at  least:  

the  future  of  fundraising,  or  capital  raising.  I  never  liked  the  word  “fundraising”  as  it  sounds  too  much  like  charity,  so  let’s  call  it  capital  and  capital  raising.  We  are  looking  for  a  return  on  invested  capital.  

•  I  am  going  to  talk  about  the  latest  developments  in  crowd-­‐funding,  micro  VCs,  the  introduc0on  of  soFware  into  VC,  AngelList,  syndica0on,  and  all  the  latest  here.  

•  But  before  doing  so,  let’s  look  at  the  bigger  picture  of  the  problem  we  are  trying  to  solve  here:  alloca0on  of  capital  to  its  best  and  most  profitable  use  

•  Okay, let’s start with Corporate Finance version 1.0 •  This is a picture of the famous banker John Pierpont Morgan, founder of JP

Morgan. He was one of the world’s most powerful bankers in the late 1800s and very early 1900s

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•  He was the typical super banker of his time. Poweful and connected in both the business and policitical world

•  He made his first fortune by selling weapons in the American Civil War •  Once he became a power broker in finance, he helped governments finance

wars, incl UK finance WW I. After WW I ended, France even donated a former Napoleon palace to JP Morgan to thank them for their service in the war

•  Mr Morgan himself avoided serving in the US Civil War by paying a substitute $300 to take his place. I guess some things never change J…. I don’t know what happened to his substitute who had to fight in the war by the way.

•  One last fun fact on JP Morgan: he invested in the Titanic

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•  JP Morgan has some famous quotes attributed to him •  On this slide there is one which I particularly like a lot… •  Universally applicable, but also in finance •  For example in the answer to the question: “what is the reason you selling

your company?”

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•  This type of Good old fashioned relationship based banking lasted until about the 1980s

•  Then, in the early 1980s, a new type of corporate finance emerged, finance 2.0, at least partly due to financial De-regulation which allowed mega banks to be created, and also led to the first bailouts in the savings & loan crisis of the 1980s. Mega banks also enabled mega buy-outs (example KKR 60 billion leveraged buyout of RJR Nabisco)

•  Another big catalyst was financial innovation (option theory, computerized trading, and the Hedge Fund industry started with LTCM which blew up the stock market in 1987).

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•  In Finance 2.0, competing for business was not done anymore through personal relationships but by using balance sheets and by large number of trading floor employees producing data analysis and crunching numbers, making calculated bets

•  Banks no longer were partnerships with say 100 people, but publicly traded huge firms, employing armies of tens of thousands, and became entrenched in all aspects of the global economy

•  In theory, markets had become hyper-efficient, less friciton, lower costs, innovation, making the world a better place, doing god’s work etc

•  But in reality, Financial institutions found new ways to take margins through the back-door under the disguise of “taking risks”, and effecively off-loading that risk to unsuspecting others (tax payers, central banks, and less sophisticated market participants) and thus skimming from the top making big profits. Characterised by complexity, in-transparency, under the disguise of hyper-efficiency and innovation

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•  Complexity also led to excesses and sometimes super high payouts which from hindsight were not all merit based

•  We tried so hard to inventivize the financial sector (including investment funds) to work hard in our interest and reward them well for it, but we turned out to have been paying for very mediocre or even bad performance

•  Overall from hindsight the financial industry became deeply imbalanced and sick.

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•  Still today, finance 2.0 and banking 2.0 are very much alive and kicking, and in fact still a growing industry!

•  But… we are now visibly on the verge of moving to a new era… of finance 3.0

•  What is finance 3.0, what trends do we see emerging already?

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•  Technology  to  build  simple  products  replacing  complicated  and  archaic  infrastructure  

•  Products  are  built  to  be  user-­‐friendly  products  •  Replicate  financial  ins0tu0ons  •  Products  are  built  by  frustrated  users  instead  of  by  financial  ins0tu0ons  •  End-­‐user  at  the  center  (rather  than  the  financial  sector  itself)  

Simplification •  Peer to peer lending: Peer-to-peer companies have stripped out unncessary

costs by using technology and eliminating branches et cetera thus creating a sustainable competitive advantage

•  Peer to peer FX trading •  Lower costs: TransferWise, simple and effective All this is very much analogous to the airline revolution where low cost operations have structurally revolutionised the way we travel by stripping out unncessary remnants from an oligopolistic industry. In this case, it is more technology driven though. Fragmentation •  Emergence of smaller funds, micro funds, super angel investors, and

entrepreneurs instead of intitutional funds. De-institutionalisation is another

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But before we get carried away simply echoing trends that we read about in tech blogs, and ideas that are promoted by a relatively small group of influential angel investors, let’s first take a step back and see what problem we are trying to solve. Here is another nice JP Morgan quote: “No  problem  can  be  solved  un2l  it  is  reduced  to  some  simple  form.”  

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•  We want to make the best investment decision based on the information available.

•  And we want to be protected and warned from crooks trying to rip us off and making us look like fools

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There are a few hurdles are making this job extremely difficult… 1. Information asymmetry (used-car sales) 2. Adverse selection (the worst opportunities end up being offered to you, the best opportunities do not come to you, you have to find them yourself) 3. Winner’s curse (you won competitive process of investing in a company? Congratulations! You probably don’t know something, that everyone else who offered less, knows)

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•  So we need a system that helps us overcome these hurdles •  Are we not just re-creating the same system again which we started from?

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Let’s focus on tech investing at the seed stage and at the growth stage (series A and up)

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In seed stage investing you have all seen many new developments in crowdfunding but also seed stage investing via AngelList or similar platforms.

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•  However these still play a relatively minor role •  By far the most important source of funding for seed stagings is personal

savings. The founder himself is the only person mad enough to invest in his/her own startup. Sometimes family and friends contribute out of sympathy ;-) But these are not financial ROI driven decisions.

•  And new avanues of funding like crodfunding still have a long long wait to go. Investing in seed capital is a strange category. Historically you needed to be a bit crazy to invest in startups, with very low success ratios

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Will crowd-funding and angel-syndication become bigger? That depends: is will they be able to offer good returns for the average unsophisticated joe

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•  And those good returns are dependent on really solving information asymetry and adverse selection problems.

•  It is absolutely critical that in the coming years we see that the average Joe is able to make decent returns on crowd funding and Angellist.

•  “If a startup is so promoising, why does it need to use crowdfunding or angellist?” - Is the often heard question.

•  We need a few more years to see the results, but:

•  the question is whether crowd-funding platforms are able to solve information asymmetry and adverse selection problems sufficiently

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•  However, crowdfunding does improve the financial returns in another way: increasing the ease of diversification

•  Investing in a startup is like an out-of-the money call option: a smalll chance for a big upside, downside limited to your initial investment, so you need to be able to spread you bets and crowdfunding enables exaclty that

•  Think about this: if you had made 10,000 small investments which all failed except one innvestment in a company called Google at a $1M valuation then, you would still make well over a 30x return on your investment, an envieable return beating the market

•  And in the digital age, upside is becoming higher and initial investment lower, so it finally starts to make sense to invest early in lean startups and make a high number bets. (See 500Startups and Kima Ventures following this strategy). But we have to wait and see if the average joe actualy can makea decent return on these investment paltforms.

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JP Morgan said: “A  man  I  do  not  trust  could  not  get  money  from  me  on  all  the  bonds  in  Christendom.” Whatever system we come up with, trust and some level of personal relationship will remain important too.

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Now let’s switch to gowth capital, by which I mean, funding of established companies in series-A and beyond

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•  The old system made sense. Investing in well-performing companies is very competitive and doing due diligence is complicated. LPs want to invest in tech but they need an expert. The LPs have to find GPs with the right expertise and impressive track-record. The GPs demand lockups in their fund so they can be credible in the market (the founder needs to know that the GP actually has money to invest). And the GP needs a proper incentive to really do a good job, so they ask for a carry. And so we arrive at the current system.

•  The problem is that this system is ery expensive and it has done a very poor job at punishing bad performance. Upside for the GPs yes, but not enough downside. This is a problem with the entire asset management industry

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•  So what could a new system look like: •  Less lock-up. LPs have more flexibliity to follow the best performers in real-

time •  Dealroom aims to be a facilitator of such system by allowing share information

on company performance and investor performance and sharing access to investment opportunities between professional investors

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Finally, let’s talks about dealroom.co for a moment

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We deliberately cover all growth stages, so that VCs can make sure they get in early. And founders have long enough lead times to educate the right investor group

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•  Dealroom is neither a marketplace nor a data provider. We provide information but based on a crowd-sourced model.

•  We add a layer of curated information through in-depth research. VCs are primarily looking for growth/traction.

•  And those who have growth to demonstrate, have an incentive to display it. •  For these high-potential companies, Dealroom acts as a fiduciary making sure

the information gets seen by the right parties only. •  In order to filter out noise, our research team pre-qualifies companies based

on basic size and growth metrics, using a mix of publicly available data sources and the proprietary information we receive directly from the companies.

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•  I am going to end this presentation with one last quote from our old friend JP Morgan….. This time a younger picture

•  “Go  as  far  as  you  can  see.  When  you  get  there,  you'll  be  able  to  see  farther.” •  And that’s exactly what we plan to to do at dealroom.co •  And that’s that. I want to thank you all for listening and if you have any

questions about us please feel free to walk up to me at this event. Thank you !!!

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