moneyball: a quantitative approach to angel investing (atlanta - oct 2012)
DESCRIPTION
TRANSCRIPT
![Page 1: Moneyball: A Quantitative Approach to Angel Investing (Atlanta - Oct 2012)](https://reader038.vdocument.in/reader038/viewer/2022103013/53f2111b8d7f72104c8b4d0c/html5/thumbnails/1.jpg)
500.co/challenge #m4s
IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
MONEYBALL STARTUPS+
PAUL SINGH
500 Startups
@paulsingh・[email protected]・resultsjunkies.com/blog
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500.co/challenge #m4s
500 STARTUPSGETTING TO KNOW
BECAUSE WE’RE KIND OF A BIG DEAL
PAUL SINGH
@paulsingh・[email protected]・resultsjunkies.com/blog
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500.co/challenge #m4s
API TO VENTURE CAPITAL & FUNCTIONAL EXPERTISE
THE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING:
(FOR FOUNDERS. FOR INVESTORS. FOR GOVERNMENT.)
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500.co/challenge #m4s
BUILD SOMETHING PEOPLE WANT
FOUNDERS:
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500.co/challenge #m4s
WRITE CHECKS AND ADD VALUE
INVESTORS:
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500.co/challenge #m4s
MAKE LIFE EASY FOR INVESTORS & FOUNDERS
GOVERNMENT:
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500.co/challenge #m4s
VENTURE CAPITAL IS OPEN TO ATTACK BY DISRUPTIVE NEW BUSINESS MODELS AND TECHNOLOGY.
“
-- NAVAL RAVIKANT (@naval)
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500.co/challenge #m4s
(R)EVOLUTION IN THINKING
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500.co/challenge #m4s
EARLY STAGE STARTUPS
HAVE CHANGED
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500.co/challenge #m4s
STARTUP COSTS LOWER THAN EVER
BUT SCALING STILL COSTS MONEY
CLOUD, OPEN SOURCE AND ONLINE DISTRIBUTION DRIVING
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500.co/challenge #m4s
WEB GETS BIGGER.WORLD GETS SMALLER.
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500.co/challenge #m4s
TRACTION IS THE NEW INTELLECTUAL PROPERTYPLATFORMS (SEARCH, SOCIAL & MOBILE) PRIMARILY DRIVING THE CHANGE.
NO LONGER “GOOD ENOUGH” TO DEPEND ON TECH DIFFERENTIATION.
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500.co/challenge #m4s
CAPITAL INCREASINGLY COMMODITIZED
RISE OF THE ANGELS, YO!
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500.co/challenge #m4s
NEW REALITY: MONEY FOLLOWS
FOUNDERS
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500.co/challenge #m4s
SIGNALS ARE EVERYWHERE
BIG DATA + OPEN SOURCE ANALYTICS = NEW TECHNIQUES FOR VC
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500.co/challenge #m4s
WALL STREET BEAT US TO IT
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500.co/challenge #m4s
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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.
“
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500.co/challenge #m4s
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500.co/challenge #m4s
TWICE A WEEK A SMALL HELICOPTER CIRCLES OVER CUSHING’S TANK FARMS ON AN OIL INDUSTRY SPYING MISSION.
“
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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.
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500.co/challenge #m4s
WE CAN DO IT, TOOSURPRISE!
IT TURNS OUT,
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500.co/challenge #m4s
+ “GUT” + TRUSTED MENTORS + MUCH, MUCH MORE DATA.
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500.co/challenge #m4s
SENTIMENT ANALYSIS
WHAT IS THE TEAM THINKING? WHAT DOES THE MARKET THINK? WHAT DO MY PEERS/MENTORS THINK?
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500.co/challenge #m4s
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.
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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.
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500.co/challenge #m4s
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
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500.co/challenge #m4s
EARLY STAGE VCIS CHANGINGHAS CHANGED
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500.co/challenge #m4s
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.
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500.co/challenge #m4s
MONEYBALLIT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
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500.co/challenge #m4s
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)
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500.co/challenge #m4s
INITIAL BET DESIGNED TO GIVE US MORE DATA FOR
SUBSEQUENT BETS
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500.co/challenge #m4s
QUANTITATIVEPORTFOLIO APPROACH
BENEFITS: CONTROLLED RISK + OUTSIZED RETURN POTENTIAL
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500.co/challenge #m4s
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
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500.co/challenge #m4s
RISK MITIGATION THROUGH
DIVERSIFICATION
MODERN PORTFOLIO THEORY:
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500.co/challenge #m4s
HIGH VOLUME INVESTING ALLOWS
FOR HIGH ERROR RATE
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500.co/challenge #m4s
TRACK IRR & VALUATIONS WITHIN
YOUR PORTFOLIOAT LEAST YEARLY. RECOMMEND QUARTERLY.
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500.co/challenge #m4s
CONTROLLED RISK:OUTSIZED RETURN
POTENTIAL
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500.co/challenge #m4s
PORTFOLIO IRR QUICKLY POSITIVE
(WITH SMALLER EARLY EXITS AND PROMISING DEALS GETTING FUNDED)
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500.co/challenge #m4s
EVEN “SMALLER” EXITS CAN MOVE
THE NEEDLEDON’T FORGET: YOU CAN SELL POSITIONS TO DOWNSTREAM OR SECONDARY BUYERS TOO.
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500.co/challenge #m4s
LAW OF LARGE NUMBERS FTW!
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500.co/challenge #m4s
INDIVIDUAL BETS ARE SMALL
MUCH EASIER TO RUN AN EXPERIMENT ON A $50K INITIAL CHECK INSTEAD OF $250K+
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500.co/challenge #m4s
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.
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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.
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500.co/challenge #m4s
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%
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500.co/challenge #m4s
DEAL TERMSSO YOU FOUND A STARTUP YOU LOVE?
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500.co/challenge #m4s
DEBT VS EQUITY
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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.
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500.co/challenge #m4s
STANDARD DOCS ARE YOUR FRIENDS
WHEN IN DOUBT, DO NOT INNOVATE IN FINANCE OR LEGAL
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500.co/challenge #m4s
PRO RATA & INFO RIGHTS
ALWAYS. ALWAYS. ALWAYS. ALWAYS. ALWAYS. (GET IT?)
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500.co/challenge #m4s
FOCUS ON VALUATION & MULTIPLES
OWNERSHIP % MATTERS MUCH LESS. FOCUS ON REQUIRED EXIT SIZE RATHER THAN SOME MYTHICAL OWNERSHIP TARGET.
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500.co/challenge #m4s
IT’S HARD TO MAKE MONEY ON
VALUATIONS > $5M(PRO TIP: CONSIDER MIN. RETURN REQUIREMENTS FOR DOWNSIDE SCENARIOS)
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500.co/challenge #m4s
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.
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AVOID BOARD SEATS
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MOST BOARDS PROVIDE MINIMAL
VALUE-ADD
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500.co/challenge #m4s
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).
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DO NOT INNOVATE IN FINANCE OR LEGAL
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500.co/challenge #m4s
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
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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
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500.co/challenge #m4s
BE A SMART INVESTOR
FOCUS ON INFORMATION ASYMMETRY & PRICE/MULTIPLES.
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500.co/challenge #m4s
BY ITS NATURE, THE INTERNET UNDERMINES ANYONE WHOSE STATUS DEPENDS ON PRIVILEGED ACCESS TO INFORMATION.
“
-- MICHAEL LEWIS
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500.co/challenge #m4s
API TO VENTURE CAPITAL & FUNCTIONAL EXPERTISE
THE BIG OPPORTUNITY IN EARLY STAGE TECH INVESTING:
(FOR FOUNDERS. FOR INVESTORS. FOR GOVERNMENT.)
![Page 63: Moneyball: A Quantitative Approach to Angel Investing (Atlanta - Oct 2012)](https://reader038.vdocument.in/reader038/viewer/2022103013/53f2111b8d7f72104c8b4d0c/html5/thumbnails/63.jpg)
500.co/challenge #m4s
500.co/challenge
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500.co/challenge #m4s
IT’S NOT SPRAY AND PRAY. IT’S A PROCESS.
MONEYBALL STARTUPS+
PAUL SINGH
500 Startups
@paulsingh・[email protected]・resultsjunkies.com/blog