Investor Stories 44: My Investing Strategy (Buttrick, Sanwal, O’Donnell)

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On this special segment of The Full Ratchet,

the following investors are featured:

  • John Buttrick

  • Anand Sanwal

  • Charlie O’Donnell

Each investor describes their investment thesis and

how they evaluate startups for investment.

FULL TRANSCRIPT

Buttrick USV Startup Thesis

Sanwal thesis startup

Charlie O'Donnell Startup Investing Thesis

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95. Q&A – Nick Answers Questions from the Listeners (Nick Moran)

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In this episode, Nick answers questions from the listeners including:

  • Nick Moran listener Q&AFirst off, a question from Dave at a family office in the midwest…  Dave asks: “Nick, I recently reviewed a great startup but am not going to pursue because of the terms. Our lawyer requires a that a convertible note has a path to equity in all scenarios. This startup’s note does not. This stance makes sense to me, but I see so many other Angels invest in this type of note that it makes me wonder if this stance is justified. I would be interested in your opinion.”
  • Sam, an aspiring practitioner in Florida asks:  “Nick, I will be matriculating for my MBA this fall and I’d like to get into venture capital. It has been suggested to me to do investment banking first and use that experience to get into VC. Do you think that’s good advice?”
  • Stephen, from Chicago, asks:  “I have an interview in a couple weeks with a VC fund. What type of modeling do you think I should be ready for?”
  • Sara, an entrepreneur in Ann Arbor, asks:  “Nick, I’m interested in beginning conversations with investors for my SaaS, edtech startup. Do you know anyone in edtech that you could introduce me to?”
  • A question from Jon, an angel investor in Nashville:  “How have you found the startup dealflow to be on Angel List? I’d like to back your syndicate but I’m not sure about the quality of the startups you’re getting from Angel List.”
    • After sending this info to John, he followed-up by asking if I back other people’s syndicates…
  • Paul from one of the largest VCs in the midwest asks:  “Nick, we are in the process of hiring for an Analyst role. Someone with 0-3 years of experience and love of the startup world. The role will focus on supporting our portfolio. If you have any strong candidates, please feel free to refer them to me this week. We are going to be closing the top of the funnel shortly, but welcome your referrals.”
  • From Ted in Chicago:  “I just received a formal offer from a startup. They are still an LLC, so they are offering LLC Grants, rather than equity options.”

 

FULL TRANSCRIPT

*Please excuse any errors in the below transcript
First off, a question from Dave at a family office in the midwest…
Dave’s question is as follows: “Nick, I recently reviewed a great startup but am not going to pursue because of the terms. Our lawyer requires a that a convertible note has a path to equity in all scenarios. This startup’s note does not. This stance makes sense to me, but I see so many other Angels invest in this type of note that it makes me wonder if this stance is justified. I would be interested in your opinion.”
 
Interesting. In theory, a path to equity in all scenarios makes sense. Doing a term sheet instead of a convertible tends to make sense too. But, we are in an industry where convertibles reign and the terms can be highly variable.
 
Just thinking out loud, there are a few common trigger scenarios w/ convertibles:
1. Subsequent Financing: The company raises a subsequent funding round and early investors convert
2. Acquisition/Change-of-Control: The company gets acquired and note holders either get paid back their investment, a liquidation preference, or a multiple equal to the delta between the cap and the exit price
3. Time Elapsed: The company does not raise a subsequent round, the time elapses and the note reaches maturity. At this point, the startup is required to pay back the note w/ interest.
 
I’d suspect your situation relates to #3. Meaning the note for this startup does not automatically convert upon maturity. This only tends to happen when the startup fails. And, I’ve never been in a scenario where the startup chose to pay back the original investment. It would be very unusaul for a startup to reach meaningful profitability where they’d be able to return the investment. Typically, if a note reaches maturity before a startup has raised a subsequent round the investor has the upper hand. The startup is required to pay the note back, so the investor can dictate terms… setting a more aggressive equity conversion price. But again, this typically happens when things aren’t going well. This whole investment class is really about playing for the upside. Protecting the downside is a nice-to-have, but investing in the best companies is the must-have.
 
If your situation relates to #2, ie. there is not a path to equity in the event of an acquisition or change of control. I find that this is common with convertible. Many do not have a liquidation preference tied to a change of control. Clearly, this is not preferred for the investor. Some of the best wins are for those startups that have a quick exit. And I do believe that early investors should be rewarded for taking the risk even when an early exit occurs. But, this isn’t always the case and sometimes it’s just better to get into the best deals. That being the case, most often you just have to roll with whatever terms the lead investor has set.
 
 
 
Sam, an aspiring practitioner in Florida asks:  Nick, I will be matriculating for my MBA this fall and I’d like to get into venture capital. It has been suggested to me to do investment banking first and use that experience to get into VC. Do you think that’s good advice?
 
There is no traditional path to getting into venture capital and it is a highly competitive area to get into to.
 
Having solid, translatable skill sets may help get you an interview but they will not get you a job. Resume builders including a top-tier MBA, working at a top investment bank or strategy consulting firm or working as an early employee for a hot tech company are all what I refer to as ‘Credibility flags.’ They may earn you an interview but they won’t win you the job.
 
My advice to young folks is always to pursue things that you are very interested in and if those lend themselves well to VC, great. Subsequently, if you change your mind about VC or find it’s too difficult to break-in, the good news is you are doing something you love.
 
In the next Q&A item, I will talk a little more about what factors have helped indviduals get a job… but the single, most significant thing you can offer is tremendous value. You want the hiring VC to feel like they’d be missing out on a one-of-a-kind candidate if they don’t hire you. How can you achieve that? Be special… get involved… demonstrate your interest in VC with action. What side projects have you done to build your knowledge of venture? Do you create content and/or maintain a blog with your thoughts? Have you networked with the startups in the ecosystem. Most VCs need two things… a competitive advantage in sourcing deals and a competitive advantage in closing deals. How does your effort and ability help them move the needle on both?
 
 
Stephen, from Chicago, asks… I have an interview in a couple weeks with a VC fund. What type of modeling do you think I should be ready for?
 
As of July of 2016, I’ve now spoken w/ 23 people have reached out to me to thank me after getting a job in VC. Here are the main notes and takeaways from these discussions:
-The podcast was very helpful, namely the best practices episodes
-Many have said that the VC had them sit through a pitch session… then they debrief and got their feedback. It seems like a familiarity with pitches and quickly analyzing companies is necessary
-Being able to estimate TAM in an existing or nascent market is critical. VCs only want to invest in massive markets.
-Some have created their own market thesis, which has led to a job. For example, a young woman sent me her deck w/ a thesis on natural language processing within AI. She included an investment strategy, drivers, comps in the space and details on the exit environment. She had basically pitched the firm on why they needed to hire her to go deep on Natural Lanuage Processing and had built the supporting market info to justify it. I found out later that she got a job at Bessemer.
-Overall, some have compared the interview process to a strategy case interview for companies like McKinsey or BCG… with a focus on assessing market opportunity.
-Many have said that they became very proficient at asking good questions about the VCs thesis, partner structure, diligence process, differentiation, fund structure, dealflow sourcing, key lessons from wins and losses. Asking intelligent questions demonstrates a solid knowledge of VC success factors.
That’s all I’ve got for now.
-Nick
 
 
Sara, an entrepreneur in Ann Arbor, asks:
Nick, I’m interested in beginning conversations with investors for my SaaS, edtech startup. Do you know anyone in edtech that you could introduce me to?
 
Off the top of my head, I know a handfull of edtech investors. I’d encourage you to find a few startups that you admire in edtech and/or SaaS, search for them in crunchbase and build the list of investors that invested in them. Feel free to send me this list and any other generalist investors you come across. I will look over the list and tell you who I know. And, if you give me a strong, concise elevator pitch on the startup, I will pass that along to investors on the list and see who is open to an intro.
 
 
 
A question from Jon, an angel investor in Nashville:
How have you found the startup dealflow to be on Angel List? I’d like to back your syndicate but I’m not sure about the quality of the startups you’re getting from Angel List.
 
This question has come up again and again. There seems to be some confusion about Angel List. Back on episode 4 with Howard Tullman, he comared Angel List to the yellow pages, essentially a directory of startups. It’s changed quite a bit since then and is now a place where many early-stage companies get funded. But there is still a misconception that “Angellist Startups” are the ones being funded. The perception is that Angel List recruits startups to their platoform and then matches them with investors. This couldn’t be further from the truth. While it is possible to find startups through the site, we are not identifying startups through Angel List. We are just using the platform to faciliate and syndicate our deals. In essence, I don’t need to use their technology platform to syndicate my deals across an array of angels, but it’s much cheaper and more efficient to do it this way. For angels that are interested in seeing our dealflow, I can direct them to the site where they can easily back the syndicate. No stacks of paperwork to review and sign if it’s all done through the platform. Also, the administrative costs and the SPV LLC organization is really cheap at $8k per deal. Most Angel Groups I’ve spoken with spend far more than this per deal. And, maybe the best feature is that I don’t have to herd cats for their checks. Every account transfer or wire transfer is handle directly through the platform. I’ve heard from many offline angel group leaders how frustrating it is to get a $ committment from members and then have to chase down the funds to make the close date on time. For these reasons, I am actually consulting two of the largest angel groups in the country right now on how they can migrate their process to Angel List. It’s cheaper and much easier to do deals, but there are still a number of nuances to learn and do it effectively, which is why their leadership has reached out to me. And, while many entrepreneurs and angels think that this is far too public a way to raise capital, the reality is that the majority of deals syndicated on Angel List are private. They are not publicly listed and deal information is by invite only. From the angel groups I’ve spoken with, there plan is to keep all their deals private.
 
So, back to the original question… this is not just a dealflow platform where I am leading deals for startups that are listed. Rather, I find deals through a variety of channels and, if we decide to move forward, I have those startups create their profile on AL, I write the investment thesis, we decide to keep it public or private, and I launch the deal to our backers.
 
After sending this info to John, he followed-up by asking if I back other people’s syndicates…
 
And my answer was absolutely. While the dealflow quality we’re seeing now is higher than ever and we are able to get very selective, the reality is we still don’t get access to all the best deals. If Semil Shah gets an allocation in an exceptional startup, am I going to pass? Of course not. He’s in a different geography and has some different focus areas and is going to see different set of dealflow than I do. The single hardest thing about this entire asset class is getting access to the best deals. If he gets a $200k allocation in a great startup and gives me an opportunity to put $5k into it, he’s giving me access to deal that I would never have a chance to get into otherwise.
 
 
 
Paul from one of the largest VCs in the midwest asks:
Nick, we are in the process of hiring for an Analyst role. Someone with 0-3 years of experience and love of the startup world. The role will focus on supporting our portfolio. If you have any strong candidates, please feel free to refer them to me this week. We are going to be closing the top of the funnel shortly, but welcome your referrals.
 
For this request, I did link Paul up with three young, talented indviduals that were interested in VC analyst roles. And these were all candidates that I felt would make great contributions to their efforts. I was able to assess that because I had gotten to know each of these three individuals very well. One of the candidates, I had worked with professionally in the past. The other two, I’ve worked on small projects with. They wanted to get involved and offered to contribute to some projects for TFR and New Stack. I’ve had many people desire to get involved and the majority flake-out when they have to do any real work. But not everyone. There have been a handful of individuals that have shown exceptional drive and capability. It is these folks that I have no trouble recommending for a job. The reason I tell you this is that I receive a lot of emails and resumes from people I don’t know; either asking for a job at New Stack or asking me to recommend them for VC jobs. And I can imagine how many of these emails the larger venture firms receive. While it may seem obvious, here’s some advice… No one will recommend you for a job if they don’t know you. I’m not going to put my reputation on the line for someone I’ve never met, especially someone that does not have the wherewithall to get to know me before they ask for my help. So, if you’re planning to send me your resume, please don’t. If you really want to roll up your sleeves and get involved in venture, let’s talk.
 
 
 
From Ted in Chicago… I just received a formal offer from a startup. They are still an LLC, so they are offering LLC Grants, rather than equity options.  I am googling the implication of these grants as we speak, but I figured it would be a good idea to ask you how these differ from equity options and what I should look out for.
 
There are a variety of different ways companies grant options in an LLC, so unfortunately I’d need more information. Things to look into are if these are true options in the capital interest or profit interest of the entity, and at what price. Some LLCs offer instead phantom equity in the LLC instead.

94. What’s Wrong with Venture? Part 2 (Dave McClure)

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Today we cover Part 2 of “What’s Wrong with Venture?” with Dave McClure of 500 Startups. In this segment we address:

  • Dave McClure What's Wrong with Venture part 2Are there any problematic issues that you’ve observed w/ founders?
  • Any thoughts on who might be one of the most misunderstood people in the venture ecosystem?
  • How do you think about the landscape of accelerators and how do you differentiate at 500?
  • Any other comments on challenges in the venture environment and what you’d like to see change going forward?
  • On the other side of the coin, what positive trends have you observed in venture over the past few years?
  • What startup investor has inspired and influenced you most and why?

Read More…


Customers… Forever or Fleeting?

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Below is the ‘Tip of the Week’ from Ep94: What’s Wrong with Venture? Part 2 (Dave McClure)

Today Dave talked about sectors and trends that are hot and attract many investors. Even LPs are wooed by the new, sexy tech trends; which has influenced the thesis of VC fund managers. Dave has seen many cycles over the years and has structured his thesis around long-term, sustainable competitive advantages. And as I reviewed his comments, I saw a parallel at the business-model level. I considered my dealflow and the businesses that have staying power. Not at a sector or technology level, but in the way a business attracts and retains customers. And I asked myself, “”From this list of startups, which have long-term, sustainable value-creation? Are their customers a one-time event or a loyal customer for life?

I just received a deck yesterday form a company that has developed a SaaS platform for highschool athletes. They have great adotion, high engagement and seem to be providing strong value to their customers. But their business has distinct limitations. They do not want to serve pre-highschool athletes and there is no strategy to expand to college. They have a four-year window to serve their customers.

Another startup deck that I received a couple of weeks ago was from a company that has re-imagined the baby crib. They have a beautiful, free-trade, organic product that has had strong success selling direct-to-consumer on the internet. Cool product, great founding team, healthy traction. But again, this is a one-time sale, at a distinct point in time.

With each of these businesses, are they selling to a customer that will remain loyal in perpetuity? Is there an opportunity to build more value and sell more to that customer over decades to come? I think the answer is no, unless they re-imagine their customer…is the customer really the highschool athlete or is it the highschool? Is the customer the baby’s Read More…


93. What’s Wrong with Venture? Part 1 (Dave McClure)

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Welcome back to TFR.  We’ve got a good one today as we welcome one of the most respected and polarizing figures in venture, Dave McClure, to the program.  Dave, of course, is a founding partner at 500 startups and, with Christine Tsai, they have built an organization that may be the most active startup investor in the world.  In this interview, we will discuss ‘What’s Wrong w/ Venture?’  We discuss issues on the investor-side, on the founder-side and how 500 is setup to address some of those issues.  We cover:

  • McClure What's Wrong with Venture?What Dave worked on and who Dave worked with in the early days at Paypal
  • Why Dave thinks most VCs are lazy and not innovative
  • The ways he’s been innovative in this asset class where others have not
  • If he invests in ideas and how early he’s willing to go
  • Other problematic and frustrating practices by VCs
  • If he thinks that LP influence is driving VC fund strategy
  • If the influx of capital from new, early-stage angels is positive or negative
  • Why valuations have adjusted down so significantly, particularly w/ SaaS companies
  • And we’ll wrap up part 1 of the interview w/ Dave’s response to Bill Gurley’s position that current founders have never experienced a difficult fundraising environment, resulting in dirty term sheets, instead of just raising at lower valuations

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Investor Stories 43: Why I Invested (Davis, Heymann, Ramsinghani)

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On this special segment of The Full Ratchet,

the following investors are featured:

  • Mark Peter Davis

  • Maia Heymann

  • Mahendra Ramsinghani

Each investor describes a situation where they did

decide to invest, what the key factors were that led

to “Yes” and how that investment has worked out.

FULL TRANSCRIPT

Maia Heymann Angel Group Venture Fund

Mahendra_Ramsinghani_Thesis

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92. Cram Session, Episodes 32-36 (Nick Moran)

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Welcome back to TFR for another Cram Session. In these special releases, we have aggregated the takeaways and tips from previous episodes. In this installment, we will be recapping the following episodes:

 


The First Mover’s Dilemma: Competing Against Non-Consumption

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Below is the ‘Tip of the Week’ from Ep91: SpaceX & Elon Musk’s Mission to Mars, Part 2 (Tim Urban)

In today’s interview, Tim talked about the challenge for first movers. Not only do they…

1. have to build a business and
2. have to innovate & develop new technology;
3. but they also have to teach the world about the importance of this new industry.

The first internet service provider’s biggest opportunity came not from converting a small number of internet users; but rather getting non-internet users to use the internet.
The early automobile maker’s biggest challenge was not convincing people why they should buy their brand; but rather why they should consider purchasing an automobile in the first place.
Even a more modern example, take a company like Fitbit. They may have gotten early traction with consumers that already had GPS and health monitoring fitness watches; but the big opportunity that they capitalized on was getting the mass market to see the benefit of wearing a Fitbit all-day, everyday.

The First Mover in a space clearly has tremendous opportunity, but therein faces a dilemma. This is related to the concept we often hear about “Competing against non-consumption.” Often the single biggest competitor for any company, in any sector, is non-consumption. There are always far more people out there that could be using your product, but aren’t using anything. And this is why I dislike seeing startup pitch slides that talk about the competition. If one is addressing a real pain point, in a unique way, they will be Read More…


91. SpaceX & Elon Musk’s Mission to Mars, Part 2 (Tim Urban)

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Today we cover Part 2 of SpaceX & Elon Musk’s Mission to Mars with Tim Urban of Wait but Why. In this segment we address:

  • Tim Urban SpaceX and Elon Musk's Mission to MarsWhen does Elon project that the first crew of people will land on Mars?
  • The surface of Mars is not livable. How does Elon plan on addressing the atmosphere issue?
  • After finishing the series on SpaceX and Elon’s mission to colonize Mars; what were some of the takeaways that impacted you most?
  • What are the key, defining things that make Elon such a unique figure in human history?
  • What is it about Elon that makes him a visionary creator?

Read More…


90. SpaceX & Elon Musk’s Mission to Mars, Part 1 (Tim Urban)

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Tim Urban of Wait but Why joins Nick to cover SpaceX & Elon Musk’s Mission to Mars, Part 1. We will address questions including:

  • Tim Urban SpaceX and Elon Musk's MissionTim, can you start us off by telling us your story and how that led to the launch of Wait but Why?
  • You’ve written about Space travel, AI, the Fermi Paradox, Procrastination, Cryogenics and much more… Where do you come up w/ your topic ideas?
  • Today I want to talk about your interaction w/ Elon and specifically the story you put together on SpaceX… to start off, how did you first get connected w/ Elon?
  • You’ve also done a specific feature on Elon as well as Tesla… can you talk about why you felt it was so important to do this piece on SpaceX?
  • When discussing Musk’s Mission to put 1M people on Mars… one first needs to understand the nature of extinction events. You introduce that well by presenting a bet between two aliens, Zurple and Quignee, on the planet Uvuvuwu. Can you walk us through the bet and why they are making it?
  • Can you talk about the number and magnitude of extinction events that the earth has already experienced and the potential causes of extinction events?
  • You use a hard drive analogy to explain why Musk wants to put 1M people on Mars. Can you recap this analogy?
  • Can you describe your discussion w/ Elon on ‘A Will’ and ‘A Way’ and how this led him to the mission of revolutionizing the cost of space travel?
  • Can you give us an overview of the major costs for rockets and how SpaceX has and potentially will continue to significantly lower these costs?

Read More…


Listener Feedback

Jonathan Hart

If you building a startup, I can't stress enough that my favorite podcast is @TheFullRatchet .. latest eps w @davemcclure are v informative!