In finance – shots on target. Being cool as a startup tech… | by Mark Saster – News Couple

In finance – shots on target. Being cool as a startup tech… | by Mark Saster

Being great as a startup tech investor of course requires a lot of things to combine:

  1. You need strong insights about where technology markets are headed and where the value will be created and sustained in the future
  2. You have to be perfect with your market timing. Being too early is the same as being wrong. In hindsight I promised “I ran too”
  3. You also need to be right about the team. If you know the right market and come in at that exact right time, you can still miss WhatsApp, Instagram, Facebook, Stripe, etc.

I was definitely wrong about the market value. Sometimes I was right about the market value but too soon. I was spot on with both but I backed the second, third or fourth best player on the market.

In short: having access to great deals, being able to invite you to invest in these deals, being able to see where the value will be created in the market, and having the luck to support the right team in the right market at the right time all count.

When you first start your career as an investor (or when you first start writing angel checks) your main obsession is to “get great deals”. You think of one shot at a time. When you play the game a little longer or when you have responsibilities at the fund level, you start to think more about “creating the portfolio”.

At Upfront we often talk about these things as ‘shots on goal’ (which is an apt analogy for football given EURO 2020 at the moment). What we discuss internally and what I discuss with my personal service providers is described as follows:

  • We support 36-38 Seed / Series A companies per fund (we have a separate growth fund)
  • Our average first check is $3.5 million, and we can write as little as $250,000 or up to $15 million in the first check (we can follow up with $50 million+ in follow-up rounds)
  • We are building a diversified portfolio considering our partners’ focus areas. We try to balance deals (among other things): cybersecurity, fintech, computer vision, marketplaces, video games and gaming infrastructure, marketing automation, applied biology and healthcare systems, sustainability and e-commerce. We do other things too. But these were the main themes of our partners
  • We try to have a few “running and ambitious plans” in each portfolio and a few businesses that are a new emerging paradigm in an existing sector (video-based online shopping, for example).

We tell our service providers the truth, which is that when we write the first check we think every one is going to be a great company but 10-15 years later, it was very hard to predict which would be the prime mover for the boxes.

I advise:

  • When GOAT started it was a restaurant reservation app called GrubWithUs…it’s now worth $3.7 billion
  • When Ring started, even the people at Shark Tank wouldn’t fund it. Sold to Amazon for over $1 billion.
  • We have two companies that we had to fund several times before they eventually went public
  • We had a portfolio company that turned down a $350 million acquisition because they wanted at least $400 million. They sold two years later for $16 million
  • In the 2008 financial crisis, we had a company that jointly hired attorneys to look into bankruptcy, and it also pursued (and achieved!) the sale of the company for $1 billion. It’s been ~30 days of bankruptcy.

Almost every successful company is a mixture of hard work by the founders mixed with a little luck, good fortune and perseverance.

So if you really want to be great at investing, you need all the right skills, access, and a diversified portfolio. You need shots on goal as not every player will shoot in the net.

The correct number of trades will depend on your strategy. If you are an initial fund with 5-10% ownership and no board seats, you may have 50, 100, or even 200 investments. If you are a later stage fund that comes when there is less upside but a lower “loss ratio”, you may only have 8-12 investments in the fund.

If you are an angel investor you have to figure out how much money you can afford to lose and then figure out how to adjust your money over a specific period of time (eg 2 – 3 years) and come up with how many companies you think diversified for you and then come back to how many write/company dollars . Hint: Don’t just do 2-3 trades!! Many angels I know have fallen beyond their comfort level in just 12 months and then feel powerless. It may be years before you start seeing returns.

At Upfront Ventures, we define our “shots on target” strategy based on 25 years of experience (established in 1996):

  • We take board seats and consider ourselves company builders > stock pickers. So we have to limit the number of deals we do
  • This leads us to have a more focused portfolio, which is why we seek greater ownership where we invest. This means that we are more attuned to the results and successes of the limited number of deals we do
  • Across many funds, we have enough data to show that 6 or 7 trades will generate 80+% returns and we never know which of the 36-38 will perform the best.
  • The result is that each partner makes about two new deals per year, or 5.5 per fund. We know this is going to a new chest.

So every fund we are really looking for 1-2 trades that return over $300M on just one trade. This is the yield, not the exit price for the company. Since our money is about $300 million, each returns 2-4 times the fund if we do it right. Another 3-5 could return for a total of $300-500 million. The remaining 31 trades will likely return less than 20% of the total revenue. Early stage venture capital is about extreme winners. To find two suitable deals, you definitely need a lot of shots on goal.

We’ve been fortunate enough to get a few of these huge hits in every box we’ve ever done.

In a follow-up post, I’ll talk about how to decide how many dollars to put into trades and how we know when it’s time to switch from one fund to another. In the project this is called “back-up planning”.

** Image credit: Mayhem Soccer Gear employment Unsplash

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