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02-28-2014, 12:40 AM
Abornmal, where did you get the long list of questions?
How did you come up with the list?
What made you think of the list?
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02-28-2014, 09:59 AM
Gringuito I think I finally came up with a way to phrase this to avoid outing your identity.
So you stated you want to see a track record etc etc...
Now let me ask.
How do you value a person's idea/personality if he/she has no track record of previous successful businesses?
Ie personality and execution how can you evaluate that from a start up perspective.
This is probably very hard to type/help give guidance but would be awesome to know how you evaluate talent. (Lets just assume the market size all checks out etc and the area does have exit opps eg. M&A activity)
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02-28-2014, 11:04 AM
^ very interesting and I get it. It seems like you are A heavy handed angel investor meaning you put large amounts in on guys you can evaluate well. Ie: not like other angel investors who will make very small bets $25-100K into a lot of extremely high risk candidates.
The best part is you're exactly like every other successful person I know. You don't talk about things you have never done before.
I am still curious about your thought process though. If you were asked to do that.
---
Where am I going with this?
As we all know paypal's creator funded Facebook with it's first $50K right?
I can't even comprehend how he made this decision back then and it still puzzles me today.
It is certainly not luck when you're plucking out the best guys multiple times in your life so I really wonder what that "knack" is. We would all be rich.
Similarly Zuck was offered a salary of $1M by Microsoft before he even went to college, so clearly two very elite people knew something.
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02-28-2014, 11:23 AM
^ good stuff. All makes sense based on your experience because you said your first failure was a cash flow issue and that was necessary to make your first break. So it ties with how you think about investing in general.
Thank you for all the answers.
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02-28-2014, 08:30 PM
I was reading Peter Thiel's wikipedia page and it says that he invested $500,000 for 10.2% of Facebook. I get the $500k - but 10.2%? This tells me that they're crunching numbers/using a formula. Otherwise, it would just be 10%. Thoughts?
An MD for a $100 million tech fund at the now defunct Bear Stearns described his investing style to me this way: that he was at a party and he was just walking around trying out the different hors d'oeuvres. $500k here, $5 mil there...same as throwing darts.
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03-01-2014, 10:43 AM
Quote: (02-28-2014 08:22 AM)Gringuito Wrote:
I'm an angel investor so I can't speak about how VCs do it. I really like what WestCoast said about value is important not valuation. When I'm valuing a company I look at it as an investment. What that means is that I'm considering how much money will I tie up for how long with what kind of return and at what risk. For example, say I have to invest $5M into a company and the possible exit is 4 years away. I look at the comparable companies in the market and any recent M&A activity. I look at the total market size and how much of it they want to grab.
- Wow, for a "start up", I think of $5mm as a successful Series A round. (like, maybe $5mm to $15mm). I typically think of angel investing as passing the hat for $100k to $250k size checks, with most of the due diligence based on trust. This is especially so because there usually isn't anything that you can base a valuation on (unless you want to get into a protracted game of "he said / she said").
- No way in hell I'd invest $5mm as a minority investor. 51%+ or discussions would stop. (At this point, I'd rather round up more capital than put $5mm into a minority position).
Of course, I understand that $5mm is just an example. But, in reality to stroke a personal check of that size without taking a majority position...serious balls.
Again, I will never understand tech. Crazy business. The gold rush mentality of making absolutely zero for three years with a 5% chance of going gang busters just blows me away.
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03-01-2014, 12:27 PM
A big thank you to Gringuito for this thread.
A lot of guys don't know, all the game he's giving you in this thread, most sucessful guys won't share it, yet they like to call themselves "mentors" because it strokes their ego. These "mentors" will have lunch with you, respond to your e-mails, etc. but never really do anything that could possibly help you get to where you want to be.
So with that being said, again I say thanks to him for taking the time to share his knowledge and perspective for anyone who wants it -- I especially appreciate it because I'm at this stage of my life right now, and the information is valuable.
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03-01-2014, 12:36 PM
True that % ownership and degree of control are separate. But, they are highly correlated and control costs more. If an equity investment requires $5mm, I'd rather pay more for control or skip equity and structure as debt. (but, not in tech...I think I'd rather walk if I couldn't take control).
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03-01-2014, 04:18 PM
First, although the $5mm number is an example, the order of the magnitude of the investment actually is important. $5mm without a majority stake implies a $10mm+ valuation. To get to these numbers, it better have positive cash flow. (Again, unless in tech...but, I leave this to the crazy bay area community to figure out why some of these companies pull the valuations that the do!).
To try to answer your question, if we assume we are looking at a company that needs a $5mm to $10mm infusion (per our previous examples), then the first and most important step for me is to look at use of proceeds. Second is growth. Unless there is some kind of blowout opportunity (rare), and it isn't a majority position, then as an investor you can get to the same place with debt. In particular, if you see a good opportunity that looks like there is a solid 25%+ revenue growth for the next several years, but no chance of an IPO anytime soon, then debt I think is the best vehicle to make sure you hit payback.
I'd probably start with the following:
- $100k for legal fees, etc. up front
- 5% upfront fee (really just reduces net proceeds available to company)
- 5yr term
- 12% coupon (paid quarterly)
- 5% warrants / equity
- Critical to have a good termination value schedule (meaning, if they payoff early that you still get everything you were hoping for and potentially a little more)
Then, get ready to get into a fight over the warrants/equity. You probably lose this, so you put in a 5% to 10% backend success fee in lieu of equity.
Of course, I'm putting this out there in a vacuum, but there are three key take-aways: 1) unlike a minority investor, you force distributions with the use of the coupon, 2) hedge your position to hit payback earlier, 3) if there is no huge IPO event or other big deal...then you are setup to hit a 18% - 22% return with the above with a much higher likelihood than a minority investor (with the minority investor having higher hopes but not a great chance of actually having a good outcome).
And, can't say this enough...I don't think this works in tech. You need positive cash flow with "block and tackle" growth opportunities. Pixie dust and hoping to be "in the right place at the right time" won't work with this type of deal.