H3 presentation - 20 Years of Investing in and Operating Technology Companies
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Experience from the buy-side, sell-side and being an operator of start-ups. Having invested in >40 companies, managed a $400 million portfolio of direct investments and fund investments, started 5 companies, and successfully exited dozens, these are some of the important lessons learned.
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H3 presentation - 20 Years of Investing in and Operating Technology Companies
- 2. HOW DO YOU GET AN ENTREPRENEUR TO DO THE IMPOSSIBLE?
- 3. Dude, you couldneverdo that.
- 4. CV § Investor § 70+ direct & fund investments § Entrepreneur § 5 funded start-ups § Vencast.com § Bump.com § Events.com § CRS § Fitmoo.com § EchoInvest (not funded) § Tech rights to: § Advisor 25+ early stage companies § Operator of numerous small businesses, tech and non-tech. § Board of UCSD von Liebig School of Entrepreneurship. 3 Start-Ups as Founder & co- founder 2 are still operating 1 sold to Instinet CEO of Private Equity – Genspring Created the first PE FOF CIO of The Drax Group Generated $50M in excess return Founded Venture Capital Distribution business for Merrill Lynch KPCB first client Founded Vencast.com Founded Fitmoo.com Personal 2001 HBS Entrepreneur of the Year finalist Ironman triathlete Kiteboarder Writer / Blogger Cook JEFF DYMENT
- 6. SOCIAL DISTRIBUTION 1 product / 100,000 store fronts
- 12. MY DESK
- 13. An entrepreneur is an investor in their own business, therefore A venture capitalist is also an entrepreneur.
- 17. Nic B**t – MD @ f**T**** Partners Path to Success for Startups § There’s a great product idea – typically an exciting use case or exciting solution to a difficult problem, backed up by some objective desk research § There’s a deep understanding of the market – customer behaviours and motivations, supply chain, pricing, go-to-market etc. § The competitive environment is benign – competitors are properly understood and differentiation is clear (note the properly…) § Business fundamentals are strong – there’s a clear picture of how margins, customer acquisition costs, and customer life time value will look at scale § Basis for long term competitive advantage – barriers to entry are clear, at least at scale § Right skills – the founder is well suited to the opportunity § Compelling plan for the first year
- 19. WHAT IS AN ENTREPRENEUR? § Owner of a small business, deli or cupcake store? § A CEO of a technology start-up? § An investor into private businesses?The maker of efficiency application. § Employee of a technology start-up. § DJ or musician? § Pro-athlete who manages their own brand? John Doerr - KPCB § Entrepreneurs used to START new businesses. § Now they INVENT new business models.
- 21. ENTREPRENEURIAL ATTRIBUTES? § Risk taker? § Calculated rick taker? § Knows how to make money? § Wants to change the world? § Disruptor? § Problem solver? § Job creator? § Savant? § Flexible hours? § Works for himself? § Poverty? § Business purchasers? § Small business? § New Division within a larger business? § Sold their company? § Works alone? § Works with a few other people on something new? § Works for a higher purpose? § Works at a coffee shop?
- 29. Who’s Right? Bill or Nic?
- 30. Who’s Right? Marc Andreessen? § a product innovator § an entrepreneur § a potential CEO § biased towards people who “never give up” Eric Ries “Lean Startup” § Successful entrepreneurs work in a “context of extreme uncertainty”
- 31. “NEVER GIVE UP?”Marc andreessen
- 33. Who’s Right? § “Extraordinary benefits also accrue to the tiny majority with the guts to quit early and refocus their efforts on something new.” § Vince Lombardi: “Quitters never win and winners never quit.” § “Bad advice. Winners quit all the time. They just quit the right stuff at the right time.” § “Most people quit. Most people just don’t quit successfully.”
- 34. An entrepreneur is an investor in their own business, therefore A venture capitalist is also an entrepreneur.
- 38. • 1,500,000 downloads in first 3 months • Offered $100 million from Google + $25M earn out. • First liquidity event. Turned it down. Instead Raised $19.5 million instead with Kleiner Perkins & Greylock at a $25 million valuation.
- 39. Sale Price to Google $125,000,000 Investment $ 2,500,000 Return 19,600% Multiple on invested capital 25 x 3-Month Return
- 43. 10-Jan-14 25,000,000$&&&&&&&& 16-Apr-12 30,000,000$&&&&&&&& 1-Feb-11 10,800,000$&&&&&&&& 1-Feb-11 8,700,000$&&&&&&&&&& 1-Nov-10 2,500,000$&&&&&&&&&& TOTAL FUNDING 77,000,000$
- 44. • Add Free Social Network, sort of like Ello • Anti-Facebook • 50-150 friends allowed • 23,000,000 registered users
- 46. “Arun Thampi of Singapore discovered that Path uploads users' address book information to Path's servers.This action isn't in Path's Terms of Use, and it's enraged a user community concerned about privacy rights….”
- 47. Whoops!
- 49. "We don't want to connect you with just anyone on Path," Morin says. "Without the contact list information, some of these features just don't work."
- 51. Raised $77,000,000 Users 23,000,000 User Acquisition Cost $3.00 Revenue $0.00
- 52. Sale to Daum Kakao $25,000,000* * rumored
- 53. Cash%Returned Return Waterfall 10-Jan-14 25,000,000$&&&&&&&&& 25,000,000$&&&&&&& 0.00% 1 x 16-Apr-12 30,000,000$&&&&&&&&& $0 ,100.00% 0 x 1-Feb-11 10,800,000$&&&&&&&&& $0 ,100.00% 0 x 1-Feb-11 8,700,000$&&&&&&&&&&& $0 ,100.00% 0 x 1-Nov-10 2,500,000$&&&&&&&&&&& $0 ,100.00% 0 x TOTAL&FUNDING 77,000,000$&&&&&&&&&
- 56. § 4,000 tech startups each year that attempt to raise venture money § Andreessen Horowitz, funds 20. § The venture capital industry as a whole funds about 200 tech startups a year, but as few as 15 will generate approximately 95 percent of the returns. E&Y Venture Report 2015 17,855 rounds / 6 years = 3,000 rds / year 3,000 rds/yr / 2 rds / company = 1,500 companies / year 1,500 companies / year * 10% tech = 150 / tech year (energy, healthcare, industrial goods, consumer services, consumer goods, IT)
- 58. OH SHIT!
- 65. FUNDS?
- 66. $31,107 $29,993 $25,054 $16,103 $13,282 $19,060 $19,838 $17,702 $30,161 0 50 100 150 200 250 300 $- $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 Venture Capital Fund Raising Venture Capital ($M) Number of Funds
- 67. DIRECTS?
- 68. DIRECTS? 543,000START EACH MONTH 3,500PRIVATE COMPANIES GET VENTURE CAPITAL / YEAR <300STARTUPS FUNDED BY VCS 99.94%DON’T’ GET VC FUNDING
- 69. SECONDARIES?
- 70. SECONDARIES BENEFITS HINDSIGHT DISCOUNT PRICING CLOSER TO LIQUIDITY POSITIVE SELECTION
- 71. SECONDARIES? $32 BILLIONRAISED IN 2014 $45 BILLIONDRY POWDER $37.9 BILLIONINVESTED IN 2014
- 72. LESSONS
- 73. DYMENT PHILOSOPHY ABOUT ENTREPRENEURSHIP§ Ideas are different from businesses. § Visionaries are not entrepreneurs § Operators are hired § Emotional attachments are hard to break § Make money from Day 1 § Sell more Day 2 § Follow the winners § Companies § Industries § Investors § Odds are against you so have fun. 1 idea a day – 300+ ideas / year 10 make it to paper 1 every 2 years makes it into a plan 1 every 5 years gets funded 2 of 3 usually succeed
- 74. Most successful businesses start FROM ONE § One paying customer § One product sale § One download § One car ride § One room rental § One enterprise sale LESSONS
- 77. Adjust holding periods when you can. Use the secondary market. Sell into structure products. Entrepreneurs: Take the money. Investors: Manage your holding period. LESSONS
- 78. LESSONS
- 79. Philosophy § Liquidity is the new gold. § The secondary market will be bigger than the primary. § Valuation adjustment has already started. § More and more companies will remain private longer and longer. § LPs, investors and entrepreneurs better buckle up 2x long holding periods. Business Models § Freemium (Strava) § Saas (Slack) § Recurring Revenue (ClassPass) § Efficiency (Canva) § Email § Wed apps § Consolidator / Organizers GENERAL TRENDS
- 80. NOTA WINNER TAKE ALL MARKET PLACE APPS VS WEB APPS
- 81. BIGGEST IDEAS New Thinking New Conduit VENTURE INVESTMENT
- 82. BIGGEST IDEAS New Thinking New Conduit VENTURE INVESTMENT
- 83. A NEXT GENERATION DISTRIBUTION CHANNEL. ACCESS TO THE NETWORKS OF BILLIONS OF PEOPLE TO DISTRIBUTE PRODUCTS AND SERVICES GLOBALLY. EVERYTHING WILL EVENTUALLY BE USING SOCIAL DISTRIBUTION FROM CARS, HOUSES, TO RESTAURANT RESERVATIONS AND CONFERENCE TICKETS.
- 85. GOAL New Codec: 6 gigabytes in 1 second over today’s bandwidth All Lossless 6 billion bytes of data in 1 second 4,800:1
- 88. BIGGEST IDEAS New Thinking New Conduit VENTURE INVESTMENT
- 90. DIRECT, INDIRECT AND SYNTHETIC EXPOSURE TO THE BEST FUNDED, LARGEST, MOST SUCCESSFUL PRIVATE COMPANIES, CLOSEST TO A LIQUIDITY EVENT.
- 91. Venture Fund Universe Largest and Most Repetitive Best Performers Best Vintage Year Fund Best Deals From Best Vintage Years Strongest Balance Sheets Companies Closest to Liquidity Discount to Last Valuations Best Funded Companies with Top-Tier Sponsors, Shortest Holding Period, All With The Advantage of Hind-Sight Preferred late-stage private company Investing methodology
- 92. ACCESS TO WORLD CLASS PRIVATE COMPANIES THROUGH UNIQUE RELATIONSHIPS WITH FUNDS AND CO-INVESTMENT INTERMEDIARIES
- 93. EXAMPLE OF AN INVESMTENT STRUCTURE FOR LATE-STAGE DEAL ACCESS Loan to Founders, Executives, Early Investors Interest = Prime + 300bp-500bp 3X-5X over collateralized Stock Incentives Outright grant or options on underlying with discounted strike = 10% of collateral value
- 97. CREATING UNICORNS § “Part of the problem seems to be that nobody these days is content to merely put their dent in the universe. No, they have to fucking own the universe. It’s not enough to be in the market, they have to dominate it. It’s not enough to serve customers, they have to capture them.” § The term startup has been narrowed to describe the pursuit of total business domination. It’s turned into an obsession with unicorns and the properties of their “success”. A whole generation of people working with and for the internet enthralled by the prospect of being transformed into a mythical creature. § David Hansson – Ruby on Rails, Basecamp
- 98. STARTUP MANIA § The startup PR machine is crazy. If you’re not VC funded then you don’t matter. Your success is measured in money raised, not money earned. If you’re not “scalable”, then you don’t exist. It took me some time to start ignoring this. I understood that so many well funded startups never take of the ground and my bootstrapped business has. Matt Kubiczek – Amazon engineer, now runs a software company that employs 60 people
- 99. Leave Behinds
- 100. CONTAGION § 1998 - Long-term captial management – over leveraged hedge fund where negatively correleated assets all of a sudden started to correlate a little to much or a little to long. § 2008 - Global Financial Crisis. Complete liquidity crisis for the entire world. § Today – Europe migrant crisis, Middle East meltdown, hyperinflation in Latin America, Puerto Rico debt crisis, Greece, Venezula, Argentina, China, Russia
- 101. Rules § Look for trends and either lead or don’t follow § Stay fluid, nimble § Liquidity § Exit § Barbell approach § New approaches to traditional non-traditional investing Help § Don’t listen to Jim Cramer § Public equity vs Private equity § Liquidity is becoming less and less an issue except for investing in no-name directs. § If you need some help, call me. PROTECTION
- 102. Investment $2,500,000 19,600% AR 5 Years instead of 3 months
- 104. JEFF DYMENT § jeff@institutionalconsultants.com § jeffdyment@gmail.com § Cell: 203-515-9686 And watch some of the other videos on www.institutionalconsultants.com
- 105. END OF PRESENTATION
- 106. Enhancement of Return by Shortening Holding Period Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 IRR (100)$ -$ -$ -$ -$ 300$ 25% (100)$ -$ -$ -$ 300$ 32% (100)$ -$ -$ 300$ 44% (100)$ -$ 300$ 73% (100)$ 300$ 200%
- 107. Positive effect of Negative effect of Positive effect of Negative effect of % Change of return % Change of return % Change of return % Change of return per unit of time per unit of time per unit of time per unit of time (5 Uts to 1 Uts, (1 Uts to 5 Uts, IRR (5 Uts to 1 Uts) (1 Uts to 5 Uts) in increments of 2 Uts) in increments of 2 Uts) 5 Yr. Hold 25% -22% -44% 4 Yr. Hold 32% 29% -29% 3 Yr. Hold 44% 40% -40% 80% -78% 2 Yr. Hold 73% 66% -63% 1 Yr. Hold 200% 173% 352% Negative Effects of Time 1 Year => 2 Years (63%)