In angel investing, it’s the extreme distribution of payoffs that keeps things interesting.
If anything, it resembles buying a deep out-of-the-money call option, but with nonlinearity. If you win big you might find yourself in on the ground floor of the next Google or Facebook. That’s incredibly unlikely, but still possible.
More likely, you’ll end up with a solid 2x-5x return from a startup that grows into a viable long-term business. But most likely of all–by a long shot–you’ll lose your entire investment in another failed startup.
The most successful angels invest in a long series of deals over many years. They know that any one startup in isolation is a gamble, and to eventually hit a big return, an investor needs to draw repeatedly from the payoff distribution.
How many deals?
A discussion with Gabriel Weinberg on this topic piqued my curiosity about the relationship between the number of deals an angel invests in, and the shape of the payoff he or she can expect from that specific number of deals.
It’s clear that a single investment would have a terrible expectation and huge variance, but how about five deals? 20? 100?
How many angel investments are needed to make the combined payoff look attractive from an investment standpoint?
Monte Carlo simulation of angel investing
I coded the following simulation in Python. [view source code]
1. Create a pool of 10,000 different investors, each investing in D deals, with a fixed time horizon and a fixed distribution of payoffs. Randomly simulate each investor’s total payoff, then compute the mean and standard deviation of the returns in the overall pool.
Read more at: jmiller inc. blog
Follow up post: A simulation of angel investing, part 2
Thread on the article on news.ycombinator.com
Monte Carlo Simulation on Wikipedia
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{Photography by Tylerdurden}
CHICAGO—September 24, 2009—37signals is now a $100 billion dollar company, according to a group of investors who have agreed to purchase 0.000000001% of the company in exchange for $1.
. . .
A $100 billion value for 37signals is “not outlandish,” says Aanandamayee Bhatnagar, a finance professor and valuation guru at Grenada State’s Schnook School of Business. Bhatnagar points to a leaked, confidential corporate strategy plan that projects 37signals will attract twelve billion users by the end of 2013.
How will the company overcome the fact that there are only 6.8 billion people alive today? “Why limit users to people?” said Bhatnagar.
In order to determine the valuation of companies, Bhatnagar typically applies the following formula: [(Twitter followers x Facebook fans) + (# of employees x 1000)] x (RSS subscribers + daily page views) + (monthly burn rate x Google’s stock price)2 and then doubles if it they use Ruby on Rails or if the CEO has run a business into the ground before. Bhatnagar admits the math is mostly a guess but points out that “the press eats it up.”
Read the complete story at: signal vs. noise
RELATED:
- We Hold Twitter Ransom For $100 Billion Dollars (TechCrunch)
- Twitter to Raise $100 Million From Insight, T. Rowe Price, Other Investors (WSJ)
- Start-up valuation: a quick and dirty approach
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{Photography by ZeroOne}
Girls has idea.
Boy likes the idea.
Boy and Girl chat the idea up.
Boy registers the domain name, starts company. Girl helps boy out.
Then the question becomes: How much is the idea worth?
Just as the idea unfolded on the web that never forgets, the new quasi-sage continues over the blog post, twits, comments, re-twits, and more blog posts.
Read, digest, process, learn
Related Articles:
- If Execution Is What matters, Where Does That Leave Ideas? (TechCrunch)
- ideas are just a multiplier of execution (oreillynet.com)
- http://lor3nzo.com/tag/ideas
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One of the world’s pre-eminent venture capitalists, Michael Moritz of Sequioa Capital, has picked winners like Flextronics, Cisco Systems, Yahoo, PayPal and Google by focusing on small teams or individuals that on first glance might appear to be unfundable. In a rare interview, Moritz spoke with the Mercury News about one of his latest long-shots, a call-center company founded in India, how he picks companies to back, and the silver lining in the financial meltdown. Following is an edited transcript.
Q.: How has the financial crisis reshaped the economy and affected the way you pick winners?
A.: I think tougher circumstances just serve to shine a brighter light on everything. The manner in which we pursue the business hasn’t changed.
Q.: Has it affected the way you view your portfolio companies?
A.: I think the managements of companies all across America understand that the sooner they don’t have to rely on the kindness of strangers to support their operations, the better off they are going to be. Again, I don’t think that is a startling new insight. It’s just when money is harder to get and credit is tight and investors are less giddy, I think companies and managements become much more disciplined. It means the people who start companies in times like these are people who are genuinely interested in starting companies. You have to be very determined to venture out into atmospheric circumstances like the ones that we’ve been through in the past nine months. Which means that the pretenders and posers and people who are really much more interested, if they are honest about it, in becoming rich than starting a company — those sorts of people will stay on the sidelines and wait for the weather to improve. (Read more at: Mercury News)
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{Photography by All Things Michigan}
David likes to say that On the average, five times as many people read the headline as read the body copy. When you have written your headline, you have spent eighty cents out of your dollar. And David knows what he’s talking about.
So when I saw George’s latest post’s title Idiot CEOs, I was not pleased: how can an article start from the get-go so negative and so opinionated? Negativity is so easy and so vague, how can george bring anything to the table? And against my best judgment I started reading the article, I knew it was going to be bad: I was jaded and biased, it was all the headline’s fault, it really didn’t appealed to me. I was expecting an experience just like a gruesome accident on the side of the road, you know it’s going to be bad, but you can’t help but look.
But I was wrong. George’s article does bring a lot of value to the table, it paints a very clear analytical picture of what the CEO a typical VC backed company might expect, not always pretty. And while the tone is a bit sarcastic, it is not overly pessimistic, it is pretty real, without fluff, or best case scenario; describing best case scenarios or atypical results was not the intent of the article.
The current situation is the result of the summation of past events in the venture Capital world during the past 20 years or so +/- 5 years. The lesson to extrapolate from the article is that Venture Capital funding is not for everyone, and surely is not the only way to raise money. VC is not for everyone, and everyone is not for VCs. In the entire population of start-up financing, the % of ventures financed by VC is in the single digit, both in absolute terms (# of deals) and relative terms (amount of capital financed). And when it comes to Internet Powered Ventures it doesn’t take as much capital as it was required a few years back. Guy Kawasaki’s Truemors (now part of NowPublic.com) is a highly transparently evidence, and Guy documented it in his famous article By the Numbers: How I built a Web 2.0, User-Generated Content, Citizen Journalism, Long-Tail, Social Media Site for $12,107.09 .
Will George succeed in his mission: “In the meantime I’ll do my best to help fund-managers revive Venture Capital. It is about time the fund-managers hear the entrepreneurs point of view. That has become my new mission.”
What if we take the stand that VCs in principle have not change since the 80′s and they have not adapted to either Web 1.0, nor Web 2.0 and surely the entrepreneurs in garages, basements, and internet cafes the world over who are creating Web 3.0 experiences need to partner wit sources of finances that are Version Compatible, where’s VC 3.0?
Is it Y Combinator?
Tech Stars?
Prosper or the Lending Club?
I am looking forward to see what the market forces will create as the winning solution to the present solution, who knows, we might have to go through a VC Vista version on our way to Funding 3.0.
Read George’s article, it’s a good one, pretend the headline read: The Ugly Side of VC-backed CEOs .
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{Photography by Christopher Woo}
