Anuj Adhiya @AnujAdhiya: What kind of startup would get your attention – enough for you to talk about it?
Answer: a startup that wld get my attention is one that i would use every day.
With startups most people focus on the idea. Everybody wants the biggest, baddest, best new new thing. The thing that will beat Google combined with Apple combined with Facebook.
It ain’t gonna happen. Or, at the very least, if someone had that idea they are not going to show it to me. They are going to show it to Peter Thiel. And with his secret Illuminati of Paypal mafia he’s going to invest $200,000 and make $5 billion on it while I sit out here in the cold trying to figure out why I’m not one of the cool guys who got into Facebook and Twitter in the seed round.
I’m no good, by myself, at investing in startups. One time I invested in a startup with profits, with low capital expenditures, with growing revenues, and I did it all by myself because I thought I have to grab all this for me. I invested a big amount. Then the company somehow went out of business or the CEO stole the money or whatever. I don’t know. It was part of how I went broke.
So now I have a checklist of when to invest. Whenever I follow this checklist, I make a lot of money. Whenever I don’t follow this checklist, I lose money. It’s like clockwork.
A) The CEO has to have built and sold a similar business before. This would’ve kept me out of Google, Apple, Microsoft, Yahoo, and Facebook (but not Twitter, Intel, or Broadcast.com). I basically have no way to judge a product. It may be good or it may not be. But if the CEO has done it before then I can check the box. It doesn’t have to be the exact same product (Buddy Media is an example where I invested and Lazerow had started two prior businesses but none exactly related to Facebook although I would say similar) but the CEO needs to be smarter than me in the area he’s starting his business.
B) I need to have good co-investors. I’m an investor in Israeli startup CTera, for instance, where Benchmark Capital and Venrock are my co-investors. They are smarter than me and they have a team of bloodhounds who did due diligence. In addition, I called the heads of sales in every country. I called customers. I did background checks, etc. So my due diligence combined with the due diligence of people smarter than me was enough to keep me happy. For Buddy Media, Peter Thiel was among the co-investors. BAM!
C) Demographics have to be on my side. I’ll use Buddy Media again as an example. This was in 2007 when I invested. A month earlier I had gone on CNBC saying that I thought Facebook would eventually be worth $100 billion. At the time I don’t even know if it was valued at one billion but I had a strong feeling about the demographic trend. How come? Because I was using it every day and more and more people I knew from every walk of my life were using it, regardless of their backgrounds. So this was happening. I’m invested in another company right now (IPO expected within the next month) that does personalized cancer diagnostics. 75 million baby boomers are aging. A lot of them will get cancer. They all want to live forever. BOOM! Huge market.
D) I have to get a deal. The valuation has to be better than any comparable investment out there. Somehow I have to be getting a discount to where I think the value is in my head. It has to be a discount to RIGHT NOW valuations. Not to where I think the company is going. Not everyone wants to sell pieces of their companies at a discount. Often you have to wait for the right environment where discounts are available and everyone else is afraid to invest. There are other tricks to getting a deal. For instance, when venture capitalists invest they do something I normally consider stupid. They try to get a deal by saying “we have to at least get our money back if the company sells”. This is called a “liquidation preference”. They might get other terms also.
Guess what? That makes their stock more expensive than common stock. BUT when the company is sold or IPOs, all the preferred stock converts to common stock anyway. Let me tell you something. The company is either going to exit for a higher price or the company is going to go out of business. Either way the preferred equals the common stock. Zero or HUGE. So once the preferred price is established by the big shot venture capitalists you can often get a discount by buying common stock. This doesn’t always work (Groupon) but it usually works if you are making sure you are getting a discount. Great in environments like right now where everyone is afraid of pulling another Groupon.
E) I have to see the exit. I have to have a general sense of how big the company can grow and what the exit can look like. I’m helped considerably by the fact that my co-investors are smarter than me and they are all looking for 10x returns on their investments. So we’ll see.
F) I keep the investment small. Never more than 1-2% of the capital I have to invest. So no one investment will destroy me.
And that’s what gets me excited about an investment.