Written by Jay Turo on Wednesday, April 30, 2014
So now we are at brass tacks: actually making Yes/No decisions on specific deals and opportunities.
In other words, handicapping the probability of a company’s investment return projections actually coming to pass.
And relatedly, fair pricing and terms upon which to consummate a deal.
It is upon these “Due Diligence” matters where the real - as opposed to the theoretical - money on early stage deals is made.
Now, due diligence - as it is done by serious, professional investors - is an enormous undertaking.
It often requires hundreds and sometimes thousands of hours of accounting, legal and background reviews and checks, along with third party validation and research as to claims regarding market opportunity, competitive landscape and customer pipeline, traction, and satisfaction.
It can be as time, energy, and expertise intense as any business process or project one could possibly imagine.
And because it is so, for almost all individual investors doing it thoroughly and right is almost always completely unrealistic.
Luckily, there are some shortcuts that can yield similar investment insight.
I call them the “Who, Why, and When” 15 minute Modern Due Diligence Checklist.
Who. Easily the most important question to ask of any endeavor of importance: Who is involved? What are their personal and professional histories and backgrounds? Of leadership, business, investment and life success? Who are the professional partners (Law, Accounting, Banking, etc.)? Who is on the Board? (Is there a Board at all)? Who are the Customers? The Partners? The Employees?
When it comes to whether a deal is good or not, the answers to these “Who” questions is more often than not all you need to know.
Why. Why is a deal happening? Why are those who are involved in fact…involved? Why is the deal being offered to you?
When. The old adage that “Time kills all deals” is also a great harbinger into the likelihood of a successful investment outcome.
How long has the deal been shopped? How urgent/desperate are those involved to get the deal done?
Now, these questions cut both ways. I as much want to see entrepreneurs that need to get a deal get done versus those that perhaps just want it to be so.
Need, in its best sense, drives urgency and action.
Want is often lighter, less substantial, and thus more prone to delays and “almosts” versus results and return.
Who. Why. When.
Mediocre answers to any of these and almost certainly the deal is not right.
But as they are all spot on, well then the next question to ask is often “What are you waiting for?”
Written by Dave Lavinsky on Tuesday, April 29, 2014
Earlier this month, the Milwaukee Bucks basketball team was sold by Herb Kohl for $550 million. What’s interesting was that in 2003, Michael Jordan was interested in investing in both the Milwaukee Bucks and the Charlotte Bobcats. However, for his $50 million, neither organization would give him managerial control.
Written by Jay Turo on Tuesday, April 29, 2014
Many were of the genre that “…Yes these companies you describe sound amazing - awesome technologies, exciting markets, management with knock-your-socks off resumes, but when it comes to actually investing them….”
…How do I even have a chance of separating the wheat from the chaff?
The superstars from the also-rans?
Or, more to the point, the ones that will make money from the ones that won't.
This is the ultimate question, isn’t it?
First of all, we are certainly not referring to “stock picking” to beat the markets. Everyone knows that this is not possible. (And if you have even a sliver of remaining doubt on this point, read this article).
And we're not talking about high profile, private companies that have already raised tens (and sometimes hundreds) of millions of dollars and are deep in the investment news cycle.
For these companies and hundreds of others backed by venture capital firms, by the time the public knows about them, almost always the best opportunity to invest in them has long past.
And, for the most part, we are also not talking about businesses or projects competing in mature and well-covered like Real Estate.
For sure, there are lots of solid real estate investment opportunities, but as it is such an efficient and well-covered market – with tens of thousands of investors seeking projects and deals of all sizes that the likelihood of finding those that offer returns even slightly above average is pretty low.
And let’s also cut out investing in “things” like art, collectibles, and commodities. While in places interesting for sure, statistics over a long period of time show that their average investment returns is significantly less than that of an S&P index fund.
So what investors seeking alpha are left with almost exclusively is that most special segment: startups and emerging companies.
Companies almost always with these characteristics:
They are Small. As in less then $10 million in in revenues and less than 30 employees. Not hard and fast rule, but holds true 95%+ of the tie.
They have an Ambitious Leader. At the beating heart of these companies is almost always a charismatic individual that leads big and manages small.
A leader with an articulate “point of view” on where a market and an industry are heading.
And who can then translate this vision to the day-to-day small business discipline required to turn dreams and visions into objective reality and results.
They Compete in Big Markets. This one is easier than ever before. Why?
Well, with a 7 billion person strong, $84 trillion global economy, almost every business – even those in the smallest of niches - has a large global opportunity.
Of course, to profit from them opportunities requires great leadership and management (see above) but the opportunities are everywhere.
Companies with Thoughtful Revenue Models. This is where the ability of a company's leader to think and act both “big” and “small” are so critical.
Quite simply, companies that build asset and equity value for their shareholders are vigilant in ensuring that their monetization strategies are built around long-term customer retention and satisfaction, and NOT short-term gain.
Companies that are Lucky. The new and eternal mantra of our age is luck. Books like the Black Swan, Fooled by Randomness, and the Age of the Unthinkable profess on it.
Aspiring entrepreneurs who seek their name in lights pray to it.
And the average man unwilling to step outside of his box gets none of it.
Yes, as it has been true since Roman times in our booming deal economy for investors and entrepreneurs like Fortune does Truly Favor the Bold.
The question, of course, is will it favor you?
Written by Jay Turo on Tuesday, April 29, 2014
Remember the bull markets of the 1980s and 1990s, when everybody was making money in the stock market?
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But today’s stock market is BROKEN.
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Written by Dave Lavinsky on Tuesday, April 22, 2014
It’s been 15 years now since I started working with entrepreneurs. Over this time, I’ve seen lots of successes, and unfortunately lots of failures.
Written by Jay Turo on Wednesday, April 16, 2014
Last week my post on Silicon Valley - where I posed that the Valley as an investment hub had become overbought, and that the best opportunities were trending elsewhere - elicited some great responses.
Perhaps my favorite was from a Midwest VC, in reference to one of his portfolios companies in the data center space..."Here is an excellent company which is part of our VC portfolio that is…in the midst of the cold Midwest in Rochester, Minnesota, a location where few Silicon Valley folks are brave enough to consider for investment."
Another came from a well-known super angel from Dallas, “very much admire the wealth and innovation coming from SV, but it is time for investors to step out and see all of the great technology companies starting and growing outside of California.”
I appreciate these sentiments very much, and they got me thinking as to what are the common threads amongst those that love, work and invest in the startup and small business sector.
It starts with a set of beliefs. First and foremost, a clear and passionate recognition that the blessings of our way of life depend on our thriving free enterprise system.
And a deep and abiding respect for those that create wealth via their own hard work, creativity, and opportunistic sense of risk and reward.
For the entrepreneurs, the owner-operators, “the risk takers, the doers, the makers of things.”
Those brave souls that embody Picasso's famous credo of "work being the ultimate seduction.”
From whom business is far more than simply a way to make a living.
AND as they do it, they make money.
A lot of it.
In fact, the vast majority of startups and small companies earn a far higher return on invested capital than their larger publicly-traded brethren.
In fact, companies on the Inc. 5000 - a list of the country’s fastest-growing privately-held companies - average annual revenue growth of over 70%.
And a good number of these companies take in outside investment to accelerate their growth.
Some from professional investors - private equity and venture capital firms - and some from individual, “angel” investors.
And when the better among them do, those that love and are passionate about entrepreneurship, about technology, and about making money, want to participate.
1. High Rate of Expected Return. Angel investing is by far the highest expected rate of return form of investing, Research from the Kauffman Foundation Angel Returns Study and the Nesta Angel Investing study, compiled by Robert Wiltbank, have demonstrated that the "...average angel investor (across the U.S. and UK) produced a gross multiple of 2.5 times their investment, in a mean time of about four years."
2. Home Run Potential. Smaller operating companies are the only form of investment that offer true "home run" potential.
Almost all great fortunes have been made via positions in small companies that became big. The list is legion, and runs from Standard Oil, DuPont, and Ford, through IBM, Hewlett-Packard, Wal-mart, Microsoft, and Oracle, to modern day supernovae like Amazon, Google, LinkedIN, Facebook, and Twitter.
And yes, Whats App and Occulus, too - companies still early in their business life but having already created fortunes for their early investors.
3. Connectedness. Perhaps my favorite, investing in smaller, private companies offers a connectedness, realness, and "human scale" interaction best compared to philanthropy.
It is the spiritual opposite of index, derivative, and Federal Reserve tea leave gazing that so unfortunately is what the media now considers “finance.”
Quite simply, early-stage investing is one of the last, pure forms of doing good while doing well…
…making a high personal expected, economic return decision while contributing to the entrepreneurial force of the world and providing fuel for innovations of all types that make it a better place.
What is better than that?
Written by Katie Perratore on Tuesday, April 15, 2014
On Wikipedia, I found the word "angel" defined as "a supernatural being or spirit, often depicted in humanoid form with feathered wings on their backs and halos around their heads."
Written by Dave Lavinsky on Thursday, April 10, 2014
I find it amazing how many entrepreneurs and business owners get burned by thinking about things incorrectly.
Written by Jay Turo on Wednesday, April 9, 2014
With 41% of all U.S. venture capital investing activity, Silicon Valley is the nation’s unrivaled tech early technology investing epicenter.
As the innovations and wealth that have flowed from Valley Tech companies - from Apple to Cisco to Ebay to Facebook to Google to HP to Netflix to Pixar to Oracle to Yahoo and thousands more - have enriched the world beyond measure.
And since the start of this year, almost impossible to believe stories of fortunes being made there have inspired us all (and provoked more than a little jealousy, too!).
I profiled a pair of these stories - Jim Goetz of Sequoia Capital parlaying a $58M investment into WhatsApp into a $3B fortune when in February Facebook purchased the messaging app
And Super Angels Peter Thiel and Sean Parker, who through their Founder’s Fund invested $16 million into virtual reality headset maker Occulus VR, which returned more than $740 million when Facebook bought the business last month.
Great for them.
But it does beg the question: Has Silicon Valley become so dominant - has it so separated itself - that the best opportunities can only be found there?
Of course not.
In fact, the argument can be made that the worst place to invest right now is in Silicon Valley.
As the stories above illustrate, deal prices there are high, and there is more money than ever (including $7 billion in fresh capital raised last quarter) chasing fewer and fewer deals.
So smart money is starting to look elsewhere.
Like in Los Angeles.
Long renowned as a digital media and entertainment hub, LA Tech investing activity has never been greater, with both funding and deal activity at a five year high.
Smart investors are making a lot of bets on young LA companies, with 70% of all area investing activity happening at the Seed and Series A stages.
Like in the Valley, Internet and Mobile-related businesses dominate - with close to 80% of all venture activity being concentrated in these areas.
These investments are paying off, with 59 recent venture-backed Tech Exits, including Demand Media (IPO), Cornerstone on Demand (IPO) Riot Games (Purchased by Tencent), Edgecast (Purchased by Verizon), Servicemesh (purchased by CSC), LiveOffice (purchased by Symantec) and Integrien (purchased by VMware).
And many, many investing “win” stories like these can be found in Tech Centers like New York, Boston, Chicago, Austin and more.
Yes, the Valley is great but it is far from the only game in town.
And there is a strong case that its best investing days may be behind it.
The word to the wise here is to look elsewhere.
To Your Success,
P.S. Click here for a recording of my private equity investing webinar: What Peter Thiel and Sean Parker Know about Investing and What You Should Too.
Written by Jay Turo on Wednesday, April 2, 2014
Don’t you just love these booming markets? Well, if you don’t, try on these IPO, M&A, and financing stats from 1st Quarter 2014:
Initial Public Offerings: 72 companies went public in the U.S. in the 1st quarter - the largest number of new issuers since 2000 -raising a total of 11.1 billion. And, as of Monday 54 of the 72 of them were trading above their IPO price.
Mergers & Acquisitions: Global mergers & acquisition activity totaled $710 billion (Thomson Reuters), up 54% from last year.
Private Equity. Private equity firms did 850 deals, representing investments of greater than $152 billion (Pitchbook), up 11%.
Venture Capital. 1,348 companies raised more than $15 billion from venture capitalists, up 36%.
They also raised $10.3 billion for 578 funds in the 1st Quarter, up 51% from last year.
After many years of ongoing economic and investment dreariness, isn’t this so refreshing?
And aren’t we heartened that the doomsayers have been proven so fundamentally wrong?
Wrong about the U.S. economy.
And wrong about what is so clearly the dominant leadership position of this country in all of the great technologies growth industries of the 21st Century - software, biotechnology, energy, digital media, and more.
And beyond the numbers, there are some great stories.
Of new industries being built, of fortunes being made. Here is one of my favorites:
Last week, Facebook acquired virtual reality headset maker Occulus VR for approximately $2.24 billion.
Among the investors were Peter Thiel and Sean Parker, of PayPal and Napster fame, who through their VC The Founder’s Fund last year invested $16 million into Occulus.
Upon Facebook’s purchase of the company and correspondingly of their shares, their position is now worth more than $740 million, or a return of close to 50X on their invested capital.
How did they do this?
What selection strategies did they utilize to identify companies with this kind of return potential?
Well, attend my webinar Thursday - What Peter Thiel and Sean Parker Know about Investing and What You Should Too - to find out.
On it, I will share:
- Why the majority of investors presented the opportunity to invest in Occulus declined to do so
- How Thiel and Parker and their fund partners diligenced the deal and decided to invest in Occulus instead of in the dozens of virtual reality technologies then and now in the marketplace
- How Big Data and Black Swan portfolio theory and modeling were critical to their valuation analysis on the deal
- How today’s booming IPO and deal market, discussed above, is affecting (positively and negatively) the technology deal marketplace
Register now via the below link:
To Your Success,
P.S. Interested in the topic but can’t make the webinar time? Well, do register and will make sure that you get a recording of the presentation.
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