Written by Jay Turo on Thursday, March 13, 2014
Last week, I shared how between 2011 and 2013, Sequoia Capital invested approximately $60 million in WhatsApp – the instant messaging subscription service bought last month by Facebook for $19 billion.
And how Sequoia’s return on that $60 million was close to $3 billion, or more than 50 times its original investment.
I then offered to share some of our research findings as to the selection strategies that early-stage technology investors like Sequoia now utilize to identify companies with this kind of return potential.
Not surprisingly, the response was overwhelming.
So much so that only a very of those who wanted to learn more were able to get in before registration sold out.
So to accommodate all of the requests I have agreed to re-present our findings and will do so via web conference tomorrow at 7 pm ET / 4 pm PT.
To register, click here: https://www2.gotomeeting.com/register/647747626
On it, I will share:
• Why the majority of investors presented the opportunity to invest in WhatsApp declined to do so
• How Sequoia partner Jim Goetz diligence the deal and decided to invest in WhatsApp instead of the literally hundreds of comparable messaging applications then and now in the marketplace
• How Big Data and Black Swan portfolio theory and modeling were critical to Sequoia’s valuation analysis on the deal
• How today’s booming IPO market, with through March 1st more than 42 IPOs raising $8.2 billion – the highest YTD activity since 2007 – is affecting (positively and negatively) the technology deal marketplace
• And much, much more
Register now via the below link:
To Your Success,
Written by Jay Turo on Thursday, January 30, 2014
Almost completely shrouded in the drumbeat of negativity that passes as business reporting these days has been the bursting growth in U.S. service exports – increasingly from U.S. startups and small businesses.
Contrary to the image of imports and exports being only “stuff” flowing in and out of places like the Port of Long Beach, last week's Census Bureau noted that services accounted for 30%, or $57.4 billion of total U.S. exports in October. And unlike our huge “hard goods” trade deficit, in the value of U.S. service exports was 51% greater than that of imports.
Business, professional, and technical services were the fifth largest U.S. export category in 2008, and half of the top 10 major export categories were services. And with U.S. service companies representing close to 15% of global commercial service exports, the United States is hands-down the world’s dominant service exporter.
Of many, let me flag three main drivers:
1. Purchasing Power Parity. Purchasing power parity (PPP) posits that with free-flowing markets wages and prices worldwide approach parity.
Protectionist types of course interpret this to mean that “our wages will get pushed down to “their” levels – or more viscerally, “if this keeps up we’ll all soon be making $2 dollars per hour.”
Well, let’s leave for now the huge economic fallacy of this thinking and concentrate on the fact that the narrowing of the relative wealth differential between the U.S. and the rest of the world has allowed for phenomena like a Ukranian manufacturing company hiring U.S. advisors (i.e. Growthink) to help them define strategic growth opportunities in Poland .
Why? Because on a dollar-for-dollar (or better yet, zioty-to-zioty) basis, it was a better value for them to import services like these from the U.S. The world is changing, isn’t it?
2. U.S. Services are Increasingly Exportable. The drumbeat always goes on how “we here in the U.S. don’t “make anything.” Well, beyond the fact, that I note in my “Made In China” post that very few Americans dream that their children will grow-up and work in a factory, we here in America “make” the most important stuff that has ever existed we do it better than any society has ever done so.
That stuff? Ideas and Innovations. Strategies.
Or more prosaically, Brands. Websites. Entertainments in all their wondrous forms – Movies, Video Games, Social Networks.
Even our current favorite whipping boy industry – financial services – continues to bring us world-bettering innovations like venture philanthropy (i.e. applying market principles to solve the world’s most pressing humanitarian challenges), super angel funds (overcoming the “outlier” or “Black Swan” conundrum of startup investing) and of course crowdfunding (democratizing fund-raising and investing in ways never before even dreamed possible.)
3. Global Best Practices. Perhaps my favorite, namely that business best practices worldwide are visible and replicable to and for all. And the corollary, the really screwed-up and ineffective ways of doing things are also blatantly transparent.
From lists like the “most business friendly” countries to California now having a portal where parents can see teacher’s ratings to the U.S. Senate studying Chinese technocrats to the simple reality that the Internet and mobile phones make it crystal-clear to all who is winning and losing in the world (see North Korea, Iran, et al.), the modern world has become a rickly competitive market in all its best senses.
The cream rises, and the inefficient, the bureaucratic, the regulatory dead-enders get left on the dustbin of history.
And guess who, when it comes down to doing business right, is the richest cream, the sweetest soup?
It is, of course, American startups and smaller and emerging companies.
And as they, like the U.S. economy as a whole, become almost exclusively services-focused, they will both lead and profit from their exploding opportunities worldwide.
Written by Jay Turo on Wednesday, January 15, 2014
As has always been the case, most commercial and neighborhood banks only lend against quickly “liquidatable” assets or at a small multiple of historical cash flow.
Given that most startups and small businesses have neither of these, for them attaining traditional bank financing has such a low probability of success that it is rarely even worth the time to pursue.
So, where should the creative and committed small business owner go for funding when the banks say no?
Here are three places to look:
1. Crowdfunding. Donation - based crowdfunding platforms like Kickstarter allow entrepreneurs to raise capital from one's social and professional networks.
And Equity-Based Crowdfunding, approved by Congress in April 2012, is very close to being through SEC rule-making.
While investor appetite will take time to develop, as it does the available pool of investable angel and venture capital (currently approximately $50 billion annually) will expand dramatically, and in turn closing the gap between the tens of thousands of companies seeking capital and the investors interested in providing it.
2. Family and Friends. Since time immemorial by far the most popular funding source for new and small businesses is to ask those that know you best to stake your entrepreneurial journey.
For sure it is emotionally loaded, as so many of us don't want to mix our personal and professional lives, but it does provide a great “gut check” as to how serious, committed, and “sold” you really are on your business.
Well, it is one thing to lose the money of strangers, quite another to do so of Uncle Jed who you'll be seeing each holiday season.
A way to “reverse the frame” in these family and friends dialogues is to recognize that while yes, a relative or friend is doing you a big favor by investing in your business, you in turn are returning the favor and more by providing an opportunity for an outsized investment return along with the unique excitement of being a stakeholder in a small business.
3. Sell Services. Especially for technology and consumer product companies, the long pathway of research, product development, and establishing distribution mean that often years can go by in the dreaded “pre-revenue” stage.
So as opposed to relying solely on investment capital to “deficit finance” this gestation period, how about generating some cash through selling consulting services in the interim?
As examples, a company building a new and proprietary mobile application could in parallel build apps for others, a new restaurant could do catering, or a consumer product business could sell research services regarding their market niche.
And, if structured right, in addition to paying the bills, consulting projects like these can also be utilized to iterate one’s product development forward.
Use these three strategies - and do so as with all matters related to starting and growing a business with creativity, determination, and persistence - and soon you will be laughing all the way to the bank.
This blog post is a reprint of an article written by Jay Turo in Vistaprint.com’s Small Business Blog.
Written by Jay Turo on Monday, December 30, 2013
This time of year offers many blessings - one of them being the pageantry of New Year’s Day college football.
I am excited to be rising before the sun on Wednesday and traveling to Pasadena with my six and seven-year old sons to their 1st Rose Bowl parade.
In the spirit of the day and of the year soon to be left in our care, here are a few of my favorite sports quotes that apply so well to the challenges and opportunities of life and business.
"Great moments are born from great opportunity…You were born to be hockey players -- every one of you. And you were meant to be here tonight. This is YOUR time.
- Coach Herb Brooks, 1980 U.S. Olympic Hockey Team Soviet Pre-Game Speech
My comment: this is the time and age of Entrepreneurs! Go for it!
"Funerals End Today”
- Marshall Coach Jack Lengyel, addressing the remaining members of his football team not long after 75 people, including most of the team and coaching staff - died in a 1970 plane crash.
My comment: Lengyel reminds us that the best to way to honor those that have passed is to live, to strive, to win.
"Leaders aren't born, they are made. And they are made just like anything else, through hard work. And that's the price we'll have to pay to achieve that goal, or any goal."
- Vince Lombardi
My comment: Hard work is the given, the base. It is a high value in itself and accomplishments of greatness and meaning are impossible without it.
"Don't measure yourself by what you have accomplished, but by what you should have accomplished with your ability.”
- John Wooden
My comment: To those to whom much is given, much is rightfully expected. We live in a global, golden age of opportunity. Think, dream, and do BIG!
Happy New Year, and may 2014 be the best year of all of our lives!
Written by Jay Turo on Monday, November 25, 2013
To read Growthink CEO Jay Turo's article from this week’s Entrepreneur Magazine as to how to make the right bets when making risky business decisions, click here.
Written by Jay Turo on Monday, November 18, 2013
Jeff Bezos is a great hero and role model for all entrepreneurs that dream of doing something really, really big, and…pulling it off.
Like all legendary business leaders, he also has a number of management and creative peculiarities well worth studying and emulating.
One of my favorites is how Jeff manages the meetings of Amazon’s senior executive team, as described last year when Fortune named him Businessman of the Year:
“…the Amazon CEO's fondness for the written word drives one of his primary, and peculiar, tools for managing his company: Meetings of his "S-team" of senior executives begin with participants quietly absorbing the written word. Specifically, before any discussion begins, members of the team -- including Bezos -- consume six-page printed memos in total silence for as long as 30 minutes”
Bezos goes on to note that “Writing a memo is an even more important skill to master." Full sentences are harder to write," he says. "They have verbs. The paragraphs have topic sentences. There is no way to write a six-page, narratively structured memo and not have clear thinking."
Now when I learn of things like this, I understand why the success of a Jeff Bezos is no accident.
Remember, in addition to founding and leading one of the most successful technology companies of all times, Jeff Bezos also made arguably the greatest investment of all time.
The story is well-known but worth re-telling. In 1998 when Larry Page’s and Sergey Brin’s Google offices were a Menlo Park, California garage, Bezos invested $250,000 of personal funds into the fledgling startup.
When Google went public in 2004 that $250,000 investment translated into 3.3 million shares of Google stock. At Google’s IPO that represented a stock share position worth over $280 million.
While he doesn’t disclose how many of those shares he still holds, at the current price of Google stock they would represent an investment position worth over $2 billion.
So, what is it about what makes Jeff Bezos tick that allows him to have such great success when so, so many others - with similar ambition and arguably even greater talent - fall by the wayside?
I recently read a great book (bought on Amazon, of course) by Mark Helprin called "A Soldier of the Great War."
It is the amazing story of an Italian PhD student in aesthetics who was drafted into the Italian Army in World War I. In addition to being an unbelievable barnburner of a read and a tale of love and heroism and adventure, it is also the story of a young man trained as an "effete" intellectual struggling to come to grips / find wisdom from and peace with the horrors of war.
The story ends with its hero - Alesandro Giuliani - as an old man looking back on his life of books, of art, of family, of adventure, and of war and loss.
In the end it is the intersection of these two - of his great intellectual journeys tempered into character and resolve via the various "mortifications of the flesh" of his life - hard work, self-sacrificing, courageous deeds and words, and the willingness to push himself to the limits of one's endurance.
And from this coupling of intellectualism and ideas with a life of action and a love of the fight does flow the genius, power and magic of a Jeff Bezos.
So at your next meeting, do like Jeff and put down the PowerPoint and pull out the pen!
Written by Jay Turo on Monday, October 14, 2013
Watching the disaster of a process that is the D.C. budget drama, I found myself with a curious reaction.
And maybe even a little bit of a selfish one.
It was, by golly, how happy I am that I get to work in this so dignifying world of business and free enterprise and not have to waste my precious life energy on such nonsense.
And then feeling a bit more generous, I felt happiness for the hundreds of millions if not now billions of people worldwide that are able to do likewise.
To work in or at a business, just a plain old simple business.
A software development firm. A medical device company.
An accounting firm. A roofing company. An insurance agency.
A tanning salon. A yoga studio. A specialty retailer. A freight forwarding company.
Walmart. A donut shop.
Now don't get me wrong, government is important.
And that those that work in it often are mostly truly public servants and we should be thankful for their service.
And yes, our vexing public policy challenges require our attention and concern.
But it isn’t that important.
So much of the real action in this world of ours takes place in the micro.
In that wonderful world of business production.
The world of multi-billion dollar companies like Cisco utilizing information technology to accomplish the accounting miracle of closing their books each and every day.
The world of General Electric growing great managers and business leaders time and time again.
The world of amazing customer service at places like Zappos and how that service dedication translates to strong profits that fuel our world.
The world of that sumptuous donut fresh out of the oven.
The world where, with a click of a button on my phone, I can buy a mobile app that sends me my text messages as e-mails (but don't ask me why I want this).
The world where I order new leather seat covers for my car, from Greece, on Ebay, and at a fraction of the price of what the dealership is asking.
And oh yes, by doing so making a small dent in that nation's debt and fiscal crisis.
And it is the world of my own business’ unique processes and project tasks and how we will profit from this burgeoning new world of global service exports.
Yes, the real and meaningful action is in this amazing 21st century global world of ours of hundreds of millions of points and more of concentrated business production.
That creates for all of us, this transcendent potpourri, this never-ending buffet, of essential, helpful, frivolous, sometimes conspicuous, but so blessedly diversified consumption.
And you know what else?
History has taught that the more folks focus on getting great at what they particularly produce, no matter how great and glamorous or small and prosaic it might be.
Well, it is by so doing that all of our fiscal cliff and other challenges as if by some magical hand just seem to take care of themselves.
Written by Jay Turo on Monday, September 23, 2013
The word from the Fed last week that it would continue with its quantitative easing - purchasing approximately $85 billion per month in U.S treasury bond and de facto continuing to expand the country’s money supply - signaled that that the era of extremely low interest rates will continue.
Predictably, stock markets worldwide cheered along with it being seen as a very positive signal for the well-recovering US housing market.
Now, as to what it means that the Fed has, since 2008, expanded the U.S. Money Supply almost 400% - from $800 billion in 2008 to over $3.5 trillion today?
Well, it doesn’t take a Nobel Prize in Economics to reliably predict the inevitable outcome…
Now, in spite of its strong negative connotations, an inflationary economy while extremely painful for very many, also offers opportunities to profit and win.
Here are three:
Winner Number One: Debtors. This is obvious, but easy to overlook. Those owing money at set interest rates - homeowners with 30 year fixed mortgages and companies issuing bonds - will benefit enormously as the inflation train rolls in.
Let’s look at a worst but not overly improbable case - a hyperinflation period where all prices rise 10X, resulting in a $500,000 home able to be credibly listed for $5 million.
It sounds crazy, but over the years in countries where hyperinflation has hit, this has not been an uncommon occurrence.
Now let’s say that home was financed (or refinanced) with a $400,000, 30-year mortgage at a fixed rate of 3.5%.
Well, with its price increasing from $500,000 to $5 million - while the amount owed on it remains fixed - all of a sudden the house’s equity to debt ratio skyrockets from 20% to 92%!
Winner Number Two: Companies with Pricing Power. Businesses with the ability to increase prices quickly without seeing sales plummet - think luxury goods and easily adjusted staples like gasoline at the pump - will hold significant advantages over businesses constrained by “stickier” prices.
Examples of the latter include services like mobile phones contracts and gym memberships, and the classic example of restaurants not increasing prices because of the cost of printing new menus.
Winner Number Three: Private Companies for Sale. My favorite, as there is no greater form of an entrepreneurial, economic success than a sale of a business at an attractive price.
In a world of rising prices, the acquisition appetites of larger companies increase as their cost of money - as driven by their valuation multiples - decrease.
This is most evident for public companies, now trading at a rich 18x earnings (S&P 500), who are able to buy smaller, usually private companies with the relatively cheap currency of high multiple public equity.
This frothiness also drives the financing environment, where buyers (investors) and sellers (entrepreneurs, companies seeking capital) more easily strike higher risk, higher valuation deals (see Fab.com, HootSuite, and scores of others) with an ease that isn’t there in a flat or deflationary environment.
So, if you're an entrepreneur, think about accelerating and intensifying both your financing and exit planning efforts.
And for investors, remember that the worst strategy in an era of rising prices is to be standing still and sliding away in fast depreciating cash.
P.S. Click here to complete our survey on investing and entrepreneurship and have a free cup of coffee on us!
Written by Jay Turo on Sunday, September 22, 2013
Individual Retirement Accounts, or IRAs, in all their forms - traditional, Roth, 401k, Defined Contribution, Simple, SEP, 403(b) and 457, have become increasingly popular vehicles for private equity investing.
For the individual investor, investing in private equity via a "Self-directed" IRA has a number of key advantages:
First and foremost are tax savings - both at the time of investment and as the investment appreciates. In some circumstances - for pre-tax contributions via a SEP-IRA for example - up to $49,000 can be invested on a pre-tax (i.e. tax deductible) basis.
Secondly, the power of tax - free compounding of interest, dividends, and capital gains - via both traditional pre-tax IRAs as well as the increasingly popular (and increasingly tax-advantaged) post-tax Roth IRAs is enormous.
In high-return and payout scenarios, where there are larger cash dividends and/or capital gains paid on an annual basis, the value of tax free compounding can lead up to a doubling of total investment return when compared to taxed compounding.
And thirdly, investing in private equity via an IRA addresses "de facto" arguably the key negative of private equity investing - its illiquidity. This is because, to encourage a long-term, retirement-focused time horizon, under the IRA umbrella there are significant, structured penalties for early withdrawl.
In short, IRAs are ideally designed to house long-term investment assets with high capital appreciation potential. This is, of course, the core objective of almost all private equity investing.
Written by Jay Turo on Monday, August 12, 2013
(Click HERE to complete my survey on investing and entrepreneurship and have a free cup of coffee on me!)
Last week, I talked about the communication breakdowns that occur when investors and entrepreneurs talk about risk.
Well, in most forms of angel and early-stage private equity investing, these breakdowns flow from a misunderstanding of the power and nature of outliers.
The concept of outliers and how they apply to early stage private equity investment was best described by the Lebanese thinker and writer Nicolas Taleb, in his best-selling books "Fooled by Randomness" and "The Black Swan."
In the Black Swan especially, Taleb described the nature and importance of outliers in a modern, inter-connected economy:
“What we call here a Black Swan is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable."
Taleb continues, "I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives."
Less famous, but more helpful when it comes to designing an effective private equity investing strategy is Taleb's theorizing on how technological interconnectedness vastly intensifies Black Swan impacts.
This idea of technological interconnectedness is related - though not exactly the same – as that of the much ballyhooed Network Effect that is so much at the heart of many of the biggest technological and investment success stories of the last 15 years, Facebook, Twitter, and LinkedIN, being first and foremost amongst them.
In its simplest form, the Network Effect posits that the value of a network increases exponentially with each new user on it.
Or, in other words, the primary reason why folks use Facebook, Twitter, and LinkedIN is because there are a lot of other folks that use Facebook, Twitter and LinkedIN too.
And, as more users join, such the value for others to join grows that much greater.
And so on and so on.
Thus, one of the first screens that the intelligent early stage investor should utilize is the degree to which a network effect is present in a company's business model.
Now, let’s get to the rub of the matter as to how Taleb’s interconnectedness concept both informs and signals danger for the thoughtful investor.
Simply put, global technological inter-connectedness drives the winning business models to heights never seen before …
…and because of this, there are a lot fewer of them.
Simply put, the winners are bigger and happen faster than ever - Facebook's IPO was bigger and faster than that of Google’s which was bigger and faster than that of Microsoft’s, which was bigger and faster than that of Apple’s.
And because the winners are bigger, there are less of them.
So that giant sucking sound you hear is the consuming of so much of the energy and return in the deal economy into fewer, bigger and more lucrative deals.
To put it another way, turning $500,000 into $1.8 billion in seven years as Peter Thiel did as a small minority investor in Facebook is just not beyond extraordinary - it is also unprecedented.
And, correspondingly, returns of this scale crowd out and widely skew the distribution to fewer, higher returning deals.
Now, how should we respond to this brave new and highly challenging investing and entrepreneurial world?
Well, one obvious response is to proceed extremely carefully.
Investing in early stage private companies can be great fun and you can make money beyond your wildest dreams if the stars are aligned right doing it….
…but the probabilities of doing so in any one company or deal are low…and getting lower.
And unfortunately, this is true no matter how enthusiastic, how passionate, how hardworking, how brilliant the entrepreneur that is pitching his or her deal happens to be.
So does this mean that early stage private equity investing is for the birds? And that we all should just stay away?
Of course not.
You just have to do it right.
Next week, we’ll share how today’s most successful investors and entrepreneurs do just that.
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