New Investment Checklist (2017)

Below is my current working pre-new investment checklist.

Most of these questions are answered early through conversations with the Founder or others at the company – so this is mainly a final reminder of what qualities I’ve found to be important in potential investments over my time at True (either through others or learning directly the hard way)

Would love any feedback on any potential new qualities to add (or questions about attributes on the list that you’d disagree with)

New Investment Check List

Founder Questions:

1. Who is the main protagonist Founder that you’re backing?

a. Are there any potential trust issues?
b. Would you want to work with this person for the next 12+ years?
c. How do they treat other individuals? (Lawyers, employees, etc)
d. Do they have the ability to be a long-term leader for the company?

2. What do they understand about the market that other don’t?

a. What experience led to that unique insight?
b. Why would others think they’re wrong?

3. Do they have the ability to recruit great talent?

a. Who are their co-Founders and how is equity split?
b. Who are early advisors and why are they excited?
c. Can they identity the people they will hire for their first 10 roles?

Business Questions:

1. Does the company’s mission matter?

a. Will you be proud to talk about this investment?
b. Can it inspire employees, future investors, etc

2. What is the company’s long-term sustainable competitive advantage?

a. Network effects are ideal
b. Are there features that increase customer lock-in or switching costs?
c. Is this a company that could exist for 100+ years?

3. Are you swimming with the tide long-term?

a. What are the major macro market forces in your favor?

4. Why is this possible now?

a. Why would have previous attempts failed?
b. Either technology or capital efficiency story
c. Why would others say this business won’t work now?

5. Is there significant innovation around product?

a. 10x better than alternative products
b. Are there any alternatives that could be indirect competitors?

6. How often do customers interact with the product?

a. Ideally more than once per day

7. What is the quality of the company’s future revenue?

a. Visibility or predictability of revenue matter
b. Recurring or Re-occuring revenue is ideal
c. Arbitrage doesn’t usually lead to long-term enterprise value
d. Any customer concentration issues?
e. Any partner dependencies?

8. Is there a path to $100m in Annual Revenue? $1 Billion in Annual Revenue?

a. At scale, what is the customer + margin profile of the business?
b. What is the profile + challenges of similar businesses at scale?

9. Is there significant innovation around early go-to market strategy?

a. Organic marketing is best
b. Are there channels to effectively reach your target customers at scale?

10. How much equity capital is required to scale the business?

a. Are there alternatives financing sources if more capital intensive?
b. Can you make money as a seed investor?

Most Important Question:

1. If you could only make one investment this year, would this be it?

Crypto Asset Analysis + Seed Investments

Presentation from our Annual Team Offsite at Stinson Beach in July 2017 included below.

This shares some of our internal discussions on how we’re starting to think about evaluating new types of crypto projects + assets.

As an active investor in startups built around open source software, we’re increasingly excited about new + interesting business models to support community activity and have been participating in the cryptocurrency space since WordPress.com started accepting Bitcoin in November 2012.

As a firm focused on pre-seed and seed investing, we believe there will continue to be opportunities for venture capital firms to invest the initial startup capital into new crypto projects (as part of an initial equity financing or as part of an agreement in exchange for future protocol tokens.)

We’re interested in potential opportunities in:

  • Decentralized applications (ie projects like FunFair for Decentralized Gaming)
  • Enabling infrastructure (ie projects like 0x (Decentralized for Trading Tokens) or zCash (Blockchain + technology focused on privacy + selective transparency)

In particular, in potential crypto investments we’re looking for:

  1. Applications that truly need to be distributed (“Need to be built on a blockchain”)
  2. Solid technical team (with expertise across Internet infrastructure and crypto)
  3. Utilization Token tied to business model
  4. Potential for Strong Network Effects

If you think you’d be a fit with our portfolio based on the above information, please reach out – it’d be great to learn more.

True Science Investments

Presentation from our Annual Team Offsite at Stinson Beach in July 2017 included below.

This shares some of the lessons from our investments involving life sciences (starting with Ginger.io in 2011 + Moleculo in 2012) as well as some of the evaluation criteria we think about for potential future opportunities.

As a firm, our focus is leading the first institutional round (usually pre-seed or seed) with investments of $500k to $3m. We often invest with angels and love research work coming out of universities or other labs.

For companies based in core science or research – we like to see:

  1. Great science with large potential impact
    1. Therapeutic applications in healthcare
    2. Other non-healthcare applications with high margin potential
  2. Founder is a leader in the space
    1. Ability to develop cornerstone IP + reputation in the space
    2. Multi discipline teams; cross discipline individual expertise
  3. Path to efficacy (or similar metric) on less than $10m of paid in capital
  4. Market size + Product + New Type of Regulatory Risk
  5. Platform opportunity with large market potential
    1. Ability to build defensible data moat is key
    2. More data makes technology better; increases enterprise value

If you think you’d be a fit with our portfolio based on the above information, please reach out – it’d be great to learn more.

Bill Janeway on Productive Bubbles (2015)

In a bubble you stop worrying about whether there’s gonna be more money behind you. The coordination failure through time is eliminated. That’s the functional role that bubbles can play at the frontier of the innovation economy. And this is simply a-a follow on to suggest theoretically that you should expect to see in bubble conditions riskier start-ups, further out crazier ideas, ones that might require so much money to get going. “Geez we’re gonna start a new automobile company. From scratch?” That only under something resembling bubble conditions would anybody take it seriously. And then Nanda and Rhodes-Kropf went out and actually looked at the data and what they found was that going back now 15 years start-ups that were founded during the dotcom, telecom, internet bubble at the end of the 90’s had a, a bimodal distribution. It wasn’t a normal distribution. More of them failed completely. But those that succeeded, succeeded bigger. There was an actual empirical demonstration of the phenomenon of financing risk that they talked about and the coordination failure that a bubble solves.

Source: Bill Janeway on Productive Bubbles 

The End of Perfect Security (and our Radically Transparent Future)

The 99 Percent Invisible blog has a great piece on the history of locks, lock picking, and the moment when the world’s last unpickable lock was broken into.

You can read the whole story here (and should) – be here’s the highlight for me:

Continue reading The End of Perfect Security (and our Radically Transparent Future)

Economics of the Music Industry (Renaissance Edition)

Interesting history on the rise of Western Music from the book In Praise of Commercial Culture” by Tyler Cowen

Financial support for musical for music composition developed more slowly than for the visual arts. Renaissance musicians usually depended upon churches, courts, or municipal governments for their support. They could not sell their product in a market thick with wealthy private buyers.

Economic factors help explain the slower growth of the music market. Early music, as a commodity, was neither durable or reproducible printed sheet music remained costly and did not successfully penetrate the music market until the eighteenth century. The performance could be sold in lieu of the composition, but performances tended to be expensive, unique events.

Georg Friedrich Telemann led the commercialization of German music with his frequent public concerts. The energetic Telemann presented secular works, sacred works, and commercial operatic productions  in great number.

Telemann targeted upper-middle-class audiences in Frankfurt and Hamburg, and did not rely on patrons. Telemann initiated the commercial emancipation of the German musician that Beethoven was to complete. His catchy themes, encouraged by his desire sire to reach a large audience, make him a continuing favorite on classical radio stations today.”

Continue reading Economics of the Music Industry (Renaissance Edition)

Investing in the Unknown and Unknowable

From Richard Zeckhauser at NBER:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2205821

From David Ricardo making a fortune buying British government bonds on the eve of the Battle of Waterloo to Warren Buffett selling insurance to the California earthquake authority, the wisest investors have earned extraordinary returns by investing in the unknown and the unknowable (UU). But they have done so on a reasoned, sensible basis. This essay explains some of the central principles that such investors employ. It starts by discussing “ignorance,” a widespread situation in the real world of investing, where even the possible states of the world are not known. Traditional finance theory does not apply in UU situations. Strategic thinking, deducing what other investors might know or not, and assessing whether they might be deterred from investing, for example due to fiduciary requirements, frequently point the way to profitability. Most big investment payouts come when money is combined with complementary skills, such as knowing how to develop real estate or new technologies. Those who lack these skills can look for “sidecar” investments that allow them to put their money alongside that of people they know to be both capable and honest. The reader is asked to consider a number of such investments.

Markets and People (or Thoughts on Venture Investing)

I’ve been thinking about this passage from an article about Sequoia’s Michael Moritz recently:

“Moritz waxed philosophical by comparing venture capital investing to bird spotting. “I rarely think about big themes. The business is like bird spotting. I don’t try to pick out the flock. Each one is different and I try to find an interestingly complected bird in a flock rather than try to make an observation about an entire flock.” For that reason, while other firms may avoid companies because they perceive a certain investment sector as being overplayed or already mature, Moritz said Sequoia is “careful not to redline neighborhoods”.

Continuing with the ornithological analogy, Moritz pointed to Cisco and said, “There’s a lot to be said for investing in the ugly duckling.” When Don Valentine led Sequoia Capital’s investment in Cisco, many others had passed on the husband and wife founding team of Len Bosack and Sandy Lerner.

At its core, venture investing is a job that can be broken down into people (execution) and markets.

Continue reading Markets and People (or Thoughts on Venture Investing)

The Challenge of Real World Interactions (Or Why Consumer Hardware Startups are Hard)

After CES, I wrote a post discussing what we look for when evaluating investments in consumer hardware products.

Since then, I’ve been involved in a series of conversations with investors, Founders, and partners of consumer hardware companies – both small, medium, and at scale.

As an increasing number of factors have brought down costs of starting these companies, there has been a growing meme around the how “easy” building a consumer hardware businesses has become – which any Founder of a scaling consumer hardware company would tell you in simply untrue. (You can see our opinion on it here and here.)

Continue reading The Challenge of Real World Interactions (Or Why Consumer Hardware Startups are Hard)