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13 Things You Might Not Know about Startup Investments



The combination of public market alpha opportunities decreasing and legislation making investing in startups more interesting to more people, means startup investing is on the rise. While there is a plethora of information regarding investment management, there is a lack of it specifically pertaining to startups. With that in mind, I put together a quick list of things to consider in order to help bring new investors up to speed quickly.

  1. You can’t just invest in any company you want. Unlike the public markets, startups companies aren’t always taking money. You have to find a company that is actively raising funds and then find a way to get into that deal.
  2. There is opportunity in the trade as well as in the investment. In the public market, the trade is established and the only variables are time and price. In the private market, there is value in the trade: negotiating shareholder rights, pro-rata follow ons, etc. Read my post “The Investment and The Trade.”
  3. The buy-side is easier than the sell-side. With crowdfunding, the JOBS Act and AngelList, it is getting easier to get into deals. Getting out is a different story. While the sell-side is starting to shape up, there is no dependable standard on existing an investment position in a startup yet.
  4. You probably wont know what you investment is worth. In the public market there are constantly trades happening, which provide price discovery. In the private market, price discovery only happens when a company raises another round or is acquired. This means that it is hard to tell how your investments are doing.
  5. No one will give you advice (legally). Most financial services firms shy away from allowing their advisors to give guidance on startup companies. They do this because the firms don’t have adequate information or coverage on startups to stand by a recommendation to invest or pass. This creates a gap in financial advice. As investors increasingly turn to startups and the private market as a way to generate true alpha opportunities, they are left to their own methods of evaluation.
  6. The good deals are hard to get into. The paradox is that the best company can likely raise money from whomever they want, leaving the lesser known investors to the perceivably less valuable deals.
  7. Just because you invested in the startup doesn’t mean you get to see its internal ongoings. There is something called Major Shareholder rights, and if you don’t negotiate it (as a small investor) you may not be entitled so see things like financial updates.
  8. You may not own the percentage of the company that you think you do. It’s wise to negotiate pro-rata rights — that is, the right to by more shares in subsequent rounds in order to maintain your ownership percentage.
  9. Most of the time, you won’t really be able to help the company succeed. A lot of Angel Investors try to pick investments where they think their sepcific experience can help move the needle for the startup — a logical way to invest. The reality is, though, that most of the time, there are way more factors at play which will marginalize such a phenomenon.
  10. It’s nothing like Shark Tank. As cool and easy as Shark Tank seems, it’s really nothing like real startup investing. Deals don’t get made in 10 minutes, they take weeks. With the best companies there is less room for negotiation and most of the time, Angels can’t move the needle as do the Sharks on TV.
  11. Diversification is expensive. In the public markets, you can diversify by buying a mutual fund with about 1k. While investment minimums are coming down in the private market, you still need about 10k to get into any deal. Standard diversification would say you need to own 15+ companies to diversify away non-systemic risk; in private market investing, that is at least 150k.
  12. Diversification is less effective. Private market companies are less proven and therefore by definition, much more risky. While owning 15+ companies does diversify non-systemic risk to an extent, it still doesn’t ensure that one of your deals will outperform others. It’s quite possible that all 15 of those deals don’t do squat.
  13. It shouldn’t be all about making money. There is no doubt that there is a true shift of the efficient frontier when you add startups to your asset allocation. In fact, it may be some of the only true alpha addition left in the market. That said, it’s still risky, and having more in mind then just making money will help you on your journey. Understanding how your investment is having impact on communities or industries is important.


About the Author

This article was written by Brandon Gadoci.


The Opportunity for Indian Startups



I was at a conference the other day, speaking on a panel with VCs and angels, when we were asked a question: With the softening of valuations and the famous Flipkart markdown, is there still a large internet opportunity in India?

My friend and co-panelist from a large VC fund jumped up and trotted out the now-standard schtick: that the combined market cap of Chinese internet firms is half a trillion dollars and as of now the combined market cap of all Indian internet firms is just around $30 billion — so yes, there is loads of room to grow. Maybe 10x or 15x or more.

But I believe there’s something terribly wrong with this logic, and the sooner we realise this, the better off we all will be.

Because you really can’t compare the internet opportunity in China and in India.

The Chinese market is a walled garden of sorts, open mostly only to Chinese businesses — after all, Google, Facebook and Twitter haven’t been allowed to freely operate in China. So Baidu ended up being the Google of China, RenRen is the Facebook of China and Weibo is the Twitter of China. And even Amazon has faced a huge uphill task there.

The Chinese have built their businesses without much global competition — that half-trillion dollar market cap came much easier, after much government protection. Sure Alibaba beat eBay — but that is one exception. There are significant regulatory, political and language barriers for non-Chinese internet firms to win in China.

It’s the same in Russia. Yandex is the Google of Russia and vKontakte is the Facebook of Russia.

While, in India, the regulatory barriers are almost non-existent, our internet is still mostly in English and our politicians aren’t able to control digital media companies like the Chinese and Russians can do in their countries.

The result of our openness? The Facebook of India is Facebook, the Google of India is Google, and the Twitter of India is Twitter.

And it’s just as likely that that Amazon — not Flipkart, will be the Amazon of India; that Uber — not Ola, will be the Uber of India; and that Tinder — not TrulyMadly will be the Tinder of India. And so on.

This has a few implications. First — if you want to see the size of the Indian internet economy, you MUST include chunks of Google, Facebook, Twitter and others in it — because these are India’s leading internet companies.

There are several ways to do it- one is to look at global revenues and market caps of these companies and attribute the Indian market cap to the share of Indian revenue in the global pie. I tried that, but came up across a big issue- not knowing the Indian revenues of many of these firms, because it’s not separately called out.

I tried it a second way — to attribute the India-linked market cap to the Indian share of the firm’s global users — and that data was a little more accessible. I took all data from public sources like press releases, or estimates from SimilarWeb and the like. Wherever available, I took user or customer numbers (in regular font below) and where not available, I’ve taken traffic numbers (in italics below). And instead of private company valuations which would count Uber and such — I’ve taken more conservative public company valuations. Oh, and further, all mistakes are mine alone.

Here’s what I came up with.

The top 10 global internet companies have a combined market cap of over $1.3 trillion. But one can attribute up to $150 billion to Indian users.

Yes, of course, there is a large caveat here. First that, as said before, the Indian share of global revenues will give a more accurate picture. And our share of revenues will certainly be less than our share of traffic or users. So you can discount this number by 25%, 50% or even 75% to adjust for that — but the final number is still significant. Though I do think market caps are not just a function of revenues — user base is also a prime consideration — after all that’s where the growth will come from.

Now if you add the $30 billion or so of market cap of our local unicorns to this $150 billion, we’ll end up with around $180 billion of market cap for our current Internet economy.

Then, adjust for the fact that China has 720 million internet users and India has exactly half, 360 million users. $520 billion of Chinese market cap per head across 720 million users is $722 per user. Our number turns out to $180 billion of market cap across 360 million users — or $500 per user.

So the real difference between the Chinese internet potential and Indian internet potential is not 10x or 15x — but perhaps closer to 40% or 1.4x. Or you can be pessimistic and call it 2x if you like. But 10x it isn’t.

What are the takeaways here?

First that there just isn’t as much headroom for growth in the broad internet economy for startups in India as you’ve been told there is. The $180 billion may grow over a few years to $300 billion — but $200 billion to $250 billion of that will accrue to non-Indian firms. Leaving $50 to $100 billion for Indian startups. Please adjust your expectations accordingly.

So a more apt way of looking at the Indian potential is to see us like the 51st state of the US. Or like a United Kingdom. Large market for global companies — not necessarily a large market for local firms.

So I’d say much of the growth assumed for our current unicorns is probably vastly over-estimated. Especially if the Indian unicorn has global competition in its way.

Second, the nature of Internet businesses is largely a winner-take-all in any niche. If you see the market share that Google ended up with in search, Gmail in email, Facebook in social networking, Twitter in microblogging, YouTube in video etc — they’re all well above 80%. So if you take on a niche — you either end up the leader with 80% of it, or a distant number 2 with 8% of it or a non-player with 0.8% of it. This is where the chips largely tend to fall — though there are a few exceptions.

So your likely playbook if you take on a global internet company are (a) to be bought by the global player or (b) to end up eventually as the 8% play.

So what’s going to happen to Flipkart now that Amazon and Alibaba have declined to buy it? Or to Ola now that Uber has declined to buy it? It may not be the nicest of news, I believe.

Which leads to the third take-away. If you want to build a large Internet business in India — then do it out of the way of the globals. Build something where the globals aren’t. From my own portfolio, I’d suggest that RedBus, CarWale, MyDentist, Chumbak and others have picked the right areas. Other firms like InMobi, Naukri and PayTM are on paths outside the globals’ footprints too. This is a good place to be, over the long term — unless you’re sure you can sell out to a global like Baazee did to eBay. I personally believe this is extremely risky — as the global firm may just turn around and say “nope, I’ll build it myself” as many are increasingly doing so.

In other words — try not to be the X of India. Try to be the yourself of the world. This is easier said than done, both because we have a long entrepreneurial history in India of building copy-paste businesses, from independence till now. And second, because most investors in Indian internet firms work for US or other firms who wrongly believe they can simply fund and build the “X of India” — and have some comfort in funding copy-pastes rather than backing originals. Even the copy-paste specialist Rocket Internet from Germany has failed in virtually every venture in India. Copy-paste just does not work in internet businesses in India. But I do see signs of this groupthink slowly giving way to backing original companies.

And the fourth takeaway — is for these firms to go global too. Naukri has expanded to West Asia. Chumbak is in Japan. InMobi is all over. And we’ll do better to expand to 2nd and 3rd world countries than taking on the first world. Because the nature of our markets and products is typically more suited to those economies than to winning in the US.

This is how you get long-term traction — do to local firms in those countries what the globals are doing to us.

Is this bad news for Indian internet startups? Only if you’re focusing on copy-paste and reading TechCrunch to see what you can quickly duplicate in India. Sure, we might not get the market caps the US firms get right away. But it will come to us, eventually.

Is this piece a downer on the start-up excitement in India? I hope not. Our unicorns can and must happen — but should happen in original areas. Alibaba didn’t copy anybody — it started in China and rules the world, Skype didn’t copy anybody — it started in Estonia and rules the world. And that should be our inspiration. Can we build great, global internet companies out of India? Yes, for sure we can. But perhaps not in the way we’re doing so currently.

Anyway, thought I’d pen this piece and see if it might trigger a few thoughts of your own — I’d love to hear those too!

Do comment here and share at will. And happy new financial year!


About the Author

This article was written by Mahesh Murthy is a venture capitalist, marketer and entrepreneur. He tweets @maheshmurthy.

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Boiling the Ocean of Dumb Startup Ideas



When Alex Hague and I first prototyped our satirical party game Pitch Deckwe threw together a spreadsheet of company names next to a list of what we would eventually call “pitch cards” — markets or demographics or just goofy ideas we could pair with the company cards.

Next I made another tab that randomly paired companies with another set of random pitch ideas to see whether the pairings were funny or not:

An early spreadsheet we used for prototyping whether this game would be funny

Not all of them worked, per se, but enough did that we knew were on to something. (How we decided which companies and ideas made the final cut of the game is a whooooooole separate post that we’ll get to one day; the tl;dr basically being “companies like Facebook and Google are too general to make fun of, and extremely broad or extremely specific demographic-based pitch cards work best.”)

Two years later, Pitch Deck has now shipped to all of our 1,889 Kickstarter backers and is doing well on Amazon with all 5-star reviews. We even just got our first friendly local game store spotlight video from Bell of Lost Souls.

Taking the website thing too far

As we were getting the game available for retail sales, we were also preparing to launch our website and I wondered what it’d be like to build a page for every card combination possible. In the retail version of the game that’s something like 31,500 pairs. A big number, but not so big you couldn’t brute force it.

Around that time my buddy and Y Combinator partner Gustaf Alströmer asked me what our SEO strategy was. I replied “None really, it’s a card game, hopefully people play it with their friends and have fun and we get some good word of mouth out of it”.

Part of what makes creating a card game fun is that they have an inherently viral nature (also known as the K-factor) to how people hear about them. Because games must be played with multiple people, each copy represents a possible set of fans. If the game is fun enough, some of those new players will buy a copy. It’s a virtuous cycle that plays out entirely IRL.

And indeed, we frequently hear from fans of Pitch Deck that they bought their copies on their phone while in the midst of playing the game with their friends. Think of it as a kind of lightweight network effect: each additional copy of the game doesn’t increase the overall value of a single copy, but rather the probability that more friends will buy the game.

But Gustaf’s question made me wonder whether this approach of a page-for-every-pair might be a subversive but canny SEO strategy — if every card pairing had a URL indexed by Google, then anytime someone looked up AirBnB for Fish we’d have a chance of showing up in the results.

And if someone was irreverent enough to google an idea for a company that just happened to be in our game, well, then, they might also be interested in buying a copy. At the minimum, if you’re googling Arby’s for Nonsexual glory holesthere’s a pretty good chance you’ll enjoy playing Pitch Deck.

I also realized that if we enabled some basic analytics and Google’s Search Console we could get a peek into what cards people were most interested in. The most popular URLs would reflect a kind of id-of-the-web as seen through the lens of our card game. And Google’s Search Console could give us insight into the keywords users were typing in order to get to our site.

Sometimes when you’re trying to build something simple but can’t resist going overboard, it is called “boiling the ocean”. This is basically what this idea amounted to (I mean who really needs a Ruby on Rails app for a card game?!) but I couldn’t resist once I got the idea in my head.

It lives

A couple weeks later, I had built the site as a basic Rails application and seeded it with the entire game. Each company card has its own page, as do all 31,500 combinations of pairings and each pitch card, and every hashtag.

Google now knows about 34k+ URLs tied to our card game.

The whole site has been now indexed by the Google search robot, and after about a month of modest traffic, we’ve collected just enough data to draw out some interesting trends.

But before I get any farther, a spoiler and content warning: it turns out the most popular Pitch Deck pairings on the web are the sex ones. They always are.

This is the case for Cards Against Humanity’s Lab as well: Max Temkin told me that the cards that do the best in their Lab are always the naughty ones. This is a funny bias in games like ours since it doesn’t play out in person; the likely explanation being that people are more inclined to choose raunchy card pairings when they’re sitting alone in front of a computer, but when they’re tasked with playing amongst friends, they tone it down.

And it turns out people find the CAH site with similarly goofy search terms — darth vader dolphin pterodactyl surprise was the least offensive one from the list Max sent me.

Free unicorn company ideas

The Pitch Deck data could be interpreted as a goofy way to judge demand for an out-there company idea. If a lot of people are searching for the same idea, it clearly means there’s some kind of interest in it.

The most feasible one I’ve seen so far that has lead folks to our site? Netflix for VR Porn. We were briefly the #3 result for this search, but the page seems have dropped significantly in the midst of a lot of hype-y news articles about the topic. And probably because we’re not offering a VR Porn rental site. But hey, it seems like a …fertile market to go after.

Another top search leading people to Pitch Deck? 3d printed fleshlight. Our page for “Fleshlight for 3D Printed Sex Toys” is now ranked #4 for that search. And while this might not be the most profitable business idea (in fact, it’s probably a terrible idea — the exact reason people are googling this is because they don’t want to pay for a real Fleshlight), it gives a peek into the future of what people really want to do with their 3D printer, and that is to manufacture genitals out of ABS plastic.

Unfortunately, this idea also highlights some of the darker terms people are regularly typing into Google. Most disturbingly: variations on Pornhub for kids. Now I assume this is not Pornhub for kids per se, but rather Pornhub ofkids. Discovering this was a really upsetting reminder of the kinds of things people are still looking for on the web. I’ve since de-indexed that and a handful of other pages (e.g. “PornHub for child prisons”) from Google so hopefully we’ll stop showing up in those results. Shudder.

I’m keeping Farmersonly for VR porn.

My other favorite dataset is the list of pages that people happen to stumble upon. Here are the top ones via our Google Search Console:

I’m particularly fond of PornHub for imposter syndrome, where we currently occupy the #1, #2, and #3 spot on Google. I have no idea if that’s a fetish or what, but consider me interested.

People searching for Did Hitler kill Tesla seem to be ending up on “Tesla for Going back in time to kill Hitler.”

At least one person clicked on our page for soylent farts, which turns out to be a fairly well understood problem. Three people searched for donald trump snuggie and one of them clicked. Martha Stewart is also strangely popular in this data and shows up in a variety of searches: egg salad martha stewart, martha stewart illuminati, martha stewart racist, and martha stewart college all make appearances.

One final twist we weren’t expecting: people are frequently searching for the actual pitch decks (e.g., PowerPoint presentations) of companies like Kickstarter, etc.

So far Yelp is leading in that department with two clicks and a couple of dozen impressions, but also popular are venmo pitch deck, rent the runway pitch deck, and snapchat pitch deck.

It’s worth mentioning a data interpretation caveat: since the content that makes up Pitch Deck isn’t representative of all content (it’s a satirical card game based on our sense of humor relative to a particular topic), it’s impossible to really draw any meaningful conclusions about what any of this means. It’s just kind of a fun, weird, and slightly depressing peek into what people are searching for on Google.

But if you’ve read this far, you’re probably wondering whether any of this traffic has lead to sales of the game. The answer is, unfortunately, we don’t really know.

We know roughly how many people head to Amazon via our website from which pages, but we don’t actually know much after that. Amazon is a true black box when it comes to understanding the data that leads people to your listing. There’s a little more work I might do to get to the bottom of it, but the truth is, I enjoy this data much more as a side effect than anything intended to drive lots of sales.

Finally, if you’re interested in this kind of search trend analysis, check out Seth Stephens-Davidowitz. He’s written done some great work using Google Search trends to analyze people’s angst, how people search for sex, and how racist we actually are.

About the Author
This article was written by Fred Beneson. See More.
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