Key take aways from Exit Strategies for Entrepreneurs and Angel Investors

Early Exits
Early Exits

Key advice for Startups and emerging companies

  • Start small
  • Stay lean
  • Raise only the funding you really need and grow judiciously.
  • Alignment from all parties on exit strategy is extremely important
  • Best time to sell a company is when the future has never looked brighter

On VCs

  • Interest of VCs might not be aligned with interest of founders and angel investors
  • VCs need to satisfy the needs of their LPs
    • Need their successful companies to generate a minimum of 10-30X return for their fund to perform respectably, taking into account overall failure rates
    • They thus need to wait longer to exit and work their investments harder.
    • They are ok to accelerate the growth of their investments with their capital or blow it up quick for a capital right off. The latter helps minimize management overheads.
    • They will block a sale if the return multiples do not meet their expectation
  • VC return multiples of term sheet valuation
    • Series A – 10X return
    • Series B – 4-7X returns
    • SEries C – 2-4X returns
  • VC funds have been getting bigger overtime. The need to deploy their capital forces them to seek for opportunities where likelihoods are slim.
  • Companies with VC money tend to exit at year 16 on the average

On Angels

  • Invest much less money than VCs
    • USD10,000 to USD250,000
  • Happy to exit in a few years with a 3-5X return
  • In the 50s and 60s
  • prior successful entrepreneurs or senior executives
  • allocate around 5-10% for angel investing
  • has experience and inclination to be great mentors and valuable directors
  • Companies with angel only money tend to exit at year 4 on the average

Drivers of acquisition

  • trend has been dramatic shift towards earlier exits
  • huge amounts of cash on balance sheets of large corporation
  • growth in Private equity and buy out funds

Insights on Growth

  • The first USD10 to USD20 million valuation are the easiest and less challenge on the skills of the CEO
    • It is easy for young companies to maintain year on year compound annual growth rates of 100% or even 200%
  • Knowledge of how hard it is to be a CEO and lots of money in the bank is usually a huge deterrent for serial entrepreneurship.
  • VCs replace CEOs of 75% of companies within 18 months of their initial investments
    • Founder’s shares get trapped in an illiquid private company for another 5-10 years
  • Use a 2 year time horizon
    • year 1 develop technology
    • year 2 develop distribution

On valuation

  • A lot of factors that have the biggest impact on a company’s short term value fluctuation will be out of management’s control
  • The factors will also be unforeseen
  • General valuation multiples
    • SAAS companies are typically valued at 3-4 RR
    • Service body shops 0.5 of per staff revenue or PE ratio of 3-4

On sales process

  • Typically 4-5 months
  • CEOs must focus on the business to ensure metrics are at their best during the sales to maximize valuation
    • can add up to 10-20% more valuation
  • Until the very last phase of the sales, it is best to delegate the sales process to a professional
    • Business broker or M&A advisor – use them as the bad guy
      • big firms shoot for exit above USD100million
        • 2-3% of final value
      • boutique firms shoot for USD20-70 million
        • 4-6% of final exit value

Related references

  • Evolution and revolution as organizations grow, Larry Greiner Harvard Business School
  • Raising money: The canadian guide to successful business financing, Douglas Gray and Brian Nattrass
  • High Anxiety or Great Expectations, Bart Schachter and George Hoyem, Venture Capital Journal

Insights from party at Ilya’s place

  • The successful investor is not very different from an investigative journalist or a crime detective
  • Most useful data are public.
  • The only difference between the successful investor and a mediocre one is the amount of work he is willing to dedicate towards validating all the key assumptions.
  • Investment relationships team of all public companies are very willing and helpful with providing information.
  • More qualitative data can be obtained by calling up customers or ex-employees of competitors
  • Once you are able to reconstruct a company’s business model, you will be able to predict generally whether a company will make or miss earnings
  • Legacy technology companies tend to have a longer half life than expected. The key is to determine how much longer the half life is and if there are legal protections that will extend it.
  • Beyond the core functionality, it is important to go into the realms of human psychology (adrenaline and dopamine) to figure out the defensible strategy
  • Smaller funds are structured to incentivize playing to win (1%-2% carry) while bigger funds are structured to incentivize playing not to lose (expecting only returns matching LIBOR rate of 2.5%) . The difference in mind set results in very different strategies.

Related References

Understanding cognitive biases is important for startups

Overview

All decisions are inherently emotional. Our lymphatic system is a more ancient and robust system than our logical faculties. Its been shown in studies, conducted by Antonio Damasio in 2000, that patients with damage to the part of the brain that processes emotions have trouble making even the smallest decisions.

Humans are by nature social creatures. Studies show that our brains contain mirror neurons which endows us the ability to empathize with another fellow human being. This also implies our emotions are easily subjected to the influence of others. This is why it is important to get familiar with the various cognitive biases in the human brain and what triggers them (see lecture by Charlie Munger).

On the flip side, it is possible to exploit cognitive biases to boost sales conversions. This is an art that touts in the streets of Cairo have mastered through years of practice. The effectiveness of any street tout is dependent on the number of cognitive biases he can exploit during the short period of encounter with his subject.

A case study on how cognitive biases are combined and used

A tout might start the conversation with a small ask, e.g. as simple as “what is your name?”. This seemingly innocent question when responded will trigger off the consistency bias. The subject will inevitably feel a sense of cognitive dissonance if he were to stop further conversation after having started the conversation by telling the tout his name.

The tout next proceeds to offer a seemingly harmless “gift” which might be small and of little value. This gift, when accepted, will exploit the reciprocity bias. The subject having received something of value will inevitably feel uneasy if he does not reciprocate in kind.

Since the subject at this point, without any prior data points, is yet sure on the “value” to place on the “gift”, a skillful tout might take the opportunity to exploit the anchoring bias by providing an high arbitrarily number about something seemingly unrelated such as one of the following:

  • the age of his 90 year old mum
  • the age of the pyramids
  • the inhumanly high temperature

This arbitrarily high number will help facilitate a higher perceived valuation of the “gift”.

And while he is telling about his mum or kids, he might exploit the authority bias by saying his mum is sick and needs money to see the doctor. One might say there is no person of authority in the immediate proximity. However in this scenario, the person is actually some authority figure the subject had in his life, while he was growing up, who preached to him the importance of being a good human being and helping others in need. Having delivered his story till this point, the tout should have successfully wiggled himself to a moral high ground in relationship to the subject.

It can be assumed that sometime has already past since the subject was given physical possession of the gift. The endowment effect should have kicked in by then. The subject if he was even mildly inclined towards the gift at the onset, he will feel a potentially higher level of psychological discomfort at returning the “gift” to the tout.

At this point from a psychological perspective, for the subject to be able to refuse the request of the tout for a donation, he would necessarily need to have priorly developed much mastery over his own emotions. It can be safely assumed the percentage of subjects parting with a “token” amount of donation to the tout will be significantly higher than an alternative scenario where a beggar simply approached begged for money.

How it is relevant to your funnel

Now one would ask how does this relate to driving up conversion rates in my startup application? The point of the story is not to teach you how to be “evil“, by getting your user to doing something against his will, but to illustrate the importance of catering to his psychological needs within your onboarding experience. The reason why your user landed at the top of your funnel was because he has a genuine need that he hopes your application could get done for him.

A smooth flowing onboarding experience coupled with a compelling story will help keep your user motivated as you drive him down the funnel towards the magic moment within your application. There is a reason why folks call the magic moment an Aha! moment. From a biological perspective, your user’s brain releases a small dose of dopamine (a feel good reward) during that very instance.

The key to user retention is to figure how to encourage repeated actions by your user so that he could experience the Aha! moment again and again until the action becomes a habit and your user does it reflexively without needing to think about it. Of course, to ensure your service can continue to benefit the world,  it is important to remember asking for contribution to pay for server cost at some point…

At GetData.IO, our mission is to turn the Web into the fully functional Giant Graph Database of Human Knowledge. We aim to do so by nurturing a community of like-minded contributors, hence the importance of successfully on-boarding our users. This is because every successfully created data source will not only benefit its creator but also other community members that might have need of it in the future.

Related References

  • Hooked: How to Build Habit-Forming Products, Nir Eyal
  • Altered Traits: Science Reveals How Meditation Changes Your Mind, Brain, and Body, Daniel Goldman
  • AARRR framework, Dave McClure
  • Influence: The Psychology of Persuasion, Revised Edition, Robert B Cialdini
  • The Power of Habit: Why We Do What We Do in Life and Business, Charles Duhigg
  • The psychology of human misjudgment, Charlie Mung
  • Jobs to Be Done: A Roadmap for Customer-Centered Innovation, Stephen Wunker

MongoDB versus Amazon

  • A scenario of company versus company
  • On 9th Jan 2019, Amazon announced the launch of DocumentDB a direct competitor to MongoDB
  • Key areas used to assess potential impact of new entrant
    • If incumbent’s distribution channel was in anyway disrupted by new entrants
    • If solution has sufficient lock in cost
    • Market segment differentiation through analysis of product features
  • Short term: Loss aversion, reversion to mean scenario
    • Market reacted by falling 17%
    • Market recovered in 14 days

Related references

Key take aways from the guide to a good life

A guide to the good life

Overview

The core of Stoicism as a philosophy is to live a good life (where peace of mind is deemed the highest good) by learning how to manage negative thoughts like:

  • anger
  • anxiety
  • fear
  • grief
  • envy

Techniques

This is done through the employment of these two techniques

Negative visualization techniques

  • Managing against hedonic adaptation by learning to desire what we already have. To do so, we must constantly remind ourselves the transient nature of things.

Focus of attention on what is within our loci of control

  • Totally within our control – focus our attention of these things
  • Partially within our control – internalize goals around parts where we have control
  • Totally out of our control – learn to be at peace with whatever outcome

Deliberate self denial

By deliberately depriving self the luxuries, one builds courage and self-control

Manage needs and desires

  • natural and necessary
    • Food and shelter
    • to fulfill
  • natural and unnecessary
    • Fine wine and luxurious food
    • to fulfill if not too much hassle
  • unnatural and unnecessary
    • fame and social status
    • to shun
  • unnatural and necessary
    • nothing exist in this category

Attitude towards time

  • The past and the immediate present is beyond change – be grateful for all that has came to pass and accept it with equanimity
  • The immediate future is where our loci of control falls – this is where we should channel our attention

Eras of stoiscism

  • Greek Stoics
  • Roman Stoics

The roman empire eventually adopted Christian religion as a the philosophical framework for state craft. This eventually displaced stoicism and other greek schools of philosophy.

Prominent stoic practitioners

  • Socrates
  • Marcus Aurelius
  • Xeno
  • Seneca

Related schools of philosophy

  • The Cynics – see Diogenes
  • Enlightened hedonism – see Epicurus

Related references

  • Meditations, Marcus Aurelius

Reflections for the morning

On communications

There are two types of communication observed. One that is very deliberate with the goal of effecting a very tangible outcome in an environment. The second runs on auto-pilot, with no constructive goals intended, driven purely by the hedonistic urge need to “feel” good, examples of which are bragging, angry out bursts and complaining.

For effective utilization of limited resources, cultivate type 1 behavior and stem out type 2 behavior.

On human resourcing

As with finding product market fit, the process of finding the right people for specific slots in the machinery requires persistent experimentation.

On personal psychology

To learn to be at ease with ambiguity   . Sometimes it’s more beneficial to leave specific without well defined rules.

To think of forthcoming phenomena in terms of probability and allocate necessary resources as according.

Related references

  • Machina, Sebastian Marshals
  • Thinking in bets, Duke Annie
  • How to live a good life, William Irving
  • What got you here won’t get you there, Marshall Goldsmith
  • Thinking fast and slow, Daniel Kahneman

Key take aways from California Mushrooms, the comprehensive identification guide

California Mushrooms

High level overview

The key features to use for mushroom identification

The steps prior to consuming

  • See mushroom
  • Collect entire mushroom
    • cap
    • stipe
    • sections of the substrate / what it grows on
  • note terrain its growing at
  • make spore print overnight
  • consult guidebook
  • search for competing lookalikes that might be poisonous
  • decide to eat it
  • post eating – check for symptom of poisoning
    • first symptoms can occur as early as 20mins into consumption
    • if first symptom occurs only after 6 hours of consumption visit emergency room – you might have consumed an Amanitin containing variant and are about to  DIE!!
      • Galerina marginata
      • Amanita phalloides, the Death Cap
      • Amanita ocreata, the Destroying Angel

These ones will kill you for sure

 

Key take way from the Truth Machine, Michael J.Casey

The Truth Machine, Michael J.Casey
  • Blockchains are decentralized ledger systems
  • trust is a vital social resource, the truth lubricant of human interaction
  • human social organization comes from our ability to craft meaningful stories that we all believe, Yuval Noah Harrari
  • Engineering talent is still in severe shortage

Three great power centers in US

  • Technology, Silicon Valley
  • Finance, New York
  • Government, Washington

Use cases

  • Refugees are thrust into statelessness. Easy for criminal exploitation
  • Removing the central silos such Uber, Facebook and Twitter and replacing them with
  • barter trade, double entry
  • Support the scaling internet of things while avoiding one central controlling big brother
  • Self-sovereign identity
    • priorly done by government,
    • now done by Facebook Google and Twitter

Types of blockchains

  • private permissioned block chain to protect sensitive information
    • gate keeping prone to monopolies and oligopolies
  • permissionless block chain where management of data is done by individual themselves

Most popular chains

  • Ethereum
  • BitCoint

Moon shot scenario

  • Technology has freed humans from work
  • Human free to focus on creativity instead of the drudgery of work
  • Getting paid for creativity instead of it being captured by Facebook

Highlights from The Future of Humanity by Michio Kaku

  • Organisms on earth eventually will meet one of three fates, leave, adapt or die. Earth has already sustained 5 extinction cycles.
  • The threats we face are largely self inflicted
  • Scientific revolution comes in waves often stimulated by advances in physics
    • 19th century
      • mechanics and thermodynamics: locomotive and industrial revolution
    • 20th century
      • electricity and magnetism bring forth the electric age
    • The forthcoming wave
      • nano-technology
      • AI, neural networks
      • Quantum computing
      • CRISPR revolution
      • Transhumanism – the need to deal with ethical questions
  • Technological regression occurs when the population becomes complacent,
    • Admiral Zheng He and his fleet under subsequent rulers
    • US space program after the cold war is over
  • Interesting phenomena worth exploring
    • wormholes
    • rogue planets – planets that do not orbit any particular stars
    • caloric restriction and increased life expectancy
    • falling birthrates and education of women
    • uploading and downloading of consciousness (Transcendence and Mnemonic Johnny)
    • achievement of super strength on new planets
    • artificial enhancement of body, seamless interfacing with machines (telekinesis)
    • big bang happening over and over again and the universe does not grow only in one direction
  • Civilization categorization method 1:
    • energy based
      • Type 1: utilizes all the energy of the sunlight falling on the planet
      • Type 2: utilizes all energy its sun produces
      • Type 3: utilizes energy of an entire galaxy
      • Type 4: utilizing energy beyond the galaxy
    • information consumption based

Key observations of Chinese One Belt Road Initiative in Africa

Territories observed

  • Egypt
  • Sudan
  • Ethiopia
  • Kenya
  • Tanzania
  • South Africa

Similarities observed

  • Heavy Chinese enterprise involvement in the building of roads and houses
  • Shops with Chinese labels observed in operation
  • In areas where there are construction operations, Chinese supervision and management observed aided by local manual labor
  • Ubiquity of mobile internet connection
  • Ubiquity of Samsung, Huawei and Tenco Android mobile phones ranging from USD50 among local adult and adolescent population

Macro trends

With the rise of the Chinese middle class, there is now increasing domestic demand for goods and services within China. This has driven the need to increase the overall throughput volume of such commodities. It can be speculated that the level of consumption is expected to surpass the level of production within China at some point.

Economic growth in China has for now hit a road block due to the following factors:

In light of these, China needs to start shifting its policy from an export focused economy to a domestic focused economy. To do so, it needs to feed and drive domestic demand for goods and services.

Regional trends

The Chinese government has been observed to enter into agreement with local African government to fund the build out of infrastructure, primarily roads and buildings. At the date of writing 85% of roads in Ethiopia has been completed within the country while in Zanzibar, Tanzania, all major roads are under construction and a sports stadium named Mao ZeDong stadium has been observed.

In exchange for the funding, local governments are restricted to engaging the service of Chinese companies. This safeguards the effectiveness of funds deployment for the operations aspects of the agreement while serving to three specific purposes. It minimizes the actual volume of liquidity that is tied up in loans to local government, while boosting demand for construction services within China and increasing maximum possible throughput volume of commodity exports from the region.

What is not obvious during the time of observation is how effective local governments are at managing funds during the stage between its receipt from China to its payment to the engaged Chinese companies. Discounting the inherent effectiveness of the various projects in driving local GDP, differing levels of corruption and maturity of national identify within the region will result in variance between actual ROI versus expected ROI for these projects.

On deciphering Chinese end goal within the region

At the moment of writing, it is yet clear how Chinese African relationship will crystalize for the future. Two key observations need to be made before we can get a glimpse of it.

Key observation #1 would be how China would react when the loans come to maturity and the local government have yet made sufficient returns from the infrastructure investments to pay off the debt.

Key observation #2 would be how Chinese companies would handle the post construction phase of projects that require ongoing maintenance in terms of knowledge transfer.

Related readings