During times like these, you’re going to see some hyped-up companies. Valuations won’t make sense, crazy (silly?) ideas will get funded, you get the picture. I want you to have the tools and strategies to see through hollow startup pitches. Today I’m going to share a story about one of the most successful investment funds in history and a little strategy they used to build a $28B investment empire. The exciting part? You can use this tactic too.
In 2021, the amount of venture funding in the US increased 106% to $311B.
That type of money makes people crazy (like Mike Tyson when he bought a tiger 🐯).
During times like these, you’re going to see some hyped-up companies. Valuations won’t make sense, crazy (silly?) ideas will get funded, you get the picture.
I want you to have the tools and strategies to see through hollow startup pitches.
Today I’m going to share a story about one of the most successful investment funds in history and a little strategy they used to build a $28B investment empire.
The exciting part?
You can use this tactic too.
Let’s dig in!
Today we’ll explore:
The “Secret Weapon” that Built a $28B Fund: The Story of A16z
The Valuation vs Traction Matrix:The signals to look for in startups
The “Secret Weapon”
Some of the greatest business minds found successful companies, others make millions knowing how to identify them. Marc Andreessen and Ben Horowitz did both.
The duo started working together in 1995 when Horowitz joined Andreessen at Netscape 🤝
They founded Loudcloud in 1999 💡 and took it public in 2001 🚀
In 2002 Loudcloud was transformed into Opsware and then sold to Hewlett-Packard in 2007 for $1.6B in cash 💰
Two years after the exit, the long term business partners founded a16z and made it one of the highest-returning VC funds in the world 💸
Their fame as two of the most influential VCs overshadows their past as angel investors. Between 2005-2009, Andreessen and Horowitz separately invested a total of $80M in 45 startups.
As of today, Marc Andreessen leads the list of Top 50 Angel Investors in the US with 73% exit rate and a total of 37 investments. In 2009, Andreessen was among the earliest investors in still fairly young Linkedin (2002), Skype (2003), Facebook (2004), Twitter (2005), Groupon (2008) and Airbnb (2008).
The “Secret Weapon”: Writing smaller checks at a startup’s earliest stages allowed Andreessen to diversify his portfolio, lower the risks and skyrocket the returns. This strategy later became his “secret weapon”: leveraging his personal money to gain insights into promising companies before any fund would get involved.
Invest a small amount into a portfolio of companies at the earliest stage
Use this access to gain early insights (Track revenue growth, etc.)
Triple down on your winners
Angel Investing Strategy:
When it comes to the evaluation of early-stage investments, VCs like a16z with billions ($28.2 to be exact) in funds prioritize the idea, team, market opportunity and business model over valuation. Angel investors with much smaller checks can’t afford this. The strategy is to use valuation to help size your investments according to the expected ROI and diversify your portfolio.
Entrepreneur and investor Jason Calacanis with over 350 investments and 10% exits has come up with The Valuation & Traction Matrix for easy estimates.
The chart consists of two variables: traction and valuation.
The green line represents an average startup in its 3 phases:
When there is just the idea and mockup, the value ranges around $1M-$2M and the funding usually comes from friends and family
MVP or unpaid pilots range between $2-5M in value and attract angels and seed round investors
Paid pilots and revenue bring in syndicate investors and catch the eye of VCs
Those in the upper left quarter tend to have less real value while the startups in the lower right quarter have more.
To get above the green line, startups normally have either of these:
Founder(s) with a successful track record
Artificially fueled demo day FOMO by accelerators like YCombinator and Techstars
“Otherworldly” product or engagement
Dumb money injected by those that fail to see the opportunity to invest in several startups with the same traction and lower prices
This 4th scenario is the most common mistake among Angel Investors and this is what I’m trying to make you avoid doing.
Let’s take an example and play around with numbers.
Andreas is an Angel Investor with $100,000 ready to invest.
He’s approached by Pete, the founder of early-stage Startup #1 with an overpriced valuation of $20M. Pete, with a successful exit track record, tries convincing Andreas that the high value comes from the greatness of the product and things will be wonderful once the startup becomes a Unicorn. This could be true but it assumes there are no other similarly good deals for Andreas, which we know is not true.
While Andreas is contemplating putting all his 100,000 eggs in one basket, Jane, the founder of Startup #2 with a $2M valuation and equally promising opportunity, approaches him.
Andreas also learns about Startup #3 valued at $5M and Startup #4 at $3M valuation with equally innovative solutions, large market opportunities and competent founders.
The risk of overpricing the startup and raising big money at the early stage usually results in failure to reach the set milestones and raising too little in the follow-up rounds. For example, Pete, who raised $1M at $20M valuation, will have less than 12 months (startups raise every 12 months or so) to make the company worth $20M if burning $75k a month to reach $100-200k monthly revenue. And if Startup #1 fails to do this (which has high probability), Pete will have to either:
Lower the company value for a round down ⬇️
Or raise a bridge round from existing investors 🆘
Or shut down/sell the company at a lower price ❌
Either of these would harm Andreas’ earnings had he invested the $100k in Startup #1 alone.
You probably see where this is going now. Andreas choosing to divide his $100,000 into four $25,000 checks increases his chances of higher returns. On average, out of every 10 investments, angels experience 5 business failures and an additional 3-4 exits that bring only a modest return. Fewer than 2/10 investments provide most of the portfolio returns, with a 10-30X ROI.
To avoid learning the hard way, it's important for you to have a strategy before writing your first check. Start with understanding:
The risks of angel investing
Your total investment size and the size of each deal
Deal returns and the need to diversify
For new investors, Calacanis suggests to do their first 25 deals in the 🟢 box area below to eliminate the founders who can’t get to basic level of product/market fit. Avoid investing in 🔴 box. Investing in the 🟡 box is for those that like a little bit of adrenaline rush.
It's important to point out that the valuations listed above have likely increased since Jason created this chart - the market for startup investing is red hot - everyone is getting involved, and startup valuations have increased as a result of that.
Make sure you get a sense of where approximate valuation bands (e.g Pre-Seed, Seed, A) stand today so you can be more effective in your approach.
THIS WEBSITE IS OPERATED BY EARLYPUBLICOFFERING.COM, WHICH IS NOT A REGISTERED BROKER-DEALER.
EARLYPUBLICOFFERING.COM AND ITS AFFILIATES MAKE THE INFORMATION AND CONTENT ON THIS WEBSITE AVAILABLE AS A SERVICE TO ITS CUSTOMERS AND OTHER VISITORS, TO BE USED FOR INFORMATIONAL PURPOSES ONLY. THE FINANCIAL INFORMATION CONTAINED ON THIS WEBSITE IS DERIVED SOLELY FROM THE APPLICABLE LISTED COMPANY, AND EARLYPUBLICOFFERING.COM DOES NOT VERIFY OR ASSURE THE ADEQUACY, ACCURACY OR COMPLETENESS OF ANY INFORMATION. NEITHER EARLYPUBLICOFFERING.COM NOR ANY OF ITS OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, OF ANY KIND WHATSOEVER RELATED TO THE ADEQUACY, ACCURACY, OR COMPLETENESS OF ANY INFORMATION ON THIS SITE OR THE USE OF INFORMATION ON THIS WEBSITE, AND ANY REPRESENTATION OR IMPLICATION TO THE CONTRARY IS EXPRESSLY DISCLAIMED, NOR SHALL ANY SUCH PARTY HAVE ANY LIABILITY WHATSOEVER ARISING FROM ANY ERROR OR INCOMPLETENESS OF FACT OR OPINION IN, OR LACK OF CARE IN THE PREPARATION OF, ANY OF THE MATERIALS POSTED ON THIS WEBSITE.
NOTHING CONTAINED ON THIS WEBSITE SHALL BE CONSTRUED AS LEGAL OR TAX ADVICE, AND EACH PROSPECTIVE INVESTOR SHOULD CONSULT WITH THEIR FINANCIAL ADVISORS, ACCOUNTANTS, ATTORNEYS AND OTHER PROFESSIONAL ADVISERS AS TO LEGAL, TAX, ACCOUNTING AND RELATED CONSEQUENCES OF AN INVESTMENT IN THE FUND AND AS TO THE SUITABILITY OF AN INVESTMENT IN THE FUND IN LIGHT OF SUCH PROSPECTIVE INVESTOR’S INDIVIDUAL CIRCUMSTANCES. ALL INVESTORS SHOULD MAKE THEIR OWN DETERMINATION OF WHETHER OR NOT TO MAKE ANY INVESTMENT BASED ON THEIR OWN INDEPENDENT EVALUATION AND ANALYSIS. ALL SECURITIES INVOLVE RISK AND MAY RESULT IN SIGNIFICANT LOSSES, INCLUDING THE POSSIBLE LOSS OF YOUR ENTIRE INVESTMENT. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE PERSON OR ENTITY CREATING THE INTERESTS AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. NOTHING ON THIS WEBSITE SHALL CONSTITUTE AN OFFER OR SOLICITATION TO SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR WILL THERE BE ANY OFFER, SOLICITATION, OR SALE OF THE INTEREST IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION, OR SALE IS NOT AUTHORIZED OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER, SOLICITATION, OR SALE. THIS WEBSITE IS NOT, AND UNDER NO CIRCUMSTANCES IS IT TO BE CONSTRUED AS, A PROSPECTUS OR ADVERTISEMENT, AND THE OFFERING CONTEMPLATED IN THIS IS NOT, AND UNDER NO CIRCUMSTANCES IS IT TO BE CONSTRUED AS, A SECURITIES OR PUBLIC OFFERING.
THE FINANCIAL PROJECTIONS AND ANY OTHER ESTIMATED, PROJECTED, TARGETED OR ASSUMED INFORMATION ON THIS WEBSITE CONSTITUTE “FORWARD-LOOKING STATEMENTS”. PROSPECTIVE INVESTORS SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, AS THEY ARE SPECULATIVE IN NATURE AND MAY PROVE INCORRECT. THE INCLUSION OF FORWARD-LOOKING STATEMENTS HEREIN SHOULD NOT BE REGARDED AS A REPRESENTATION, WARRANTY OR GUARANTEE OF ANY KIND BY EARLYPUBLICOFFERING.COM, ITS DIRECTORS, OFFICERS, EMPLOYEES, REPRESENTATIVES, AFFILIATES, AGENTS OR ANY OTHER PERSON OF THE RESULTS THAT WILL ACTUALLY BE ACHIEVED BY THE APPLICABLE COMPANIES. ADDITIONALLY, EARLYPUBLICOFFERING.COM HAS NO OBLIGATION TO UPDATE OR OTHERWISE REVISE ANY FORWARD-LOOKING STATEMENTS, INCLUDING ANY REVISION TO REFLECT CHANGES IN ANY CIRCUMSTANCES ARISING AFTER THE DATE HEREOF RELATING TO ANY ASSUMPTIONS OR OTHERWISE. EQUITY CROWDFUNDING INVESTMENTS IN PRIVATE PLACEMENTS, AND START-UP INVESTMENTS IN PARTICULAR, ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND THOSE INVESTORS WHO CANNOT AFFORD TO LOSE THEIR ENTIRE INVESTMENT SHOULD NOT INVEST IN START-UPS. COMPANIES SEEKING STARTUP INVESTMENTS THROUGH EQUITY CROWDFUNDING TEND TO BE IN EARLIER STAGES OF DEVELOPMENT AND THEIR BUSINESS MODEL, PRODUCTS AND SERVICES MAY NOT YET BE FULLY DEVELOPED, OPERATIONAL OR TESTED IN THE PUBLIC MARKETPLACE. THERE IS NO GUARANTEE THAT THE STATED VALUATION AND OTHER TERMS ARE ACCURATE OR IN AGREEMENT WITH THE MARKET OR INDUSTRY VALUATIONS. EARLYPUBLICOFFERING.COM IS NOT ACTING IN A FIDUCIARY CAPACITY WITH RESPECT TO ANY USER OF THE EARLYPUBLICOFFERING.COM SERVICES, AND EARLYPUBLICOFFERING.COM DISCLAIMS ANY BROKER-CLIENT OR ADVISOR-CLIENT RELATIONSHIP WITH RESPECT TO ANY PARTY USING THOSE SERVICES.