Wednesday, April 27, 2022
Austen Allred - Investing in 120 Companies Per Year
From dropping out of college and moving to China with $1,000 to self-publishing a book that earned him $175K, to founding a company that has raised over $170M and investing $6M per year into startups - this is Austen Allred
Explore This Expert Session
- Meet Austen Allred 👋 : From dropping out of college and moving to China with $1,000 to self-publishing a book that earned him $175K, to founding a company that has raised over $170M and investing $6M per year into startups - this is Austen Allred
- Investor Toolkit 🧰 : The criteria Austen looks for when investing in high-growth startups
- Personal Investing 💰: The barbell strategy - balancing his risk startup investing, with long-term safe bets
- New Markets Research 🔬: The future of student loans
- Portfolio Spotlight 📸 : Innovative companies Austen has backed. What do they do and where are they now?
- Business Idea of the week💡: 99 designs for memes
Follow Austen On Twitter: @Au;sten
Let’s dig in!
History & Facts:
2008 - The First Entrepreneurial Experience 🔧 : Austen had the bug for entrepreneurship early on - learning very quickly that flipping products on eBay would net him much more than mowing his lawn for $5/hr.
One weekend, his family was planning a trip to New York City to watch a musical. After scouring eBay for tickets on eBay, he recognized that certain tickets would sell for 2X-3X retail prices - his entrepreneurial mindset kicked in💡.
At 17 years old, Austen and his brother built Stubtopia, a secondary event tickets website that aggregated tickets from over 700 ticket brokers and sold them via a single portal. The company grew from $0 to $5 million in revenue in 3 years.
2013 - College Dropout 🎓 : College didn’t provide Austen with the stimulation he craved - he’d spent 2 years as a missionary in Ukraine and loved the experiences that came with learning new cultures. He dropped out of college and flew to China with $1,000 to his name.
2014 to 2015 - Building of Grasswire 🗞️ : While in China, Allred was supposed to catch a train but ended up missing it at the last minute.
That train ended up colliding with another train and killing hundreds of people. Austen witnessed first-hand how the Chinese media attempted to cover up the cause of the accident and the number of casualties.
Austen decided to pack up and move to Silicon Valley with the idea of starting a business that would let everyday citizens report on the news.
Austen raised $600k to launch Grasswire - a company that made it possible for anyone with a Twitter account to become a citizen journalist.
While the company ultimately shut down, he learned a lot about building and raising money from investors.
2017 - Launching a Book and Earning $175k 📖 : After shutting down Grasswire, Austen joined a FinTech company called LendUp as a Senior Manager of Growth.
Austen decided to document his learnings growing a venture-backed startup and self-publish a book called Secret Sauce: The Ultimate Growth Hacking Guide. He sold the book for $40 each.
In the first week, he netted $30,000…
Since then he has grossed over $200,000.
2017 to 2022: Starting BloomTech (Formerly Lambda School) With “Crazy Experiments” 💻 : Austen moved back to Utah to build an “anti-VC business” - one that wouldn’t require any investment and could earn him a cushy $250,000 per year salary.
His plan? Start a coding boot camp - he’d teach 50 students a year how to become software engineers and charge them $10,000 each.
One day, after a student said they could afford the $10K price tag - he had a crazy idea.
Instead of paying $10,000 upfront, what if a student paid $0 upfront and $10,000 + interest once they landed the job - while they’d earn less up-front, their incentives were aligned and they could potentially make a lot of money.
They sent this new $0 upfront cost offer to their email and waited….
Soon after sharing this offer, over had 2,000 people applied to their program.
They took this idea to YCombinator, a San Francisco-based tech accelerator, and raised $4M in ~2 weeks.
To date, BloomTech has trained thousands of students and raised $170M from Venture Capitalists.
2021 - Raising A $30M Rolling Fund With One Tweet: Over the years, Austen has become part of the Silicon Valley tech community. He’d grown a large presence on Twitter - totaling 150,000 followers and was beginning to invest in some reputable companies like Clubhouse (Valued at $4B), Levels Health (Raised $12M in venture financing), and Roam Research (Raised $9M at $200M valuation)
In early 2021, fellow founder and investor Sahil Lavingia sent a tweet highlighting Austen Allred's potential prowess as a startup investor.
When Austen woke up the next morning, he had over $30M in rolling fund interest.
Austen cut back the fund size and raised a rolling fund where he invests $6M per year into startups.
Spotlight 🔦 : Top-performing companies in Austen's portfolio
Investor Toolkit 🧰 :
A set of rules, frameworks, and strategies that help him make impactful investments:
- Unique Access 🎣 : The best deals are often the hardest ones to get into. Part of Austen's investment thesis is that given his position in the startup community, he is able to garner unique participation in any deal he tries to get into, even if it’s “oversubscribed.”
- First-principles thinking 🤓 : Austen looks for founders that approach business-building from first principles. They identify a problem and work to discover novel solutions to that problem. Here’s a simple framework for first-principles thinking:
3 Criteria Austen Looks For in Every Startup ✅ :
- Size & State of The Market 🌎 : Is the market “winnable” & is it big enough? Big startups exist within big markets. The dynamics have to be right such that a new startup can take market share from existing players and maintain a dominant market share in this growing market segment.
- Level of product-market fit 🔩 : Austen looks for product-market fit. While not every startup will have launched its product, he looks for evidence to support strong market adoption.
Here’s how Marc Andreessen, Partner at $27B fund a16z, defines product/market fit:
"The customers are buying the product just as fast as you can make it -- or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You're hiring sales and customer support staff as fast as you can."
- Internal Psychology of The Founder 🧠 : Austen often invests early in a company's lifecycle and bets heavily on the founder. One question he always tries to understand is “Does the founder actually believe what they’re telling me, or are they going through the motions? Do they inherently think they’re going to win?”
Money Frameworks: What is Austen's wealth-building strategy? (Reminder, This Is Not investment advice)
Austen has a unique advantage when it comes to startup investing - access. Because of his access, he has been a uniquely successful investor, noting that he “Invests everything into startups” because “there’s not another asset class that I would have done better investing in”.
The Barbell Strategy:
Austen's framework resembles a strategy popularized by Nicholas Nassim Taleb. The barbell investment strategy advocates pairing two distinctly different baskets of investment assets – distributing between the two extremes with almost nothing in the middle. One basket holds extremely safe investments, while the other is highly speculative investments.
Instead of your portfolio being mildly conservative or aggressive, it is both hyper-conservative AND hyper-aggressive at the same time. Doing so, could potentially limit your downside risk—the total amount you could possibly lose — yet expose you to the potentially unlimited upside.
New Markets Research:
The Loan Of The Future & Income Share Agreements (ISAs)
High Growth Market: Global Search volumes for Income Share Agreements (ISAs) have increased +170% since congress declared them as a valid funding tool in the Investing in Student Success Act of 2014.
Income Share Agreements – a contract through which an individual (or company) receives upfront money, in exchange for a fixed percentage of their future income – are increasing in popularity as a funding source for education programs.
In 2020, 175 schools in the US alone issued an estimated $500M in ISAs to students seeking education (a form of student loan).
Why Does it Matter?
- ISAs are outcomes-driven: They align the incentives of both recipients and issuers.
For example, a student (ISA recipient) that uses an ISA will only have to repay if they get a job offer within a defined salary range after the completion of the program. If they don’t get a job offer within a defined period of time, or the salary is lower than planned, they don’t pay.
- ISAs give people options: ISAs are an alternative funding solution to traditional loans or equity. They’re essentially a hybrid of both:
ISA funders benefit from a new asset class that has the upside potential of stocks and the cash flow nature of loans.
Despite being a new market, there are over 130+ players providing ISA services:
Interesting Applications of Income Share Agreements (ISAs):
1) Education: BloomTech is an online coding school that has raised $122M in venture financing. It trains students in high-salary skills like Software Engineering and Data Science, but instead of requiring students to pay upfront (~$21,000…which, you can still do) they offer alternative payment methods:
- ISA: A down payment of $2,950 (instead of $21,000) and a % of their monthly income after getting a job paying a minimum of $50K annually. If the students don’t get a job within a year after completion of the program, the remainder of the tuition fee is waived.
- Outcome-Based Loan: Get a loan from their financing partner, Ascent Funding. If you do not land a job paying at least $50,000 a year within 1 year after graduating, your entire tuition of $21,950 will be refunded + an extra 10% for wasting your time.
BloomTech partners with ~100 companies including Apple, Oracle, Microsoft, and AT&T to help BloomTech graduates land jobs.
2) Business Financing: Chisos Capital funds entrepreneurs and their early-stage businesses with $25,000 — $50,000 checks.
They take the ISA agreements a step further by signing Convertible Income Share Agreements (CISA) with founders.
Imagine a startup receives a $25,000 investment, there are two potential scenarios:
- It fails shortly after. The ISA guarantees Chisos gets back its investment and return from the entrepreneur that is responsible for paying back 10% of their personal income (not business earnings) for the next 120 months or until $50,000 (2x $25,000) is repaid.
- Succeeds and grows. Inspired by YC’s SAFE notes, Chisos allows entrepreneurs “buy back” part of their equity ownership once ISA is paid down. Once 50% of the repayment cap is paid back, the ownership claim drops to 2.5% (or reduced by 50%). And once the remaining half of the repayment cap is paid, the ownership by Chisos is reduced by another 50% to 1.67%.
Business Idea of The Week
The “Meme Factory” 🦄
Austen was at a founder meetup when this idea came about - if you want to run with it, let me know. He may be interested in funding it :).
“I know people who would spend $1,000 per day buying the right memes because they’re that impactful” - Austen
The Context: Ideas travel at the speed at which they can be effectively communicated. In recent years, there has been a shift in the way consumers share information through social media, leading to an explosion of memes - why? Because memes are inherently viral.
Here’s an evergreen meme for ya
As Elon Musk says…
The Problem: Companies want to use memes to create viral marketing campaigns, but creating memes at scale requires systematic creativity and design skillsets.
The Idea: A “99 designs for memes”
99designs is a Melbourne, Australia, based company that operates a freelancer platform for connecting graphic designers and clients.
It could work like this:
- Input Needs: Via a portal, you submit a project telling the freelancers what you’d like
- Gather Responses: Freelance designers (aka Memelords) submit their meme ideas to the company and pick their favorite.
- Finalize & Pay: Companies finalize their meme and continue working together - the platform would take a percentage of the transaction.
Be sure to check out the interview with Austen Allred above!