Sunday, June 26, 2022
Morgan Schwanke - Generating a 10.5X Return in 2 Years
From founding a real estate startup and ultimately returning investors $6.5M back to investors, to turning $885k into over $9.33M (a 10.5x return!) in just 2 years, to investing in over 150 startups - this is Morgan Schwanke.
Hey hey! 👋 ,
We have A LOT to unpack here. Morgan is an “operator-investor,” meaning he throttles between operating companies and investing in them.
I believe it’s precisely because he’s an operator that he’s become such a potent investor. He’s so close to the day-to-day action of company building and in the trenches daily.
Morgan invests in ~5-10 startups per month, totaling over $50M invested, and runs Business Development at a high-growth company that has raised $53.5M in funding.
Let's get after it!
In Today's Expert Session:
- Meet Morgan Schwanke: From founding a real estate startup and ultimately returning investors $6.5M back to investors, to turning $885k into over $9.33M (a 10.5x return!) in just 2 years, to investing in over 150 startups - this is Morgan Schwanke.
- How Can You Collaborate? You can invest alongside Morgan via his rolling fund and investment syndicate. He’s become one of the most active investors on Angellist.
- Investor Toolkit: The 3 Criteria Morgan looks for in every startup.
- Personal Capital: The Mana team have developed an asymmetric upside machine though investing in 5-10 companies per month.
- New Markets: This unique strategy can lead to hyper-growth startup investments.
- Business Idea of The Week: This idea is novel. It could boost a startups capital reserves and turn loyal customers into ravid fans.
Guest: Morgan Schwanke, Founder at Mana Ventures (Twitter: @MorganSchwanke)
Video Length: 40 minutes
Meet Morgan Schwanke:
2012 to 2015 - Building Airbnb For Student Rentals: As a sophomore in college, Morgan wanted to live off-campus and started trying to rent an apartment.
He found the process difficult, like really difficult, especially as a new undergrad that had never rented before.
Morgan wanted to fix it and thought of a solution - “Airbnb for student rentals,” he thought.
Just like that, On My Block was born.
In short, On My Block was a marketplace to help students find and book quality student housing.
Morgan moved to the Bay Area and raised a Seed round of $700k and a subsequent Series A - bringing his total fundraise to $6.5M!
He rolled out the platform to 20 colleges throughout the western United States and prepared for world domination.
There was a problem, though.
After 4 years, the company hit a roadblock. Specifically, landlords weren’t adopting the platform.
It occurred to Morgan that the Landlords had the pic of the litter. It wasn’t hard for them to fill rentals. It was only hard for the students to find high-quality rentals.
To make it worse, both students and landlords were frugal - it was tough to squeeze out margin with this business model.
Just like that, the ride was over.
Morgan decided to sell off the company's assets and returned the $6.5M he raised to the investors.
2015 to 2017 - Joining Unity Technologies and Catching a $55B IPO: Morgan had just shut down his business. Unsure of what exactly to do next, he decided to speak with the first angel investor in his last startup, John Riccitiello, CEO of gaming company Unity Technologies.
Morgan liked the work John was doing at Unity. Its Real-Time 3D software is behind some of the most advanced CGI graphics. Its technology is used in movies like Avengers Endgame and successful video games, like Fall Guys.
Morgan decided to join the company. And this is where things get interesting.
He knew that the company was experiencing exponential growth. As an insider, he could see the metrics, so he pooled $885,000 of capital alongside a group of 3 friends and deployed that into 10 companies over 2 years.
He was so convicted that he invested $600,000 into Unity.
Only 3 years later, the company IPO’d, reaching a high of $55B valuation in the public markets.
2017 To Present - The Explosion of Live-streaming & the Rise of Mana Ventures::
While at Unity Technologies, Morgan heard about a small company in Ukraine that was becoming exceedingly popular with gamers.
The company was called Restream, and it helped gamers live-stream across multiple platforms, like YouTube, Twitch, Facebook, and Linkedin, all at once.
He decided to reach out to the CEO, Alex Khuda, and well, let’s just say it went exceedingly well for Morgan.
Check out the Restream story in the Investor Toolkit segment below.
How To Collaborate With Morgan:
You can invest directly alongside Morgan via his syndicate or rolling fund. Let’s explore these vehicles below.
The History Of Mana Ventures:
- Mana Ventures Fund I (closed)
- Mana Ventures Syndicate
- Mana Ventures Fund II (Rolling Fund)
Mana Ventures Fund I:
In 2016, Morgan launched Mana Ventures Fund I. Over 2 years, he deployed $885k into 10 companies.
Of those 10 companies, two were breakout investments - Unity Technologies, which went public in 2020 and reached a high of $55B, and Restream, which raised a $50M Series A in 2020. The Mana team exited its restream position via secondaries in this Series A round, generating a 9.3X multiple on investment.
Mana Ventures Fund I was a high-performing fund. The original investment of $885,000 is now valued at $9.3M, realizing 10.5X returns and an IRR of 210.9%.
Mana Ventures Syndicate:
In 2019, Morgan launched the Mana Ventures Syndcate. Within 3 years, it has grown to 4,500+ Limited Partners (LP’s), aka investors that participate within the syndicate, and become one of the most active syndicates on AngelList.
The Syndicate has invested in 100+ companies, invested over $30M int startups, and generated investors a 40% return.
Mana Ventures (Rolling) Fund II:
Morgan raised a Rolling Fund, an investment vehicle that allows investors (Limited Partners) to “subscribe” to a fund every quarter, and capture the upside across that basket of investments, as opposed to on a deal-by-deal basis, like the syndicate.
This vehicle also allows Morgan to commit to companies faster, as opposed to the syndicate process, which can take several weeks to gather commitments from investors and exposes the company's financials and growth strategy to the public.
Want To Make Money? Introduce Morgan to Companies You Like!
Morgan works with a network of over 4,500 investors. If one of those investors sends him a company that he ultimately invests in, he will give them 20% of his carry in that investment (carried Interest is a percentage of profit from the eventual exit or sale of the company)!
Investment Deep Dive: Restream.io
In 2017, Morgan heard about live-streaming company Restream. In a nutshell, the company helped gamers live-stream across multiple platforms like YouTube, Twitch, Facebook, and Linkedin, all at once.
He connected with the CEO via Twitter, and after a great first call, joined the company as an advisor.
Alex was having difficulty raising capital from US-based investors while based in Ukraine, so Morgan convinced him to move to San Francisco.
The duo pitched Venture Capital firms for 2 months and eventually closed a $5M seed round. Morgan invested $50,000 from his fund into that round.
Why Did Morgan Invest In Restream?
1) Committed Team: Morgan immediately knew this team had grit. The founders couldn’t raise funding while based in Ukraine, so they had no choice but to bootstrap the company to profitability.
2) Clear Product-Market Fit: Users raved about the product. There’s nothing better than raving fans. Also, performance metrics were very strong. They had thousands of users and a $1M revenue run-rate (this is Morgans sweet spot).
3) A Mega-Trend In Streaming: At the time, live-streaming startup Twitch was the king of streaming. But other platforms were popping up to challenge them. Platforms like Facebook, Twitter, Youtube, and Linkedin were getting into the game and gaining traction. Suddenly, a trend that started in gaming was now expanding to professional streaming, live conferences, and the broader creator economy.
Currently, there are 100 people on the team, the company is profitable, and continues to grow.
Every investor is trying to find the next Facebook or Stripe. It's the winning strategy, but it's exceedingly rare. Morgan knows he invested $600k into Unity Technologies, which generated him a $7.86M return, but these types of investments may occur once in a decade.
Instead, Morgan prefers to take his time, invest prudently, and has set strict investment criteria.
What Does Morgan Look For in Companies?
- Founders Must Have Grit: It's critically important that the founders have the grit to make it through the early stages of company building and hunting for product-market fit. In every case, Morgan says the founders he’s backed are the sharpest in their vertical, and he can typically pick up on grit via their operating history or a few in-depth conversations.
- 90%+ Margins & a <$15M Valuation: Morgan views a $1M revenue run-rate as a great inflection point in a company's development. Its potentially before large VCs invest, but at a point where you can see the company's potential if you infuse capital into it. It’s also critical that the company is built to scale - with 90%+ margins, it can heavily re-invest back into growth.
- Bridge Rounds: Some of Morgans' best investments are in “bridge rounds,” where founders haven’t quite hit the metrics needed to raise a large Series A but have strong enough traction that he can begin to see where it is heading. At this point, Mana Ventures can come in before it gets too competitive and gets a good deal, often with a discount.
Morgan is hyper-focused on further building his startup portfolio and has yet to develop playbooks in other asset classes. His system to source, diligence, and invest in early-stage startups is a well-oiled machine.
- Mana Ventures & Syndicate: A suite of early-stage investment vehicles from which Morgan collects a 2% management fee on assets under management (AUM) and a 20% carry fee.
- Restream: Morgan is the Head of Business Development at Restream, where he manages integrations, partnerships, and enterprise sales. Morgan collects a salary and equity in the company from this position.
Investment Holdings: Morgan doesn’t have a strict investment playbook across asset classes.
- Equity 40%: Morgan’s equity holds are driven by his positions in startups that he’s invested in that have IPO’d (Like Unity Technologies).
- Crypto 30%: Due to early involvement, his crypto values have ballooned and become a much more significant portion of his portfolio.
- Real Estate 25%: Passive real estate investment holdings.
Is This System Working?
Morgan has built a flywheel in the early-stage investment market. Today, Morgan has a network of 4,500 investors that both source companies and invest alongside him. This network has enabled him to deploy over $50M into 150 companies and invest in ~5-10 new companies per month.
As his investor network grows, so does his capacity to source and invest in more startups, further driving his brand and reputation within the industry.
What’s The Trend: Over the last decade, venture funding in Latin America has steadily increased. However, in 2021, investment accelerated significantly. This trend has carried into 2022. In the first two weeks of 2022, Latin American startups received more than $450 million in funding.
Many of these companies are leveraging proven business models developed by companies based in the United States or other proven markets and applying them to the Latin American market.
Why It Matters: Applying a proven business model in an untested region dramatically reduces the market risk. Assuming local conditions are similar, it is very likely that customers in this new region will value the product or service similarly.
Because of this, some Latin American startups are growing more quickly than their US-based counterparts, with a less expensive go-to-market process, creating a unique opportunity for explosive growth.
There are many examples of this strategy being implemented successfully.
The “Imitation Game” For Startup Success - Examples:
1) Oliver Samwer - The $8B Copycat:
Rocket Internet is a Germany-based investment fund and incubator. It takes proven business models from tested markets and applies them in untested markets. Rocket internet has invested in and incubated more than 200 companies, now valued at ~$30 Billion. Oliver Samwer, the CEO at Rocket Internet, owns 45% of the business, giving him a net worth of ~$13B.
Its not the first time Oliver used this strategy. In 1999, he sold an auction site named Alando to eBay for $43M after just 3 months of operation.
The site was a blatant copy of eBay and an attempt to replicate eBay's success in Germany. This “copycat” approach has created a somewhat negative reputation for Samwer and Rocket Internet.
2) Dafiti: The “Zappos” of Brazil
Dafiti derived its original business model from the U.S. company Zappos, which was acquired by Amazon for $950M in 2009.
It customized the business model to adapt to local Latin American market conditions. As a result, it discovered sizable success in Brazil and even joined Rocket Internet’s global fashion group, now valued at $1.1 billion.
3) CargoX: “Uber” for trucking in Brazil
Brazilian freight company CargoX implemented an “Uber for trucking” business model and became widely successful. CargoX aims to lower the number of empty trucks on the highway, boosting trucker revenue and decreasing freight owners’ costs. To date, CargoX has raised $390M in total funding.
The list goes on. Other examples include MercadoLibre, which is the “eBay” of Latin America, Despegar is Latin America’s “Expedia,” and OLX is their “Craigslist.”
The Power Of This Formula: There are a few enormous advantages to this “imitation” strategy:
- A Proven Playbook: Startups can readily describe their idea to local investors creating a reference to highlight the gap in the market as well as the proposed solution and a playbook on which they can execute.
- Reduced Financial Risk: Investors in Latin America tend to be more risk averse. Thus, they are more comfortable investing in ideas that have proven successful in other countries, like the US. Ultimately, the applied business model strategy works because it satisfies unfulfilled needs in an existing category. In most cases, it’s typically faster and cheaper.
So, How Do you Capitalize on This?
Mana Ventures is Pursuing Investments In Latin America: Yummy is a Latin American competitor to GoPuff, a local delivery service which raised $3.4 billion. Yummy aims to have 50 active locations in every Latin American country by the end of 2022. Its goal is very similar to GoPuff, to deliver a variety of over 2,000 products in under 15 minutes.
Morgan, via Mana Ventures, is an investor in Yummy, and members of his syndicate and fund had access to the deal.
This could be you :).
Business Idea Of The Week:
The Context: In 2021, Mercury Bank raised $120M to build its “bank for startups.” But this wasn’t your typical insiders round. Sure, some of the best Venture Capital funds invested in the company. But this time, something unique happened.
Mercury let its customers invest as part of an additional $5M round, which is exceedingly rare for a top-performing company, but upon reflection, it comes with some unique benefits, and a potential business opportunity for a budding entrepreneur.
The Problem: The best-performing companies are often those you know and love as a customer. Take Apple, for instance. It has millions of raving fans (including myself)- it's no surprise that they’re one of the most valuable companies in the world - currently valued at $2.29 Trillion.
But, what about the other companies that you’re a loyal customer of? What if you know they’re amazing because you’re a user, but they aren't public?
The Idea: Allow customers to become shareholders at point of checkout.
Let's explore this idea further.
What if loyal customers were given the opportunity to invest in a company in the most seamless way possible, during the checkout flow. What impact would that have?
It turns out there could be some precedent for the concept:
- Shopping Gives allows online retailers to offer customers the opportunity to make donations to causes during the checkout flow.
- EcoCart allows customers to make their orders carbon neutral by adding a small fee to the purchase price during checkout.
- StockPerks allows companies to engage and reward their retail shareholders with perks such as exclusive product offerings, discounts, free items, and unique experiences.
But why would a company want to do this? What’s in it for them?
Well, it turns out there are real benefits.
Benefits Of Customers Becoming Shareholders:
- Increased Customer Advocacy: If customers become investors, they become invested in the company's long-term success and want to spread awareness about the product or service. This creates an army of raving fans spreading the word about your product.
- Increase In Customer Lifetime Value (LTV): Customers who have aligned interest with the businesses succesff are also much more likely to spend with that company and stay longer than those who aren’t. This increases the lifetime value of a customer.
- Access To Friendly Capital: Many businesses, especially startups, struggle to raise capital. But what if your biggest fans can seamlessly invest in the company during the checkout experience. This would unlock a new source of capital that was previously inaccessible to most companies.
Food for thought :)