Tremendous

An angel investor's take on life and business

  • This Is How Startups Pitch Investors

    You walk into the room, palms sweating. You go over your script in your head. You pray to God your computer doesn’t crash. Eyeing you skeptically are a bunch of grey haired money guys. Don’t screw this up.

    At the very least, that may be how the public imagines the meetings where startups pitch investors. The reality isn’t quite so dramatic, especially now that virtually all meetings are conducted via Zoom. I just got off such a meeting myself with a Software as a Service (Saas) company that was looking to raise about half a million in funding. While I can’t discuss the specifics of the company, here’s an overview of what these meetings are like:

    1) Intro: The founders describe what the company does, what the market is like, and how the company has grown so far.

    2) Deck: The founders go through a slide deck (PowerPoint presentation) that provides further details on what their product does, what makes it different from its competitors products and the size and growth of the market.

    3) Demo: This is when the founders actually show you the product in action. I found this part the most interesting. I remember doing software demos myself when I worked in the field, and invariably, something seems to go wrong that worked in rehearsal 1,000 times. But investors understand that, especially if you can get it working in a few minutes.

    4) Q&A: The other investors on the call asked a lot about the competition. How is this company different from others in its area? What stops larger companies from shoving their way into the market, elbowing you aside?

    I was immediately struck by what a small room one of the founders was in during the call. His chair appeared to nearly touch the door behind him. This brought a smile to my face: they’re not using investor money to pay themselves exorbitant salaries before the company is a clear success.

    The other co-founder mentioned getting a refund of $30 from a vendor that accidentally overcharged them. I don’t think he was trying to make any particular point with this story…it was an incidental detail to a larger narrative. But it made a strong impression on me: these are frugal founders that will be good stewards of the capital they’re raising.

    I can’t say for sure, but I think this company has strong odds of being funded by our investor group. The round is led by other investors and they’ll already be getting a substantial sum from them, in any event.

    The competence and frugality of the founders, coupled with year-on-year growth in the hundreds of percent, is likely to convince a large number of investors.

    For more on startups, check out these posts:

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    Photo: “Rich Uncle Pennybags” by Sean Davis is licensed under CC BY-NC-ND 2.0

  • How to Lose $8 Billion in 10 Days

    Archegos Capital Management, run by Bill Hwang, is imploding, racking up losses at a record pace:

    Mr. Hwang alone lost approximately $8 billion in 10 days, a person familiar with the matter said, in what traders and investors say was one of the fastest losses of such a large sum they had ever seen.

    Archegos borrowed massive sums of money to invest it in just a few stocks. Like addicts that get 10 oxycontin prescriptions from 10 different doctors, Hwang never revealed how deep in debt he was to the banks he dealt with:

    Archegos was regularly putting up $15 of collateral to borrow $85, on the high end of leverage for stock-trading firms with similar strategies, said a banking executive familiar with the borrowing.

    Archegos’s lenders say they were unaware of the extent of trades he was making with other banks, information that would have encouraged them to curb their lending.

    The fact that Archegos used swaps, rather than owning shares directly, further obscured his activities. In the “contract for difference” swaps he used, the bank owns the shares while Hwang’s firm pays for the losses or receives the gains on the stock.

    This is important because investors have to disclose to the SEC when they own over 5% of a company. Hwang would have had to make several such disclosures. But because he used swaps instead, none of that information was public, making it harder for banks to find out how heavily leveraged he was. This may have been by design.

    A further odd wrinkle is that Hwang, the son of a pastor, suffused Archegos with religious fervor:

    Mr. Hwang returned clients’ money in 2012 and turned his firm into an office to manage his family’s wealth. He named it Archegos, which, translated from Greek means “leader” or “prince of Christ.” A Christian ethos permeated the firm, with voluntary Friday morning Bible studies where a recording of Bible readings would play to music.

    He tended to view gains as signs of God’s favor:

    “Do I think God loves it? Of course!” Mr. Hwang said in a video, referring to his early investment in LinkedIn. “I’m like a little child looking for, what can I do today, where can I invest, to please our God?”

    If Hwang had a religious certainty about his positions, he’d be all the more likely to hold them even as he lost money, expecting to be vindicated.

    It strikes me how incredibly simple this one-time billionaire investor’s strategy was. Borrow a bunch of money and invest it in a few well-known stocks like Viacom. Anyone could do that if they had access to capital. There was no special sauce, and now Hwang is paying the price for his recklessness.

    For more on Archegos and financial markets, check out these posts:

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    Photo: “Gamble” by jetglo is licensed under CC BY-ND 2.0

  • Amazing Drugs Are Going from the University to the Graveyard, While Patients Pay the Price

    Was the cure for cancer invented in a university, only to be shelved for a lack of funding?

    University labs are creating incredible drugs on a regular basis. Unfortunately, most will never get to the patients that need them so desperately. This is the conclusion of an intriguing book I just read, Preserving the Promise: Improving the Culture of Biotech Investment, by Scott Desain and Scott Fishman.

    The problem is that universities don’t have the massive funds it takes to bring a drug candidate through clinical trials to FDA approval. What about Big Pharma? Well, they’ve been cutting their R&D budgets drastically for years.

    This leaves early stage biotech investors to fund much of the commercialization of new drugs, and there simply aren’t enough of them to fund all the good candidates. Indeed, the number of investors specializing in this area is shrinking. This doesn’t surprise me given that most early-stage investors focus on software startups and have a software background themselves.

    This does leave the few angel investors who specialize in biotech in an enviable position though: more great companies out there than there are angels to fund them means big slices of great companies for less money, and thus higher returns. This is an area that I may be branching out into in the future. Being even a tiny part of creating a new lifesaving drug or medical device would be incredible.

    University policies also hinder the effective commercialization of research, the book notes. Technology Transfer Offices own the patent, but sometimes are hesitant to license it unless they can get lots of revenue for it right away, which is hard for a fledgling company to provide. In other cases, they bury the patent, thinking it unpromising. And university conflict of interest policies can often stop the inventor from continuing to work on the research with company funds. This separates the technology from the person who is best positioned to advance it.

    In all, this seems like a neglected area with a lot of problems. That we rely on it for virtually all new drugs is scary. But investors like myself should eye the area with interest, especially given rich valuations in software startups.

    For more posts on biotech, check these out:

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    Photo: The co-founders of BioNTech, a biotech success story. “Forschungszentrum der Biotech-Unternehmen BioNTech AG und Ganymed Pharmaceuticals AG” by MWKEL-RLP is licensed under CC BY-NC 2.0

  • UBiome and Theranos Are So Similar It Will Shock You

    The co-founders of lab testing startup uBiome are under indictment for fraud and are currently on the run. Listening to a podcast about uBiome this morning, the parallels between it and Theranos struck me as uncanny:

    • The two co-founders were romantically involved, just as Theranos CEO Elizabeth Holmes was with COO Sunny Balwani. Perhaps its easier to keep secrets in the context of a romantic relationship?
    • Both companies surrounded themselves with high profile advisors with little scientific expertise. People like this create a halo of legitimacy but don’t have the background to ask the tough questions.
    • Unlike most Silicon Valley startups, it was in the hard sciences. It’s a lot harder for investors to verify the technology works than with an app they could download and play with themselves. And fewer investors have expertise in that area.

    There are some incredible tidbits in this podcast, including the fact that the photos used in patient testimonials were Shutterstock stock images. It occurs to me that savvy investors could do a Google reverse image search of any such photos from a company’s slide deck and find out if they’re doing the same. It would only take a few minutes. I think I’ll do the same in the future with startups that pitch me.

    Another important point is that this company went through the very prestigious accelerator Y Combinator. But accelerators don’t do deep due diligence. The checks they’re writing, usually in the $100,000 range, are too small to justify it. So don’t take that as an indication a company isn’t a fraud.

    For more on Theranos and startups in general, check out these posts:

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    Photo: “LEWEB 2014 – CONFERENCE – LEWEB TRENDS – THE REINVENTION OF HEALTHCARE – JESSICA RICHMAN (UBIOME)” by LeWeb14 is licensed under CC BY 2.0

  • Almost Everyone Gets This Question Wrong

    I came across an interesting problem yesterday. It seems simple but almost everyone gets it wrong:

    You’re on a game show. The host shows you three doors. Behind one is a car. Behind the other two, nothing. Choose correctly and a brand new car is yours!

    You choose Door #1. The host opens Door #2 and shows you there’s nothing behind it. He then gives you a choice: stay with Door #1, or switch to Door #3.

    Which should you choose?

    What most people, including me, think at first is that it doesn’t matter. You could either switch or stay with Door #1. Either way you’d have a 50/50 shot.

    Most people are wrong. You actually have a 2/3rds chance of winning that awesome new car if you switch to Door #3!

    But how can that be? You’ve got two possibilities, so that’s 50/50 odds right? The key is that the game show host already opened Door #2.

    Before he did that, there was a 2/3rds chance that the car was behind either Door #2 or Door #3. After he opens Door #2 and shows you there’s nothing there, that’s still true. There is a 2/3rds chance it’s behind Door #2 or Door #3, except now Door #2 is eliminated. So there’s a 2/3rds chance that the shiny new car is behind Door #3, and you should switch.

    This is called the Monty Hall Problem, and if you got it wrong, you’re in good company. Mathematicians and even the brilliant professor who’s teaching the class I’m taking got it wrong at first.

    I find this problem fascinating because it shows us how wrong our intuitions can be, even in simple circumstances like these. If you’re interested in more puzzles like this, you can sign up for the Puzzles, Problems and Paradoxes class here. It’s online every Wednesday at 11:10am Central through UT-Austin. You’ll have missed the first of six classes, but believe me, it’ll still be worth your $108. The professor was one of my favorites from college and it’s a privilege to be able to learn again from this brilliant man!

    For more posts on philosophy and the mind, check these out:

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  • 7 Companies Had 3 Minutes Each to Pitch Us. This Is What Happened.

    I had the privilege of watching 7 excellent startups present at The Syndicate’s Remote Demo Day. All are seeking early stage funding for their company from the investment group, which I’m a part of.

    I came away from the meeting amazed at the quality of companies out there now. While I can’t share specifics about the companies (yet), here are a few things that struck me:

    • This was a pretty diverse group. It’s not all a white guy’s club anymore. I’m grateful because I don’t want to miss out on any good ideas! Diversity is on a lot of people’s minds right now, and I see things changing.
    • These are real companies. The public may think of startup funding as someone walking into a meeting with an idea and asking for money, but that’s not what it is. Every company had a real product in the market and many had millions in revenue. Some are even making a profit already. They need money to scale, not to start.
    • It’s not all software. One was a hardware solution for growing indoor gardens!
    • What the companies had in common: they were all focused on somehow making things easier, whether that’s working out with friends, growing food, etc.
    • Incredible growth rates. Many companies had year over year growth rates of 100%, 200%, even 500%.
    • Quality of companies is incredibly high. We have a lot of transformative innovation to look forward to very soon.
    • Many make opportunity available to anyone, whether that’s by monetizing your car or van, helping you pay for college, etc. This could be a real antidote to inequality.
    • My favorite company: a startup in the income sharing agreement area, which lets people sell a share in their future income to pay for school. This can replace expensive and hard to access loans. You only pay if you make a good living after graduation.

    Most are likely to be funded by our investment group, especially the software companies that act as a platform or marketplace. It’s a tried and true strategy that certainly worked for Uber and Airbnb, and that trend seems to be continuing.

    Congrats to all the amazing companies involved!

    For more on technology and startups, check out these posts:

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    Photo: ““Great white shark” by Gussy (Luke) is licensed under CC BY-NC-ND 2.0

  • Americans Are Using Their Stimulus Checks to Get Out of Debt

    Stimulus checks for $1,400 went out this month to most Americans. I found myself wondering today, did they save it, invest it, or just blow it?

    Data indicates that the biggest use of stimulus funds has been to pay down debt. A Census Bureau survey found 52% of people mostly used their checks to pay off debt, while only 28% mostly spent them.

    Repeated rounds of stimulus have left households with the lowest debt levels on record:

    Households finished 2020 with $14.1 trillion combined in checking and savings accounts, compared with $11.4 trillion in 2019, according to Federal Reserve data. Their debt-service burden—the percentage of after-tax income used to pay off debt—fell to its lowest level in records going back to the early 1980s.

    Nonetheless, the impact of stimulus funds on consumption has been notable. Bank of America found a huge spending spike among its customers:

    As the latest round of federal stimulus payments reached bank accounts, credit and debit card spending soared 45% overall last week on a year-over-year basis and 23% over two years, according to data aggregated by Bank of America.

    I strongly advise people with debt to pay it off before they do anything else. If you owe money on a loan at 10%, for example, when you pay it off, you are automatically guaranteed a 10% return on your investment! And that’s exactly what it is, an investment in your future.

    As someone who invests for a living, if I could get a guaranteed 10% return anywhere on earth, I’d be singing Hallelujah and dancing a jig. Take the easy win!

    For more on markets and finance, check out these posts:

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    Photo: “Monopoly Guy Graffiti – Rich Uncle Pennybags” by Indrid__Cold is licensed under CC BY-SA 2.0

  • This 21 Year Old Makes Millions Selling Products He’s Never Seen

    As a teenager, Kamil Sattar knew he wanted to work in business. But he dropped out of his college’s business program during his second year when he said he realized, “I wasn’t actually learning how to do business. I was learning how to work for someone else’s business and make them money.”

    His online store has pulled in $1.7 million in revenue this year alone. Sattar sells products online that he sources from manufacturers. Another company holds and ships the actual items. This is called drop shipping.

    Offshoring separated manufacturing from distribution and marketing. What drop shipping is doing is separating distribution and marketing. Sattar excels in promoting products and running the online store. With drop shipping, he can do just those functions and leave the manufacturing and distribution to specialists:

    Drop shippers use wholesale marketplaces like AliExpress, which is owned by Alibaba, China’s largest e-commerce site. AliExpress sells every category of goods, from apparel to luggage and yoga mats, for shockingly cheap prices. Drop shippers then identify products they think will be of interest to consumers. Once they find a product, they advertise it on platforms like Facebook and Instagram with high-quality photos and video, and if a customer bites, they handle getting the product from the supplier to the customer.

    This market is growing like a weed. Drop shippers clocked $102 billion in sales in 2018 and the growth rate through 2025 is projected at 29% a year, leaving physical retail in the dust.

    This makes me wonder what other aspects of the retailing experience will be unbundled and done by specialists in the future. Perhaps one company does the online promotion while another focuses on maintaining a usable, scalable website?

    For more on markets and the economy, check out these posts:

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  • Inside the Archegos Implosion: “We Don’t Know How Far the Tentacles Go”

    Brokers are selling over $30 billion worth of positions in imploding hedge fund Archegos Capital Management, shaking markets. Wall Street does not know exactly how many positions the fund holds for two reasons:

    • It is very lightly regulated because it’s organized as a “family office,” rather than a typical hedge fund
    • Archegos didn’t actually own most of the stocks it took positions in, if any. Instead, it owned derivatives called “contracts for difference (CFD’s),” which have few disclosures.

    Some experts liken the Archegos blow-up to the bankruptcy of Bear Stearns, which helped precipitate the financial crisis:

    “We don’t know how far the tentacles go,” said Joe Saluzzi, co-head of trading at Themis Trading. “Early in the Bear Stearns crisis, the market was fine — until it wasn’t.”

    Others are comparing the liquidation of the hedge fund’s positions to that of Long Term Capital Management (LTCM) in 1998, which caused severe market turbulence and ultimately required a bailout:

    “This reminded me a lot of the Long-Term Capital situation,” Steve Sosnick, chief market strategist at Interactive Brokers, told Insider in an interview.

    Long-Term Capital Management, a massive hedge fund staffed by famed traders and Nobel Prize-winning economists, employed such highly leveraged trades that it threatened to expose America’s largest banks to more than $1 trillion in default risks by 1998. The “genius” hedge fund nearly collapsed had it not been for a bailout package from the Federal Reserve and some major Wall Street banks.

    However, Archegos’s positions appear to be far smaller than those of LTCM. Nonetheless, Archegos was very heavily leveraged:

    Shrouded by the secrecy of CFDs, Hwang was able to build up almost $50 billion in stock positions on the back of the $5 billion to $10 billion that Archegos managed.

    Perhaps the greatest source of worry for markets is uncertainty over exactly how many positions Archegos has and with which banks. This counterparty risk was a driving factor in the LTCM crisis in 1998 and the financial crisis of 2008:

    …it seems clear that the banks didn’t realize until too late that they were holding similar positions, with malign implications for efforts to keep markets in those shares from falling further.

    “You can have a suspicion that maybe this person is doing this trade with a bunch of other people,” said Jay Dweck, a former trading and risk-management executive at Goldman and Morgan Stanley and now consults for banks and hedge funds. “But no one knows the aggregate.”

    In all, given the smaller size of the portfolio being liquidated and the current buoyant state of markets, I don’t expect any extreme shock from Archegos going under. I think the experience with LTCM, Bear Stearns, Lehman and others will also stand banks and regulators in good stead when dealing with Archegos. But you could see some choppiness for a while as we find out who is exposed to Archegos and wind down those positions.

    Another possible outcome is stricter regulation, especially of these opaque family offices, which I think would be good for markets. Indeed, regulators are already scrutinizing hedge funds after the run-up in GameStop shares this year stung some with huge losses. From the WSJ:

    The steep losses at Archegos come as a council of top U.S. regulators known as the Financial Stability Oversight Council is already scheduled to meet on Wednesday to discuss hedge-fund activity during the pandemic-triggered crisis.

    For more on Archegos and markets, check out these posts:

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    Photo: “Fire” by Mike Poresky is licensed under CC BY 2.0

  • When the Suez Canal Was Blocked for Eight Years

    As the Suez Canal, chokepoint for 15% of world shipping, was cleared today, I thought of another time it was blocked. Not for a week, but for 8 years.

    Following the Six Day War in 1967 between Egypt and Israel, Egypt blocked the canal to prevent Israel from using it. They placed old ships, debris, and even explosives in the canal. And it stayed that way, for eight years.

    Thousands of workers rotated on and off the ships over the years to protect these valuable pieces of equipment. They organized joint social events and even created their own postage stamps, which have since become hot items for collectors.

    The closure also had a serious effect on world trade, especially for countries that relied heavily on the canal. Seventy-nine country pairs saw the effective distance between them increase by 50% or more:

    For these pairs, the closure caused an average fall in trade of over 20% with a three to four year adjustment period. Trade between these pairs recovered completely after the canal reopened eight years later with a similar adjustment period.

    By the time the canal reopened, most of the ships in the Yellow Fleet could no longer make the trip:

    The canal had remained closed so long that most of the Yellow Fleet ships had decayed and needed to be towed. But two of them—the German ships Münsterland and Nordwind—made it out on their own steam.

    We had the benefit of peace this time, so the canal could be unblocked quickly. These episodes really emphasized to me the importance of peace and the free flow of goods to our prosperity.

    For more on current events and the world economy, check out these posts:

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    Photo: “File:Israeli Tanks Cross the Suez Canal – Flickr – Israel Defense Forces.jpg” by Israel Defense Forces is licensed under CC BY-SA 2.0