Lecture 5 Flashcards

1
Q

What are the main sections of an investment memo?

A

Market Opportunity
Competitive Advantage
Team/Founder
Risk

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2
Q

What is one of the areas that people get too caught up with when it comes to evaluating company potential?

A

Market share

e.g., San Fran didn’t have a huge black car market until Uber

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3
Q

What are the attributes of a well-structured memo?

A

Short
Simple
To-the-point
clear

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4
Q

Is the job of a VC to avoid risk?

A

No, the job is to understand it
–> need to highlight all your learnings on the space
–> the risks section can be one of the longest sections of the memo

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5
Q

What are the 3 metrics to evaluate market size?

A

TAM: Total Addressable Market
SAM: Serviceable Addressable Market
SOM: Serviceable Obtainable Market

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6
Q

Taking the example of Uber, what would be the elements of market size?

A

TAM: Transportation globally
SAM: taxis in the US
SOM: Black cars in SF

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7
Q

What is SOM often referred to as and why?

A

The SOM can often referred to as a “wedge”
–> it helps you validate something and get product-market fit in a very narrow market
–> the SOM itself is not big, but it helps you to unlock bigger markets

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8
Q

Why is the TAM considered the king of all market calculations?

A

It assesses a company’s future potential and overall growth opportunity.

Needs to be in the hundreds of millions for VC to see potential

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9
Q

What is a criticism of Investment Memos?

A

Very sales based and usually used to try to convince someone higher up about the deal

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10
Q

What is the innovators dilemma?

A

Can x company get big enough before a large company ends up in that market

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11
Q

What is a competitive advantage?

A

Something that you have that your competitors will not be able to replicate with their offering

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12
Q

As a founder should you start by going big or small?

A

Need to “sell” a big vision to investors and employees (TAM)

However, you need to execute on a small wedge to de-risk the business (SOM)

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13
Q

What is market penetration?

A

to launch a product, enter the market as swiftly as possible, and, finally, capture a sizeable market share

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14
Q

What questions must you ask to determine the effectiveness of the market penetration strategy?

A
  • Is the current market size right?
  • Is the company creating a brand new market that doesn’t exist?
  • Are there network effects? If so, the penetration rate can be extremely high
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15
Q

What is the network effect?

A

the phenomenon whereby a product or service gains additional value as more people use it.

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16
Q

What are forms of competitive advantage?

A
  • Technology/ Intellectual Property
  • Network effects
  • Resources (access to capital/talent)
  • Experimentation (investors’ dilemma)
17
Q

Why can a startup succeed against a
large incumbent?

A
  • Culture of experimentation
  • Threat of extinction
  • Less stakeholders to please
  • Allowed to make mistakes
18
Q

When having the initial meeting with a founder what key things should you ensure gets achieved in the process?

A
  • only ask for the data that you need
  • your goal is to get to the 3 questions that matter
  • be transparent (don’t drag out the process, be honest, keep in short)
19
Q

When having the initial meeting with a founder what key things should you ensure gets achieved in the process?

A
  • only ask for the data that you need
  • your goal is to get to the 3 questions that matter
  • be transparent (don’t drag out the process, be honest, keep in short)
20
Q

When evaluating the founder what should the VC be weary of?

A
  • Co-founders should have complementary skills
    –> 2-3 co-founders is optimal
    –> Solo founders are a red flag
    –> looking for a mix of skills
  • Academics should be evaluated carefully
    –> Are they “do-ers.”
    –> only relevant for fields that require deep technical background (e.g., healthcare)
    –> have they built something before?
  • Should have excelled at something in their lives
    –> Most tier 1 founders are exceptional at something (e.g., violin as a kid)
    –> demonstrates that they are capable of greatness, even if it isn’t in the business
  • Ideal founder has startup experience but also spent time in a big company
    –> Experienced the industry and wants to disrupt it
    –> Have a unique mental framework
21
Q

In order to generate true alpha you need to make a prediction about what?

A

Something that the market is NOT pricing in

22
Q

What two attributes must you have to build something massive?

A

Being both right and contrarian
–> just being right is not enough because the market won’t be big enough

23
Q

How can you ask great questions to a founder during a meeting?

A
  • The founder spends 24/7 thinking about their business, you do not
    –> be humble
    –> be a ‘learn it all’ not a ‘know it all’
    –> be open to being wrong
    –> absorb knowledge, even if you disagree
  • Come prepared having done research
    –> show you care and your market knowledge
    –> ask questions they may have not heard before
    –> get to the burning questions rather than the standard questions
  • Make it conversational
    –> its not an interview, its a relationship building process
    –> treat them as a partner/friend from the get-go
    –> be professional, prepared, and engaging
  • Figure out how you can help them and if there is a match is supply and demand
24
Q

What is a bad question for a VC to ask?

A

All of the “bad” questions are things you could have found on your own
Examples:
- How big is your market?
- How did you perform last year?
- What are the biggest risks?

25
Q

What makes a good question for a VC to ask?

A

All of the “good” questions are designed to get into the mindset of the founder to see how they operate.

–> This will be a better predictor of their ability to build a company and manage talent and capital

Examples:
- What keeps you up at night?
- What values do you use to run the company, and how do they influence your decision-making?
- What structural things are changing in this market that may not be obvious from the
outside looking in?

26
Q

How do risks in an investment memo relate to the power law?

A
  • A risk is not a 10% revenue miss
  • A risk is if an entire section of the market becomes unaddressable for example
  • They are much more “macro” than “micro” in nature
27
Q

You are evaluating a company, and you are focusing on the market opportunity section of the investment memo.

  • What are the most important things to understand if you want to believe in the market opportunity?
A

Market size (is it growing?) and Tailwinds (whats moving growth forward?)

28
Q

You are evaluating a company, and you are focusing on the market opportunity section of the investment memo.

As a power-law investor, which calculation of market size is most important to understand?

A

TAM because that is the one they will be building in to drive the 100x outcome

29
Q

You are evaluating a company, and you are focusing on the market opportunity section of the investment memo.

Why is it important to understand deeply the SOM?

A

SOM is how you evaluate product-market fit

30
Q

Explain what the innovator’s dilemma is and use an example of where that might be true in the tech ecosystem. Why could the innovator’s dilemma hold true?

A

Can a company get the distribution of their product before a large company gets innovation

Example:
Netflix (continues to innovate) and blockbuster (didn’t innovate or devote resources to it)

Startups have uniqueness
- They can fail
- They can lose money
- They can take risk

31
Q

What section of the investment memo contains the discussion of the investor dilemma?

A

Competitive Strategy/Competition

32
Q

Explain why most outlier outcomes are cases where the founder was both right and contrariant.

A

Need to:
- find the power law

  • be right on your market thesis
  • be contrarian due to efficient market theory, if you are not then the alpha is hard to find since information is already embedded into the stock price
  • make the right bet and can’t rely on the heard. Are you doing the deal because you had conviction about the company or that because another VC is doing it and you have FOMO.
  • Most founders come from outside the industry, they bring a unique lens to an old problem