Stages of Business | Andy Tang

How many of you are married? And how many of you are dating someone in the process of maybe getting married, you just don't know that? Okay, good. All right, so I thought there's some relevance. I've been in venture for 15 years. I've been married for almost 9 years. So I feel like I could share with you some of my observations. I'm Chinese, so my approach to business is quite Eastern, even though I've been in the US for 25, I forget, 30 years. So I'll share with you my observation, so you should take away from that. So treat me more of a journalist sharing facts with you, and your takeaway will be different for each one of you. Make sense? All right, good. Oh, so I often put up this slide because the things I share are very candid. So feel free to use the knowledge, but you don't have to give me credit for it. So this is a house in the UK. It's kind of a think tank. People go and discuss issues, and they just use the content. Without credit the reference. So it's the Catam House Rule. So first we'll start with the Huffington Post, right? 10 reasons why it's so difficult to get married, okay? Number 1, people are not in a hurry in general. People are getting married later and later. So there's no hurry to get married. Number 2 is actually quite obvious. Sometimes we get married with our best friends and that puts your friendship at risk. Okay? How is this relevant to fundraising? You could pretty much— it's actually kind of a fun game. As people say, you get some marital advice. Replace the word getting married by getting funded and see if the sentence still makes sense. Okay? So don't raise money from your best friends. You might put your friendship at risk. And take your time in getting your funding. You shouldn't be in a hurry. Okay, so earlier I think you guys had a class on the various types of investors, is that right? Right. when to seek what kind of funding from who. I think it's a person from UC Berkeley, right? Correct. Yeah, okay, good. So I'm going to revisit this and just kind of follow the money trail. This is kind of an eye chart, but it basically helps you break down the stage of the business, what type of financial instruments, and who the funding source. Right. The pros and cons of each. Okay, so this— so very quickly, so we start with the sort of the prototype and you get it from the friends, families, and fools. And then once you progress, you have an MVP, then you may raise from accelerators, angels, and even micro VCs. And as you're scaling, then the institutional VCs, the larger investors, are coming in. And then the growth stage, you have large, much larger funds. So today what I want to do is to focus on these 2 pieces. Because that's kind of where I think where you guys are. You have a minimum viable product and you are kind of scaling. So you probably have some money from angels and some accelerators. Maybe you're knocking on the doors of either micro VCs or the larger institutional VCs. Right. So today I'm gonna focus on these 2. So it's important as you're raising money from these institutions, kinda understand what makes them tick, right? Just like when you're dating someone, kinda understand what drives the individual. So you gotta really dig deep. Oftentimes people go raise money without fully understanding how The investor's business model works, right? And I think if you kind of peel the onion, it'll give you an appreciation not to— not only to fully understand what the investor's asking, but to even anticipate what may come as you start preparing for the pitch. Okay? So, background, how does a VC fund work? So typically you have 2 types of people, general partner and limited partner. And the term stems from actually legal liability. General partner means general liability, limited partner means limited liability. So if something goes wrong, the limited partners actually don't have to be liable for any mistakes. Essentially they're the financial backer and the general partner makes all the operating decisions. such as who to fund and when to fund, how much to fund. Does that make sense? Right. So, you basically have a manager and you have financial backers. So, most of the time people refer to a partner in a fund, they're referring to the general partner. These are the people who make decisions. They, or we, typically put up at least 1%. So, I've seen as much as 50% of the fund contributed by GP, but generally So the partners themselves have some stake in the game. Our fiduciary duty is to maximize value. So it's a financial instrument. Just like you invest in stock market, you want to make money, we invest in companies, we want to make money. And the target return for our funds, typically it's 20% a year net. So you take out fees and all the overhead. And a sort of a minimum cash-on-cash we provide to our investors is about 2.5 to 3 times the return. Right. So this may look— I don't know, it depends on who you are. If you're a fixed-income investor, this return looks high. And if you are a day trader, this return looks low. But this return may look low to you, Compared to the kind of venture return you read in the newspaper or what you may have in mind. But keep in mind this is at the portfolio level. This is when I make 100 investments on the aggregate, the return looks like that. Okay. This return profile looks very different if you look at one individual case at a time because people oftentimes look— analyze winners. And they forget about the ones that didn't work out. Investment decisions are typically consensus because why they call it partnership, typically you have partners, we make decisions. And if you study psychology a little bit, when you have multiple people making a decision, making consensus-driven decisions, those decisions tend to revert to the most conservative decision. Yeah. Right? Kind of the reversion to the mean. And I'll address why this is important to understand as you embark on a business. Because there's a little bit of a paradox behind taking risk, but yet you're dealing with a decision-making body that's inherently conservative. Right? Managing false negatives and false positives. Who is familiar with this term false negative or false positive? Okay, so I'll give you a quick example. If you go to the doctor's office, right, your doctor, for the most part, is trying to manage false negative. They wanna make sure you're safe, right? So it's very conservative. You wanna make sure if there's something going on with you, they don't overlook it, and making sure they catch anything early, right? So in the investment world, if you're an early-stage investor, what you want to manage is the idea of a false negative. Okay, so if there's a really good investment that comes across your desk, you want to make sure you don't accidentally write it off as a bad investment. Okay, so that's a false negative. By the same token, if you are a Fidelity of the world, much larger funds, what you're then managing at that point is actually false positive. You can't take the risk of putting in $100 million and poof, it's gone. That's just really bad. Does that make sense? Yeah. The difference in approach. On the one side, in the plain language, you are managing the risk of missing out a very large outcome 10 years from now. Right. This other guy is trying to manage the risk of making a mistake 1 year from now, $100 million, poof, gone. Right? Different mindset. Make sense? Yeah. OK.