Startup Pitch Night
Table of Contents
1. Who’s Leading
2. Universal Principles
3. Pitch Arena Prep
4. Let’s Get Practical
1. Who’s Leading
In my extra email to you two weeks ago, I linked to this piece on Jack Dorsey, which I was surprised to find to be well worth my time. I’ve never had much interest in Mr. Dorsey before, and I rarely tweet. I have been thinking, though, of switching over from Instagram because you KNOW I don’t trust Instagram’s owner, Facebook. Maybe I’ll start tweeting more often now that I have a better sense of the person in charge of navigating the thorny thicket of censorship and privacy on Twitter.
The article’s author, Roger Parloff, mentions Dorsey’s ‘eccentricities’ no fewer than four times. It reminded me of the adage that wealthy people are eccentric; poor people are just crazy. So, Mr. Eccentricity: what are you up to?
I DO know that I totally want to be friends with him. I could tell him a thing or two about meditation retreats.
Beyond just learning about the guy who leads Twitter and Square, though, Parloff’s article reminded me that what I love about investing is the process of discerning trustworthiness. Investing, the way I do it, is all about choosing people. Investing in those who are worthy of handling my money with care.
Ideas and products change. Great investing is about knowing how to find people you can trust, who are obsessed with their mission, and will lead those changes with integrity and purpose.
That is true in mature public companies and in fledgling startup companies. We tend to focus on public companies around here, but last week, I got the exciting chance to apply the Munger/Rule #1 investing principles to a few startups. It was a thrilling reaffirmation of how well they work.
2. Universal Principles
When I first came to Zurich, I asked around to see if there was much of a startup community, and I didn’t get many leads. I must have been asking the wrong people.
Zurich, it turns out, now has a thriving startup scene, and I’ve been completely out of it because of writing Invested and launching The Invested Practice and writing and shooting Mostly Invested.
But all of that is now done. So I can show up to startup community events and start to get to know everyone. I was honored to be asked to sit on the panel of judges for a startup pitch night called Pitch Arena.
When I was asked, I panicked for half a second, and then remembered that I’d, of course, judge these companies the same way I judge every company and every potential investment, whether private or public company, early or late stage, entity or real estate: with Uncle Charlie Munger’s four principles of investing, plus my fifth principle of Mission. At its core, startup investing is the same as public company investing, is the same as real estate investing, is the same as private company investing…etc.
That’s the beauty of Buffett-and-Munger investing the way my dad taught me: it applies to every kind of investment, every time. I remember my dad using the example of buying a rental apartment down the street to help me understand the four principles, especially Moat, because if I could easily tell whether a neighborhood had special characteristics that made it different from anywhere else in the city and that it was going to be hard for anywhere else to be like that neighborhood, and that that apartment building also had special characteristics that made it different than any other apartment building, and the apartment itself had special characteristics – well, then I knew that I had a special apartment. That apartment had intrinsic and durable characteristics of competitive advantage. Same for a company.
3. Pitch Area Prep
A startup pitch night means that a few companies each have a representative get up on stage and present their formal pitch to investors. It can be a formal event with only serious investors in the room, or they can be casual events with a mixture of serious and casual investors along with people just there to have fun and see what’s new with startups these days. Usually there is a short period for questions after each pitch. Sometimes there are judges and a winner, sometimes there aren’t.
At Pitch Arena, there were judges, and I was one of them. How does one judge a competition of startups? Each of the companies presenting on this particular night was at a different stage of development. Each one was in a different industry. Each one was, frankly, totally different from each other.
Which made for a really fun evening of hoots and hollers from the audience, surprises, and a lot of excitement depending on what each person’s given interests are.
It also made it hard to judge them and ask comparative questions. How would you evaluate a company that you know very little about?
So here, with five startups staring me in the face to be judged and evaluated, I could use the same principles I use in my investing practice every day. The source material was different, but the principles were the same.
Here’s how I did it. In this issue, I’m going to give the criteria. In the next issue, I’ll break down how I ended up thinking about each company and what happened at the pitch night.
I got the list of companies the day before, and the organizers also sent out some limited information for investors. Each company was totally different: one had a short pitch deck of slides, another had only a one-paragraph description of their company, another offered a professionally-finished PDF of company data and projections. None of them really gave any more information than was already on their website, so the website what I mostly relied upon.
The first thing I did was, just as I do with public companies, visit each website. I was looking for how they present themselves to the world. Do they lead with their Mission? What vibe does their marketing give me to let me know what this company is all about? How much information as an investor can I find easily available on their website?
Private companies are, of course, very different from public companies in multiple ways, and they have zero obligation to give any real information on the internet. Indeed, many private companies don’t want casual online viewers to know anything about them – especially startups, which often are working on innovative technology they’re keeping close to the vest, if not fully secret. There isn’t a right or wrong here, when it comes to putting information out on the internet about your startup company. I just find it interesting to observe what they choose to do.
Here are the companies that pitched at Pitch Arena, with their websites.
What questions do you have for each of these companies? Think of Charlie Munger’s Four Principles:
1. Am I capable of understanding this business? For a startup, I think it’s valid to ask DO I understand this business from the information they’ve given me? Does it make sense what they do?
2. Does this business have a sustainable and intrinsic competitive advantage? For a startup, why are they creating this business and who is already in this space and ahead of them? What other startups have the same ideas?
3. Does the management have integrity and talent? For a startup, WHO is the management? Why are they the right people to start this business and succeed where others have failed?
4. Is it available at a price that makes sense with a margin of safety? For a startup, yeah, it has to be a price that makes sense and for high-growth emerging companies, that’s often hard to determine. I’m not even going to touch this one.
I went through the information I could find about each company and made a list of my unanswered questions. Most of my questions related to my understanding of the business, which is natural for such new companies. They’re finding themselves and probably doing a bunch of stuff that doesn’t actually make sense. Or, what they do makes good business sense, but they’re not explaining it well to an outsider. The ability to understand what lululemon does comes a lot more easily than does the ability to understand what ScanTrust does because I can touch lululemon’s products, wear them, compare them to similar companies that I understand, and get a quick sense for whether or not this is a company I can get into.
In my past life as a startup and venture capital lawyer, the focus on people was a mantra amongst the venture capitalists I knew. How much can you learn about the team running this company? Is the founder still there?
Frankly, I didn’t go into this thinking of it as investing practice. I made the classic mistake of expecting something fun to not count as investing practice! But investing practice it was, and actually I found it to be surprisingly grounding. I’ve gotten kind of accustomed to reading about public companies, looking at the same sorts of information filed with the regulator, reading the same sorts of disclosures. It was super fun to jog my memory and my understanding of my investing practice as I applied to companies with none of those same filings or disclosures. It took me back to the root: do I understand this company and can I understand what they want to do? Are they going to get killed by their competition? Who is the team who will be stewards of my money? What are their prospects?
SwissLoop in particular was super interesting to study because its technology is so experimental. I found this site about the Hyperloop competition in which the team at Swissloop got second place, and which is spawning all of these hyperloop startups around the world. There is LOTS more information online about Hyperloop, Richard Branson’s Hyperloop One company, and other companies and universities developing hyperloop technologies. It’s SO much fun to learn about these innovations and it’s only through investing practice that I spend time on this stuff!
If you have the time and the inclination, I highly recommend you do the same. Go to each
company and discover it.
What questions do you have? What do you need to know to decide if you’d hand over a chunk of your money to these people?
If you were sitting in a room of 150 people and had to ask a question of each one of these companies – but only ONE question – what would you ask?
Enjoy your practice!
LET’S GET PRACTICAL:
Here are the companies that pitched:
Websites are not the only source of information. Just as with public companies, there are articles in the press about these companies, about their founders, and about their competition. They may have taken part in or won other pitch competitions. They may have announced successful funding rounds. There is a lot to be learned by poking around the interwebs and following what’s fascinating to you.