Venture Investing Part 2 - Strategy

Happy Friday, Doriot Venture Community!

Welcome to the 4 new Community members this week! ✋ 

Hope everyone enjoyed the US Independence Day holiday! We don’t know about you all, but it feels like summer is flying by! Hopefully, you've had some time to relax and recharge.

As we dive into this edition, we'll be exploring key strategies to optimize your startup investing strategy and discussing the latest trends in the market. Whether you're a seasoned investor or just starting out, our goal is to provide valuable insights that help you make informed decisions and achieve outsized returns. But, first:

Soccer field scores its own Goal!

In Alton, Illinois, a massive sinkhole swallowed the center of a soccer complex built over a limestone mine. Luckily, no one was hurt.

The park's now closed while experts try to fill the giant hole and maybe even find some buried treasure. 🏴‍☠️ 

And, some venture nuggets:

• Kingscrowd recently released a summary of investment trends, top deals, and platforms in regulated investment crowdfunding for the first half of 2024. Notably, online investing via RegCF and RegA+ has decreased by 9% compared to the same period last year. Additionally, Republic, once a market leader, has significantly lost momentum. Read more here.

• According to Pitchbook, valuations for early- and late-stage deals in the first half of 2024 reached all-time highs, despite lower deal volumes. Although the market remains challenging for startups not meeting growth targets, those with strong fundamentals are finding more opportunities to raise capital at higher valuations. Read more here.

Retail Venture Investing (Part 2)

By: Gerry Hays

As I mentioned previously when sharing my portfolio, I've learned a ton over the years from watching, teaching, and investing. There is a proven formula to help retail venture investors succeed. Let’s define some key terms

• Venture Projects: Projects aiming to introduce new innovations to society, either by building upon existing markets or creating entirely new ones.

• Retail Venture Investing: The process of discovering and allocating small amounts of capital into credible (and accessible) venture projects, where each opportunity offers the potential to return 30-50 times the invested capital.

• Successful Retail Venture Portfolio: A basket of venture projects in which 10-25% of the projects succeed, compensating for those that don’t, while still offering 20-25% annualized returns over a decade, thereby accelerating net worth.

Two weeks ago, I laid out what I personally believe to be the first component of three to succeed at venture investing: a fertile mindset. Namely, we must implant in our minds that the world is abundant, not scarce; change is constant (always creating an opportunity to learn and grow); and that we must trust the universe has our back. 

Our mindset is the “soil” upon which everything in our lives will sprout. This sets the right framework for being a venture investor, an area of investment that is high risk but high return. Namely, we need to be optimistic about the future, right? 🪴 

Hopefully, you’ve played along with me and have reminded yourself of the importance of preparing your mind for success. Remember, it takes about 30 days of repetitive thought to implant a new idea into your mind, so stick with it!

Today, we’re going to focus on the second component of being a successful startup investor: Strategy.

Having a startup investing strategy is important because it provides a clear roadmap to achieve goals efficiently, maximize capital, and navigate uncertainty effectively.

In my experience, I have found that many beginning venture investors only go so far as wanting to invest in the next Facebook, SpaceX, Uber, etc. This isn’t a strategy; this is gambling 🎲 🎲 

But before we get into forming a strategy, it’s important to understand why you might want to invest in venture. And the answer isn’t to hit the lottery; it’s to achieve returns that outperform the stock market over a prolonged period of time (say 10 years). Traditionally, if done correctly, one might be able to earn 15-20% compounded returns or more per year compared to 8-12% in the public markets. For those of you who didn’t study Finance, this might not seem like a big deal, but compare the two:

Again, as venture investors, our goal is to optimize our opportunity to achieve outsized returns compared to other avenues while feeding the entrepreneurial engine that keeps our world economy rolling.

Developing a Successful Venture Investing Strategy

So without further ado, here are the three building blocks of a sound venture investing strategy

• Budget Wisely - Decide how much you are willing to commit to venture each year. A general rule (which I personally did not follow early in my career) is that you shouldn’t invest more than 10% of your net worth into venture for an obvious reason: you might lose it all. But the bigger reason is that you need to budget that capital so it is available when a “credible” deal you like arises. If you don’t mentally commit and set aside a budget, you may find yourself “flailing” during the execution period (next week’s discussion).

• Set a Timeline - Set a period of time you would like to take to build your portfolio. As mentioned above, you’ll need to build a portfolio of 25+ “credible” venture investments to be properly diversified. Probably 20 of the 25 deals will fail, but the 5 that succeed should cover the losses and offer an outsized return. This is a dynamic that has been proven time and again over the past 70 years. Again, the deals have to be credible, and we’ll discuss what that looks like in the coming weeks.

• Choose a Stage - Decide which venture “stage” you want to invest in and stay there! For example, I like to be very early in the game where the risk is highest but the valuations are the lowest and I can offer input and mentorship. In that instance, I’m looking at the founder(s) and, to some degree, the idea, but really the founder(s). Others might prefer to invest much later when companies are more mature, but the valuations are much higher. Each stage offers a different return scenario. At the pre-seed stage, I’m looking for 100x returns but with a 90-95% risk of failure. In a later-stage deal, you might be looking for 5-7x returns with a 30-40% risk of failure. Mixing stages will likely cause your portfolio to underperform in most instances. So stick with a stage you are comfortable with and stay there!

So here’s a what a sound venture strategy might look like:

Suppose I have a net worth of $50,000. I’ve decided to set aside $5,000 over the next three years to build a portfolio of 25 credible pre-seed companies. This means I am prepared to invest $200 into each of 25 pre-seed deals over the next three years. I know that 20 will fail, but, consistent with traditional venture returns, the 5 that succeed will return my initial capital plus an additional multiple of 2-4x (i.e., $10,000 - $20,000) in returns.

In conclusion, a successful startup investing strategy involves budgeting wisely, setting a clear timeline, and choosing a specific investment stage. This will equip you with a disciplined approach for effective execution. Speaking of which, next week we’ll focus on the third component of successful startup investing: Execution.

And, if you have questions you’d like for us to answer, feel free to email them to [email protected] 

Next Week’s Deal Alert:

For our Premium Members, we’ll be releasing an analysis of PerVista next Week!

DVC Portfolio Updates:

TimePlast (Deal #46) - TimePlast, TimePlast, aiming to commercialize water-soluble plastics and disrupt the plastics industry (and dramatically improve our environment), was reportedly blackballed from one of the world’s largest plastic conventions. They weren’t allowed to set up a booth and created a video about the event. Watch it here. 😡 

StayFi (Deal #23) - StayFi continues to tear it up, reaching $1.9MM in ARR and reducing their burn below $50K per month. They’re raising a new round on AngelList, at a 3x mark-up from where DVC reviewed the deal! 🚀 

Thank you for reading & participating!

Sincerely, Team Doriot