10 simple and effective ways to lose money in private investing - lessons learned

July 23, 2013

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RTA Lecture July 23, 2013 -

Simple and Effective Ways to Lose

Money in Private Equity Investments!

July 23, 2013

Today’s Goal

Walking through what I’ve learned about how to lose money

in PE, I hope you’ll gain a few insights on how to structure

and lead your own companies to attract smart capital and

succeed wildly …

1

July 23, 2013

Lecture Outline

• Introduction and background

› Me

› My company (PNT Marketing Services, Inc.)

• Ten ways to lose money in PE investments – guaranteed!

› Plus: bonus tips!

• 10-minute break

• Case studies

• Q&A/wrap-up

2

July 23, 2013

Enough About You – What About Me?

• Me

› Regis ‘78

› Harvard ’82

› Stanford PhD dropout ’83

› Founded PNT ‘88 with partner Phil (R’78, H’82)

› Married, 2 kids

› ADHD? Pianist, singer, motorcyclist, triathlete, RE investor,

early-stage company investor …

3

July 23, 2013

PNT Marketing Services Overview

4

July 23, 2013

What Is PNT Marketing Services?

PNT Marketing Services

(PNT) is a leading

provider of Customer

Intelligence-based

marketing services

(customer databases,

insights, and high-ROI

marketing actions).

PNT helps clients

acquire, grow and keep

profitable customer

relationships.

5

July 23, 2013

Our Beginnings

??? 1988 1989 2003 Today

Marketing

Fin

ance

Operations

IT

6

July 23, 2013

Our Clients

7

July 23, 2013

Our Methodology

Step 1: • Diagnostic

Step 2:

• Creating the customer-centric marketing and analytic datamart

Step 3: • Generating customer insights

Step 4:

• Implementing high-ROI marketing actions driven by customer insights

Step 5: • Measure/track/improve (“virtuous spiral”)

PNT engages

with our

customers in

a simple and

powerful 5-

step

methodology

8

July 23, 2013

Our Approach

Our rigorous and streamlined DATA-driven approach yields pure Customer Intelligence. And that's how we help smart business partners win.

9

July 23, 2013

Investing in Private Equity (PE)

10

July 23, 2013

Enough about ME – what about PE?

11

• Perfect for someone who’s ADHD!

› Lots of opportunities

› Lots of moving parts

› Highly risky (“Certainty of death. Small chance of

success. What are we waiting for?”)

Rule of thumb: 7 of 10 failures, 2 out of 10 modest

success, 1 of 10 grand slam

• Track record of five years of losing money

› Unfortunately, blemished by a few good deals …

July 23, 2013

10 Lessons: How to Ensure That You

Lose Money in PE Investing!

12

July 23, 2013

10 Lessons on Losing Money in PE Investing

13

• Lesson 1: Invest only in companies

with no revenue

› In fact, the farther away they are from generating

Dollar One, the better!

› Best if there’s no plan to generate revenue, either

(whether now or in the future) …

July 23, 2013


14

• Lesson 2: Make sure the founder is

untested and hasn’t done this before

› Best if he/she has no track record whatsoever in

the industry

› Next best is irrelevant experience in another

industry …

› … and a close third is having another demanding

job that prevents him or her from putting in the time

needed to get the new company off the ground …

July 23, 2013


15

• Lesson 3: Invest in companies that do

not have a team in place

› Make sure there’s no CMO to pay attention to

brand, audience, and market

› Make sure there’s no CTO to head up tech

platform development

July 23, 2013


16

• Lesson 4: Don’t attempt to determine if

there’s a market for your product or

service before you spend resources

creating it

› It’s far easier to lose money by following the Field

of Dreams approach - just “build it and they will

come”

› Since the company will have no team in place

anyway (Lesson 3), it’s a short step to not paying

attention to the market!

July 23, 2013


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• Lesson 5: Make sure there are no

investors on board who are smarter or

who have deeper pockets than you do

› In fact, invest alone if you can – why share

success or risk with anyone else?

July 23, 2013


18

• Lesson 6: Invest in companies with

government-backed loans or lines of

credit

› Our federal and state governments have a terrific

track record in private investments and hardly ever

make decisions which negatively impact the

companies they’re backing, so you’ll want to invest

right alongside them!

July 23, 2013


19

• Lesson 7: Make sure the company has

really complicated technology

› Preferably, this technology should be unproven

› It’s a bonus if the technology requires on other

suppliers to provide similarly unproven

components

July 23, 2013


20

• Lesson 8: It’s helpful if the company is

high profile, has lots of media attention,

and has a rockstar CEO who has never

run a company before

› Figureheads with completely non-operational

backgrounds make the worst CEOs, so keep a

special eye out for those …

July 23, 2013


21

• Lesson 9: Don’t invest with a theme or

methodology in mind

› Make sure your PE investments are scattered

across industries, technologies and themes

› It’s best, in fact, to have a complete lack of focus

July 23, 2013


22

• Lesson 10: Don’t invest in a company

where you can add value with your

industry expertise, contacts, etc.

› It’s best if you know nothing whatsoever about

what you’re investing in

› Why would you want to help the company you’re

invested in with more than money, anyway?

July 23, 2013

Bonus Lessons!

23

• Bonus Lesson 1: Don’t stay in close

touch with other board members, senior

executives, advisors, or other investors

in the company

› You should maintain complete radio silence for the

best chance at losing money

July 23, 2013

Bonus Lessons!

24

• Bonus Lesson 2: Wherever possible,

throw good money after bad

› If your goal is to lose the most money possible, it

never makes sense to cut loses – you should

continue to invest money right up until the doors

close!

July 23, 2013 25

July 23, 2013

Case Studies

26

July 23, 2013

Case Studies

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• Social Mobile Travel App

› Idea was great: let’s create a social mobile travel

app to provide curated content for travelers that is

there when they need it (on their smartphones) and

helps them connect in-country with other like-

minded travelers

› Space was attracting a lot of attention and capital:

intersection of social, mobile, and travel was (and

is) hot

July 23, 2013

Case Studies

28

• Social Mobile Travel App, cont’d

› Founder was also head of institutional sales for a major

P2P lender going through explosive growth (Lesson #2)

› Tech “team” was sub-contracted out on the fly and

changed multiple times (Lesson #3)

› No attention paid to understanding audience and

whether app would find traction (Lesson # 4)

› This idea was outside my domain expertise and I

couldn’t contribute contacts or advice except of the

most general kind (Lesson #10)

July 23, 2013

Case Studies

29

• Social Mobile Travel App, cont’d

› Result: a stunning success!

The project finally resulted in an app that’s now available

on the AppStore

However, since no thought was put into marketing it or

building audience, it’s languishing with hardly any

downloads

All the investors (5, including the founder) lost all of their

seed capital since the founder decided to pack it in and

get back to his day job

July 23, 2013

Case Studies

30

• Re-commerce site (“Mint + Kayak for

re-commerce”) › Another great idea: consumers are sitting on a mountain of stuff

they no longer want or need, have little inclination to deal with it

(it’s a real chore to sell stuff on Craigslist, ebay, etc.), and don’t

know exactly what they have or how much it’s worth.

› Re-commerce channels are under-utilized, provide various

choices for monetization, require a lot of effort, and vary in

convenience and value

› Solution was to create a platform to add an emotional trigger

(getting great deals on new purchases), shifting the goal from

“dealing with the stuff I don’t want anymore” to “getting great

deals on stuff I really want”

July 23, 2013

Case Studies

31


re-commerce”), cont’d

› Founder was an attorney and MBA with deep experience in

financial services (Lesson # 2)

› CTO was in place, but no CMO and no focus on finding a

market/audience for the service (Lessons # 3, 4)

› Only one other investor on board (Lesson #5) and I never

met them or spoke with them (Bonus Lesson #1)

› There was really no theme to my investing in this start-up

(Lesson #9), and I didn’t have any background in e-

commerce or re-commerce or any contacts I could leverage

(Lesson #10)

July 23, 2013

Case Studies

32


re-commerce”), cont’d

› Result: another money-losing success!

Founder was abandoned by CTO who couldn’t keep contributing

his time and found another job

No other investors stepped up to the plate when funds ran out,

and the other investor cut off further investments

Founder, too, was under financial pressure with a young family

and turned to consulting to make ends meet

> He is now co-founder in another startup in medical technology, which

I graciously passed up

Platform/site is live in a “beta” mode, with just a few (< 50) users

over the last few months; not enough funding or focus from

founder to continue, so a total write-off

July 23, 2013

Case Studies

33

• Electric car company: Fisker

Automotive

› Founder was Henrik Fisker, rockstar auto designer and

industry veteran (Lesson #8)

› Bleeding-edge technology (Lesson #7)

› Backed by US Govt (Lesson #6)

› Not an area I knew (Lesson #10)

› Not really part of a theme (Lesson #9)

› I went back in for two additional rounds (Bonus Lesson

#2)

July 23, 2013

Case Studies

34

• Electric car company: Fisker

Automotive, cont’d

› Results were really spectacular: Fisker had huge

tech/engineering problems, defaulted on its government

loan, laid off almost everyone, and is seeking a buyer

now …

July 23, 2013

Case Studies

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July 23, 2013

Case Studies

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• Automated monitoring support and

data analytics for distributed

generation systems focusing on

solar PV: LocusEnergy

› Founded in 2007, company was started by a serial

entrepreneur (Mike Herzig) and has experienced rapid

growth and adoption of its hardware and software in the

marketplace

July 23, 2013

Case Studies

37

• LocusEnergy, cont’d › I really violated a lot of my sure-fire, money-losing lessons on

this one:

Company had revenue when I invested (Lesson #1)

Mike, Locus’ founder, had a track record as a serial

entrepreneur (Lesson #2)

Locus had a great team on board already (Lesson #3)

They had a tested – and growing – market for their products

and services (Lesson #4)

Many smart investors, some with deep pockets, were on

board (Lesson #5)

I’ve stayed in close touch with Mike, other investors, and an

IB firm who’s raised money for them (Bonus Lesson #1)

July 23, 2013

Case Studies

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• LocusEnergy, cont’d › My results were therefore unfortunately not in line with my other

investments; to date (after 2+ years) I’ve almost doubled the

value of my investment and the company is on track for

continued solid growth

July 23, 2013

Case Studies

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• Responsible teen spending

company: BillMyParents › This was brought to me by a boutique investment firm

› I tried my best to lose money on this one, but it violated too

many of my rules: in-place team, climbing revenue, tested

market adoption, etc.

› I couldn’t take the pressure, so I sold out after 6 months for a

40% gain on my initial investment

› Epilogue: I should have held on!

Current value of shares down 50%

July 23, 2013

Case Studies

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• Online social reputation scoring (FICO for

sharing economy): TrustCloud

› Chairman, CEO, CTO, and COO are all serial entrepreneurs

(violation of Lessons #2 and #3)

› Rapid adoption of platform by users (10K+ and growing) violates

Lesson #4)

› Chairman and co-founder is tied to large angel-investing group

(Lesson #5) and this is right in the middle of my investing theme of

companies leveraging social data to provide value (Lesson #9)

› I’ve also got plenty of contacts who can help these guys (Lesson

#10), and I’ve stayed in touch with the Chaiman, CEO, CTO, and

COO (Bonus Lesson #1)

July 23, 2013

Case Studies

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• TrustCloud, cont’d

› It’s not too late – company is still in early stages and has little

revenue, so I may still eke out a win and lose money on this one, but

with the team in place the odds are against me …

July 23, 2013

Case Studies

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• Career matchmaking site: Sokanu.com

July 23, 2013

Case Studies

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• Sokanu, cont’d › Great team in place, including CEO/founder who has hired PhD scientists to

help build his platform (flouts Lessons #2, #3)

› Site has really gained traction with many thousands of users (Lesson #4 out

the window)

› Many investors including a UK venture fund have signed on (violates Lesson

#5)

› Fits theme of companies leveraging data to create value (Lesson #9,

ignored)

› I’ve already added value by introducing the CEO to a client of ours who is

very interested in partnering with Sokanu to provide value to my client’s

4MM+ customers – this would be a big win for Sokanu (sorry, Lesson #10)

› Finally, I’ve stayed in touch with other investors and with the CEO (bye bye,

Bonus Lesson #1)

July 23, 2013

Case Studies

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• Sokanu, cont’d › With a great team, solid investors, excellent market traction,

revenues, and a great adoption curve, it’s unlikely I’ll lose money on

this investment, but hope springs eternal …

July 23, 2013

Q&A / Wrap-Up

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July 23, 2013

Q&A / Wrap-Up

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• Any other questions, criticisms,

conundrums, quibbles, concerns, or

comments?

• To reach me:

› [email protected]

› 914-588-7278

mailto:[email protected]

10 simple and effective ways to lose money in private investing - lessons learned

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