Maybe the way to invest?

Howdy y’all 🤠.

This blog is about both building and investing into startups. So far we’ve talked about some “maybe the way” operating tips, some commentary / analysis on current trends, but this week I’m so excited to introduce the topic of investing with a real live deal set to close next week. Lmk if you’re interested in participating by sending me an email.

A VERY brief introduction to Angel Investing

Until about 6-months ago, I’ve only ever been on the fundraising side : asking folks for money. But over the past year, I decided to start angel investing and it’s proven to be a ton of fun. Startups grow so much faster, and the change is so much more tangible than when investing in a public equity. I’ve really enjoyed brainstorming and problem solving with other founders, and it makes it that much more fun when I have skin in the game.

Since my foray is so new, it’s quite hard to tell how I’m doing, so my perspective here really is “maybe the way”. That said, my decisions have from having operated a hyper-growth startup (at Setter we grew from 15 to 70 FTEs in ~1 year), from having been involved in the operator-side of fundraising, participating in various accelerators and program incl. Hustle Fund’s Angel training program, from several years of business training at McKinsey, and just generally from far too much reading. My personal simplified framework for angel investing has been the following in rough order of importance :

Traction. Are they managing to at least 3x YoY? Very excited if they’re doing anything 5x or above.
Unit economics. Is there a path to doubling their CAC in 6-12 months? What about towards achieving 5-10x CAC over the customer lifetime?
Market. Is the market big enough or can I envision how it will grow large enough to justify a 100x return on the valuation of my investment? Is there an enabler that has unlocked the market? to carve out an initial segment of the market where they have an unfair advantage?
Team. Are they world class executioners and storytellers, and do they have the competencies required for the biz?
Value proposition. To what extent do they have a winning product? If a marketplace, is there a clear value prop for both sides?
Deal. Am I getting terms that are on par with or better than market?
Acquisition. Have they found a repeatable, scalable, and profitable channel through which they can grow demand and supply if necessary?

In my head I don’t actually need a startup to perform really well on all dimensions, but to believe they might 100x, I’d like them to be incredibly spiky on at least 2 of the top 4 (Traction, Unit Economics, Market, Team), and strong on a couple of the others.

It’s important btw that I mention that I’d like them to 100x. The idea in venture is that a small number way outperform and most go to zero. See below an analysis that shows the important of having a small fraction of winners. This is based off 25x $5K investments and assumes no follow-ons. So if there’s 1 100x investment in the group of 25, and a few 10x, then I’d have a 27% IRR. If there’s 1 1000x then I’d have a 70% IRR.

That assumes no follow-on into the winning investments. But in reality, a lever that investors use that benefits IRR is to double-down on the winners. For example, Setter investor Hustle Fund’s strategy is to invest $25K into lots of companies and then double-down on those that are high-performing with a larger investment. Here’s how the above IRR performance looks if you assume a follow-on 1-year post initial investment that is 5x the size of the initial investment (in this case $25K). It additionally assumes that by the follow-on the valuation has already doubled for the 10x companies, tripled for the 100x companies, and quintupled for the 1000x companies.

The opportunity

I’ve actually been wanting to help a founder raise by running a syndicate for a while now, but have been waiting for a great deal to kick it off so it ends up being the best possible experience for investor participants (and then together we can fund more startups!). I’ve considered and decided against a bunch of deals but I’ve finally found the right first deal. It’s open until end of next weekend but I expect we may fill our allocation before that. Here’s the highlights :

Traction (Big spike!). Telehealth company founded in March 2020 and that has grown at 20-30% MoM towards $300K GMV per month today. Having grown at this pace at Setter briefly, I can experientially confirm sustaining this pace for that length of time is totally bonkers.

Market. It’s playing in a massive $150B tele-health market in North America, and they’ve got a differentiated approach where they’ve focused on enabling physicians to provide better care by : partnering and integrating with at-home diagnostic devices to expand potential care, significant investment into SaaS tools for Physicians built by Physicians, and providing free care in Canada (majority of biz) by working through the public healthcare system (e.g. Maple does not!).

Team (Spike!). A Telehealth startup with a super-talented founder with loads of industry experience (Practicing ER MD, Global health NGO Founder, John Hopkins MPH, UCLA Adjunct Professor, Scholarly research publishing) that I know personally very well and is actually doing me a bit of a favour by providing allocation to this syndicate.

Value Proposition. Customers love it (4.8 CSAT based off 10,000+ internal reviews). Physicians love it because of all the SaaS tools built by Physicians for Physicians.

Deal. This is into a bridge round ($21M pre-money valuation) prior to their A later this year or early next year where expect their valuation to increase. My allocation into the startup is $100K, and opening it up to anyone that wants to participate for as little as $2.5K. No Pro Rata rights on this one unfortunately, but I have a handshake deal we’ll get it if helpful on their Series A which we anticipate being. I invested earlier this year and will be investing again in this round.

If you’re interested to learn more about this deal, or just keep being in the loop for future deals, let me know!

As always, you can also reach me at altmbr@gmail.com, or on twitter @AltmanBryan. Also if you like this post and want to see others in your inbox 👇

Bryan