Archive for the ‘Uncategorized’ Category

Decision tree of VC, How I evaluate companies

After the initial screening of a company, which includes a quick look at the addressable market, team, and underlying solution, I look at the future of a company much like a decision tree.  At a first meeting I step in with the entrepreneur and create a vision of what needs to happen for the company to be successful and grow the exit we are looking for.  I then isolate the bottlenecks and obstacles as I see them. I largely evaluate an entrepreneur on their ability to recognize them and develop a reasonable plan to address them.  I will look backwards at the company/ teams track record of overcoming ones in the past.  Expect most of the questions I ask to be focused on these areas.  If I miss a major obstacle bring it up.  It will come up later in the diligence and you will get credit for judgment, forthright and understanding of your business. This also helps to explain why VCs rarely read an entire business plan.

Why civilians shouldn’t pick stocks

As a former trader I always find it amusing how many (otherwise intelligent) people think they can pick stocks successfully.  I will lay out an argument that I have made many times before that suggests that the only reason an individual should ever pick stocks themselves is for entertainment (or some other perverse incentive).

Let’s consider two strategies side by side: ‘Picking Stocks’ and investing in a stock ‘Market’ index. The market index reflects the asset class as a whole. When comparing ‘Picking Stocks’ to the ‘Market’ asset class, ‘Picking Stocks’ becomes a zero-sum game.  Now let us consider the market dynamics.

Let’s further split investors into two categories: professional and individual.  As professional organizations, strategies or investors become successful, their allocations of capital grow (both externally and organically). In short, the better traders/ strategies/ investors have more capital under management. By definition then, there are more, smaller, investors losing out relative to the market index.  This seems quickly forgotten in a bull market.  The smaller losers are individual investors or professional investors who will soon go out of business.

Picking Stocks is like playing against the casino with the odds against you.  If you are doing it for fun, great. As an investment, it is an awful idea.

The only two exceptions/counter arguments that I give any weight to are: insider trading (illegal, last I checked) and Random Walk Hypothesis (which I don’t personally subscribe to, but is credible and suggests that you are equally well off picking stocks as investing in the index).

Trying out wordpress

I am switching to wordpress so you will see a bunch of posts transported here over the next couple days (and hopefully soon the URL)