The "99% Profit" Rule

By Matthew Milner, on Wednesday, June 11, 2014

Every week, venture capital firms see dozens of new deals…

Over the course of a year, a 3 or 4-person firm might see several thousand of them.

But can you guess how many they invest in?

Let’s take a look…

The Funnel

Satya Patel, a venture capitalist with Homebrew Ventures, recently wrote a revealing article:

He showed the number of deals they looked at last year, versus how many they invested in.

Here are the numbers:

•    885 opportunities evaluated

•    399 initial meetings or phone calls

•    71 follow-up meetings to dig deeper

•    And only 9 investments!

That’s an investment hit-rate of only 1%.

In other words, they said, “No, thanks” 99% of the time!

As another example, check out this infographic from a venture firm called Passion Capital...

They looked at 2,000 deals, and made 35 investments.

That’s a hit-rate of a little less than 2%.

These numbers from Homebrew and Passion Capital are typical:

Most venture firms invest in just 1% to 2% of the deals they look at.

Should you take the same approach?

Triple-Filtered For Your Safety


In fact, the words, “No, thanks!” should always be on the tip of your tongue.

And we’re here to jump-start your efforts:

The deals we show you have already made it through several filters…

Filter #1: Crowdability

There are hundreds of equity crowdfunding platforms that connect investors with deals.

Crowdability only shows you deals from about ten of them:

We focus on the ones with the most experienced investment teams, and the ones that put their own money alongside yours.

Filter #2: The Platforms

But the funding platforms do some serious screening before we even get there.

FundersClub, for example, accepts just 3% of the starts-ups that apply for listing.

MicroVentures accepts only 0.5% of its applicants – in fact, it’s easier to get into Harvard than it is to get listed there.

And OurCrowd has a deep bench of professional investors whose only job is to source and filter deals on your behalf.

Filter #3: Accelerators

To take it even further, some deals you’ll see on Crowdability have already been through a third filter…

Platforms like FundersClub and WeFunder only feature start-ups that have graduated from “accelerators” like TechStars.

Accelerators are mentoring programs for start-ups. They accept only a handful of the companies that apply, and they put them through several months of “boot-camp.”

It’s as if the start-ups graduated from an Ivy League college.

Bottom line regarding all this filtering?

If you source deals from Crowdability, you’re looking at the small number of opportunities that have passed the scrutiny of multiple layers of professional investors…

And even then, you should still be limiting your investments to a tiny fraction of the opportunities you see.

More Ways to Fast-Filter

Crowdability is busy building a set of online tools to help you quickly identify the most promising start-ups…

But in the meantime, here are three easy ways you can fast-filter on your own:

1.    Team – The founders should have “domain” experience (i.e., direct experience in the same sector as their new business), start-up experience, or technical experience. If they have none of the above, say “No, thanks!”

2.    Valuation – For seed-stage companies, valuations should be a few million dollars or less. If valuations are too high, it’s unlikely you’ll earn 10x on your winners (which is what you need to earn in order to make early-stage investing worthwhile).

3.    Risk of Ruin – If the start-up requires millions of dollars for things like inventory, hardware, or transportation of physical goods, it’ll be more prone to run out of capital. As a rule of thumb, these types of start-ups are too risky.

If a company doesn’t make it through each and every one of these filters, don’t be afraid to say, “No, thanks!”

There’s Always Another Deal

Every Monday morning at 8am EST, we email you with half a dozen or so active deals.

That’s a few hundred opportunities each year. With a 2% ”yes-rate,” you might only invest in about 6 of them.

But keep in mind: equity crowdfunding is still in its first inning…

Soon, thanks to forthcoming legislation – specifically, Title III of the “JOBS Act” – all Americans, regardless of their net income or wealth, will be allowed to invest in start-ups.

Only then do we expect the market for equity crowdfunding to explode. So instead of a few hundred opportunities, you’ll likely see thousands.

At that rate, you might say YES to 10 or 20 deals per year…

Over a few years, you could build a portfolio of 50 different start-ups. Ideally, over time, you’d invest in hundreds. That's the level of diversification that will turn you into a successful investor.

In the meantime, remember this:

There’s always another deal. 

99 times out of a 100, you should just say, “No, thanks.”

Happy Investing – and Happy Not Investing!

Best Regards,
Matthew Milner
Matthew Milner


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Tags: Equity Crowdfunding Ourcrowd Techstars Wefunder MicroVentures FundersClub

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