Uber, Twilio, Sendgrid. These are just some of the incredible companies David Cohen invested in with his first fund, Bullet Time Ventures. In our latest interview with Cohen, we reveal some of the strategies behind what is now considered to be one of the best performing funds in history.
Although a commonly regarded principle of investing, the importance of this cannot be underestimated. As Cohen states, “it is all about shots on goal.” For Cohen with his $5 million fund, this meant cutting $50,000 cheques and ensuring his portfolio was as varied as possible.
“Consistency is key,” according to Cohen, and this rings true at the seed stage, with regards to cheque size. At this level of financing, there is no real data or metrics to suggest which are the home runs. Therefore, do not have a varied investment amount, have a consistent and rigid cheque size and stick to it. This will also allow co-investors to know how much of a round they should allocate to you.
Despite Sheryl Sandberg’s statement, “It does not matter where you sit as long as you have a seat on the rocketship,” valuation does matter.
As Cohen illustrated, “we had to get in early at the low prices.”
If you invest $50,000 in company Y at a $5 million valuation and the company exits for $500 million, you have returned the $5 million fund (dilution not included). However, if you invest $50,000 in Company X at a $10 million valuation and the company exits for $500 million, you have only returned half the fund. As a result, at the early stage, it is crucial to be investing early at low valuations.
“I have done one and I will not be doing anymore,” said Cohen when asked his thoughts on uncapped notes. For Cohen, the numbers simply do not work out. Often the conversion discount and price caps in a note result in the company creating more liquidation preference than the amount of money the note holders have invested.
For example, John loans company X $100,000 on a convertible note with a pre-money cap of $1 million or 20 percent discount. The company raises $1 million ($900,000 in new money, plus $100,000 for the note) at a pre-money valuation of $1 million (assume at $1 per share) — same as the pre-money cap in the note. What percent of the company should the note holder get on conversion? The answer is not 5 percent, as the $1 million pre-money valuation doesn’t trigger the cap because the share price, by using the discount, would be lower than the share price at the cap.
The correct answer is that at a $1 million pre-money valuation, the discounted share price for the note holder would be $0.80. So the number of shares they could buy for $100,000 is 125,000. So the actual percentage would work out to 6.17 percent. It is this math that led Cohen to state that “uncapped notes lead to a huge multiple of worseness.”
As an investor it is very easy to be swayed by market sentiment. However, this is not the optimal investing strategy. As Cohen suggests, “the hot deal is often the one that does not work.” Instead, Cohen prefers to focus on ‘big boring industries’ that have must-have products, rather than nice to have products.
Surround yourself with mentors
The early-stage investing landscape is a treacherous one. Surround yourself with experienced people who know the industry and its intricacies. As Cohen recognizes, “I was lucky to have amazing mentors like Brad Feld and Jason Mendelson.” However, not only can mentors provide advice and strategic guidance, but deal flow too. Cohen described the Uber deal, which came about because Ryan Graves was a mentor at Techstars Boulder.