How (And Where) Vinny Lingham Invests His Money

Posted on September 6th, 2016
Funding

How (and where) Vinny Lingham invests his money

 

Mention the name Vinny Lingham anywhere in South Africa’s tech scene and you are bound to get the interest of most entrepreneurs piqued.

The serial entrepreneur ticks almost every box of a startup rockstar – from founding a number of successful startups and raising numerous successful rounds of funding, to scoring a multimillion rand exit and making waves in the startup capital of the world, Silicon Valley.

Lingham spoke at a recently held DEMO Africa dinner where he shared with some of the country’s leading investors and entrepreneurs how to best navigate seed investing and pitfalls to avoid as both an investor and as an entrepreneur.

Here are the ultimate dos and don’ts according to Lingham you need to know for succeeding in the risky investing environment.

ENTREPRENEURIAL SKILLS

On the importance of technical and business skills
​We typically look for [startup founder] teams of two (and three maximum) and very rarely one person by themselves. And it’s very important that there’s a technical co-founder and a business co-founder.

There’s a lot of emphasis, I think, that needs to be placed on the combination of technical and business co-founders because we find that when those two are present the companies are more successful.

On the pitfalls of outsourcing skills
We do not do any deals now where people come to us and say we’re outsourcing to a development shop in, wherever. Those deals don’t make sense. We want someone who is in the business because when there are bugs, there’s a R10 000 bill to fix that bug, it adds up. So it needs to be two people who are dedicated.

“The purpose of a startup is to test hypotheses”

On the importance of getting market validation
One of the things that annoys me tremendously, when meeting South African entrepreneurs in particular, is the sort of top down market driven approach, (where entrepreneurs will typically value their business according to the size of the market and the market share they hope to achieve). That doesn’t work.

What does work is market validation. The purpose of a startup is to test hypotheses. When you fail you fail. You come up with an idea you say ‘we’ll do this better, faster, cheaper or some different approach to the market’ – this is the hypothesis. And if you fail, that’s ok because you’re not losing tens of millions of Rands. We’re happy to lose money [as investors], in fact we tell our founders, ‘you failed, that’s fine. Come up with another idea and we’ll fund that’.

WHAT YOU NEED TO GET RIGHT WHEN INVESTING

On betting the right amount
We look to get in early at R2 million to R5 million valuations for a seed round. We try not to commit more than the R150 000 – R300 000 range, with other [investors] if need be to [make up the investment round].

On going in early
That’s the mentality of seed stage investing. You’ve got to go in early, you’ve got to give the guys enough money and enough runway to get to a minimum viable product, get it to market and then when you have data start optimising.

So look at the data – what’s happening? Are people coming back? Are your customers using the service? Are they engaged? Are they happy? Are there repeat orders?

Once you have those metrics, that sort of traction, then it makes more sense to say, ‘ok now we can raise R2 million to put more capital in the business and go hire more people’.

“It’s very much like playing poker. If you bet the wrong amount you’ll lose in the long term”

We’ve had some really great successes working with this model. By the way this is not just a local model this is what we do in Silicon Valley, we just use Dollar signs instead of Rands.

On keeping your portfolio focused
From my perspective when I’m on TV doing Shark Tank and all that stuff, I am industry-neutral. Whatever deals come we evaluate them on the merits of the companies. So from that perspective it’s neutral. Outside the TV show it’s purely tech. I look at businesses that can scale, I look at internet technology, and I do Bitcoin. That’s where I keep my books and I think you need to keep your focus if you’re running your funds as well. You can’t go investing in different sectors because the returns are different per sector, there’s different exit numbers (the amounts at which your stake in the business is sold) as well.

THE RISKS

On keeping clear of lopsided bets
If you get involved in series A, series B or late stage and early stage companies, each stage of investing has a different risk/reward return and profile. So the mistake everyone makes (people who have failed so far to deliver VC returns) is they don’t know how to right-size their bets. It’s very much like playing poker. If you bet the wrong amount you’ll lose in the long term because the risk-adjusted return for that bet is off.

On finding the right balance
So you can’t have a situation where you have five investments worth a million Rands each and then you go and put R3 million in one company. Those are lopsided bets. If the 3 million loses, all of a sudden those 5 investments will be under pressure.

So you’ve got to make sure your bet sizing is very good. It doesn’t have to be exactly the same amount every time but as long as it’s in a certain range and a certain stage.

“You need to keep your focus if you’re running your funds”

On the trick behind early stage betting
There’s something called the ‘Efficient Frontier’ and it’s a portfolio theory approach of how you price and how you put multiple high-risk bets together so that your returns actually smooth out. Because if I took 100 bets on early stage companies, you’re going to believe that at least one or two of those are going to pay off big time.

That’s what happens in the Valley. I’ve got a friend, he put $25 000 into Uber’s seed round. He has 200 companies in his portfolio. He’s probably spent $5 million, or whatever it is, over the years, but his Uber stake alone is worth $140 million for a $25 000 bet. But did he know that it was a going to be a win? No of cause not. What he did was say ‘you know what, I’m just going to write $25 000 cheques to all these companies that come along and one day I’ll catch an Uber. (At that point he was probably saying one day I’ll catch a Google.)

And so if you want to play early stage, [you’ve got to put in] lots of bets, preferably in syndicates and you need large portfolios. You need about 20 to 30 companies per portfolio because the failure rate is obviously very high at the early stage.

On easing risk by focusing on one segment
Pre-traction, post-traction and growth and scaling, those are three different segments. Be very conscious of that. So don’t try and build a portfolio across all three because you won’t balance your risks properly and you won’t get the returns you need because there’s different volumes of deal flow in each one that you need to balance risk.

I think it’s more important that people find the segment or the market that they are interested in. If you want smoother returns with lower risk go late stage, there’s nothing wrong with that.

THE EXIT

On the typical exit horizon
Exits, typically, are not going to come from institutional buyouts (IBO’s) or trade sales. They’re going to come from the next round of inventors coming in and because you hold a stake in the company they want strategically they might want to buy you out at some point. So the horizon we look at to exit an investment is probably 2 or 3 years.

On when is a good time to exit
[We look for] 20 to 30 times return on investment before we want to sell because 10 times is not really going to pay off the portfolio if you have 15 companies, for example.

So you’ve got to get over 15 times on one deal to pay off the portfolio and then the rest is your profit.