Dan Doman, an associate at G-51 Capital, won our March Madness Extravaganza this year, which prompted the following thoughts.
Thanks for the opportunity peHUB readers. Hopefully you’ll enjoy my tortured sports metaphors, and laugh instead of grimace at my attempts at comedy. So here are my three rules for winning your office pool and making solid seed-stage investments… or how business and sports sometimes merge in the same lane of the brain.
1. Advance good teams
In college basketball, good teams typically have a great floor leader playing the point (CEO), a dependable big man (techie) and a third player that if he gets hot can really carry a team deep (biz dev, sales stud or maybe even a marketer). As an investor, you want the ball in the CEO’s hands; you trust him to lead the attack and minimize costly turnovers, and you depend on him to get the best out of his teammates. This player needs to be coachable or have experience under the spotlight in good times and bad.
Your CTO is crucial to a balanced offense and he is the foundation on defense (although you may not want him handling the ball too much… there’s a reason some guys do better in the chess club). Good teams also are well coached by a gray hair who keeps everyone on the same page, and whose experience helps navigate around common pitfalls. In the seed-stage world this is often an angel, an advisor or the seed stage VC.
2. Consider the intangibles
In addition to the starting lineup and the coaching staff, there are a number of intangibles that lead to a good run. The first is depth. Starters foul out and go cold, just as founders stray off the strategic path and struggle with scaling. Also worth considering are RPI and SOS.
The golden rule here is that context is everything. A 30-0 record in the MWCOB doesn’t mean you are ready for the bubble team from a BCS conference, just like riding shotgun during 1999’s big exit doesn’t mean that you are prepared to put $10MM of Series A cash to work as the CEO in this environment.
One final intangible is location. Home teams enjoy a statistically significant advantage in college basketball. Remember that the selection committee often accommodates the top four seeds, when possible. For us at G-51, we generally invest 60% of our funds in Texas and 40% out-of-state, so long as the out-of-state company is within reasonable proximity to our syndicate partners (or if the company initially locates a key executive in Texas). Location also might mean proximity to your investment thesis. If all of your successful exits involve software or hardware, why dribble into medical devices?
3. If you don’t believe in them, don’t let popular opinion sway you
You cannot expect out-sized returns if you are doing the same thing as the next guy. You need a thesis, and if you want to out-perform your peers, it can’t be vanilla.
This year I didn’t believe in the Big East. I thought they were getting too much credit for a conference that could only boast an above average mean (i.e., come tournament time I thought they would do well, but would not have any championship caliber teams). Meanwhile, I knew the rest of the country was reading the same article over and over (online journalism has become a process in which one expert writes something worthwhile and everyone else Control C’s and P’s it into their own blog, but maybe that’s another column, if I stay lucky). America was drooling over the Big East upper crust and their title potential.
To be different you had to sell them. It was a big risk selling Pittsburgh and Louisville early (and Memphis too, though they are in Conf. USeAsy). What’s really risky is that some firms write large checks to twenty-somethings with assets consisting of a Red Bull filled mini-fridge, two laptops and an iPhone app that tells the teenage kid his parents are on their way home early (and everyone needs to get out). If you don’t believe in algal oil or if you agree with me that battery technology is anything but green (ravages the earth for its ingredients and then returns them in dangerous form to contaminate my water supply), then why are you investing in them? Because the guys with billion dollar funds are? Exactly… Goodbye Panthers, Cardinals and Tigers.
A bit of background on my selection strategy:
Luck (91%): Sorry if you won your office pool and are still wearing the Burger King crown with “Nostradamus” scrawled across the front in black sharpie. You were just lucky, which is actually better than Nostradamus, who was just vague.
College B-Ball Junkie (2%): I have an insatiable appetite for watching lousy late-night college basketball games on ESPN 8 (I’m such a fun guy) while plugging away on models for early-morning deadlines. I would like to think that this knowledge warrants a higher percentage, but I have been an addict for 20 years and while my results have been top quartile, I have also had several orderly shut downs.
Tom Izzo & Michigan State Spartans (6.998%): I grew up bleeding green in the Northwest suburbs of Detroit, so it was an absolute blast traveling home to watch the Final Four. Detroit forgot it was Detroit for a handful of days and threw one hell of a party. I knew this team had the right CEO (Lucas), CTO (Suton), and Directors of Dunkology and Defense (respectively Summers and Walton). I watched every game this season, to my wife’s dismay.
As a side note, I actually learned there are three phases of dismay – saying I was pathetic, actively rooting against my team (futile) and finally rooting for the Spartans. Her eventual support was the product of tying certain promises, which I now regret, to State victories. Most importantly, though, State has one of the best tourney coaches ever in Tom Izzo… but could they put it all together at the right time? The road to Detroit was an exciting path and the UConn win was an incredible sporting event – 74,000 fans at a college basketball game? Awesome, definitely one for my memory book.
My Tournament Model (.002%): Yes, I purposely waited until the end of the article to disclose that I am really that big a dork (hopefully all of my friends have stopped reading by now). So, I was bored (no, not on company time) and I threw every D1 game into a database and determined that there were 6 statistics that stood out more than the rest as highly significant (email me for the answers, plus send me $19.95 or $250 in old gold jewelry for my iron-clad lock of the week).
Overall, I give the model a B-. It did have UConn #1 and UNC a very close #2 and Missouri beating Memphis. My model said that Utah State would beat Marquette straight up (so I cautiously put money on the potent Aggies to cover the spread). They lost outright by just a point and the model paid for itself that day. On the flip side, I also applied the model to all D1 teams (not just tourney-bound squads) and it said that Notre Dame was the fifth best team in the nation and my beloved Spartans were in the mid-teens. Outliers…. I hoped.
Note: Like a good associate, I built a model that shot out the answer I was looking for – “State wins it all” based on 1.) Mascot coolness – rating based on model builder’s wife’s discretion under intense pressure from model builder to say the correct answer and 2.) Number of alums nicknamed “Magic”.
The original model also said that my alma mater, Northwestern, was better than three other tourney-bound teams from the Big Ten, despite a (1-6) record against those teams in the regular season. Okay, so maybe the B- is a bit aggressive.
For those that can’t resist… my bracket had 14 of the Sweet 16, 7 of the Great 8, 4 of Final 4, 2 of 2, and UNC was my champion pre-Obama pick too. In the venture capital spirit, when it comes to picking THE winner, sometimes you have to set aside emotion and personal allegiances and go with the obvious.
Till this time next year (I hope), stay thirsty my friends.