Matt GelberFounding Partner, Bitterroot Asset Management
Bio

I have worked extensively in financial services technology and trading, and have been focused on deploying private equity capital into the space over the past eight years. I have run quantitative hedge funds, an options exchange and have worked extensively in the advisory marketplace with RIAs and IBDs. My current business is working to bring together distribution, product and technology to the retail advisory market, building the next generation of asset management. I am also focused on the disruptive potential of the robo-advisor marketplace.



Recent Answers


This is a great question, and critically important for every entrepreneur. Funding and valuation are at their most punitive during the earliest days of a venture, and equity is almost always more costly to a founder than debt. If at all possible, decide if there is any way prove that your concept works in a market that requires a smaller outlay of capital (or stage your startup). Once you have a proof of concept, your negotiating power rises substantially and can materially lower your cost of growth capital. Next, determine if it's possible to finance the next phase with debt instead of equity. It can put the business much farther down the valuation road before the first discussion with outside equity capital. Once you have proven the model and can show cash flow as a result of a solid and workable business plan, you may not need to discuss why $50k isn't worth 50% of your business. If going big is the only path to get started, seek an investor willing to structure a deal as debt or a debt/equity combination to help preserve your ownership until later capital raising stages, and consider partnerships in your market with firms that could both finance your launch and help you grow. It may not lessen the capital impact to you, but could help accelerate growth.


The simple answer is yes, as long as the terms are consistent with the offering and other documents that discuss fees. It gets more complicated if you plan to sell to non-qualified/accredited investors, at which point the fees would also need to be reasonable and fair as well. In either case, fees should be competitive with other similar offerings investors might be able to access, and expect that they will almost always be a point of negotiation with any large investor.


While this can seem a logical extension of a business, it’s important to know that operating and investing are completely different pursuits and require very different skill sets. To get started, try to define the mandate of the department. It’s useful to understand whether the investment process you envision is designed to broaden your current business or to better use existing capital.

Investing in business lines related to your primary business can often inform buy vs. build decisions, can help define product extensions by better understanding costs and market dynamics, and can also bring your firm closer to suppliers, distribution or product innovation. If this is the goal, target investment opportunities can be filtered through the lens of vertical or horizontal extensions to the existing business. The best investments are ones where there is a natural asymmetry in marketplace information, where the opportunity is informed by your existing business knowledge.

However, investing can also be incredibly distracting for the core business, and rather than diversify the firm’s risks, can often concentrate them. Having defined the purpose of the investment program, it can be helpful to know in advance which resources you would use to make investment decisions, and more importantly which would be deployed to solve problems should a portfolio company run into trouble. You want to avoid the scenario where you have your best talent working to solve problems in a small investment instead of running your primary business.

Finally, it’s important to have a clear and shared view of how and when to exit investments. It’s easy to get behind great people; but if they turn out to be unproductive or your business is better off deploying capital in a more productive venture, having pre-determined rules of disengagement can be as important as understanding why you’re initially setting up the department.


You’re asking some great questions, and beyond the fact that there is no teacher as great as experience, it seems tragic how common this experience is, and making great investments is hard even for seasoned professionals. But it’s incredible how often the only two factors used to assess an investment are how much it will make, and how much they like (or know) the people running the deal, when just a few additional questions can often make all the difference.

When looking at a new opportunity, the first thing I do is ask if I believe management’s story. This is really about getting a feel for whether you believe the people running the business or opportunity are qualified to exploit whatever inefficiency they have identified in the marketplace. If they can’t express in simple terms what that opportunity is, why they’re qualified to take advantage of it, and exactly how what they do will generate returns for the investor – run away. This is different than asking if I believe in the management, or like them – it’s about their ability to state in plain language their investment thesis, and back it up with the skills and tools needed to execute.

Next, put it in context - consider the size of the opportunity and this investment’s place in it. Is it a big market, or small? Lots of competition or not? Does this investment bring something new to the space and will gains come from new business or is the plan to take it from existing competitors? If there are no crisp answers to these sizing questions, consider it a big red flag.

The next bit is about understanding the risk of the investment. The single most common mistake made by investors is mis-pricing risk. Markets are pretty efficient, so there has to be a reason someone else isn’t already doing whatever this investment proposes to do and understanding what this dynamic is can be the single difference between good and bad investments. It may be that nobody has thought of it, or no one can do what this will do at the same low cost. Or there is an asymmetry of information, where you know something others in the market don’t yet know. Whatever it is, trying to understand the risk of the investment is key: understanding the timing of the probable returns, appreciating what could go wrong and how management will respond if it does, what change in the environment (like new laws, new competitors, new technology) could turn the deal on its head, and what assumptions need to remain true through the course of the investment. I’m not sure there is any way to get all of the right before making an investment, and surprises always happen, but the more work done to figure this part out can help determine whether the investment is worth making based on what its expected to return, and it often highlights something just plainly wrong with an investment.

Finally, know that there are very few great investment opportunities relative to the number of absolute junk stories out there, and finding ones that make sense for your risk tolerance and timeline just takes work. And experience. And even when you get everything right, sometimes good investments still go bad.


As the former CEO of a quantitative hedge fund complex, I’d suggest there are several critical qualities shared by successful hedge fund professionals, but the single most valuable may be intellectual flexibility.

Being a good quant manager requires a strong opinion about a market inefficiency, a carefully constructed and well tested, rules based plan to exploit the weakness, and a solid feedback mechanism to ensure the program is delivering the expected results. Great managers have ability to describe this inefficiency in simple terms, and explain why they are uniquely skilled to have identified it.

However great managers also presume that inefficiencies don’t persist, that market environments change and the best constructed plans eventually fail. Skilled quant managers have the ability to measure and understand when results are not consistent with expectations. Strong math skills or experience in physics are specifically useful for this, as much of the work is about managing data and probabilities. Programming skills are also useful, but not always necessary, but the single most important quality of a great quant manager is the ability to honestly assess when well constructed plans, systems and strategies aren’t working as designed.


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