What are your opinions on investing in pre-revenue companies? How did you value them when you worked in venture capital? Yeah, so it's tough. What you have to do is you have to think of the size of the...
total addressable market. And a lot of venture capital firms like Kleiner Perkins, and I had a partner from Kleiner Perkins, really good dude actually, a guest lecturer in one of my classes. But what Kleiner Perkins does, for example, It's quite often they'll never invest in a company where the size of the market, the total addressable market, isn't at least $20 billion. And the reason is, in the unlikely event that the company gets 5% share of a market, 5% of a $20 billion market is a billion dollars in annual revenue.
And so what a lot of investors do, especially with pre-revenue companies, is they look at the size of the total addressable market to see if it's big enough. What they... they also do, and the most important thing they do, is they analyze the management team.
Because ideas are commodities, but execution is not. The jockey is always more important than the horse. You know, it's interesting.
I'll teach you in my MBA program how to analyze management teams as well. What people do in business school, it's unfortunate, is they analyze business models. But what's the point?
What's the point of analyzing a business model if you don't like the management team? You always start with the management team, and then you you go from there. So in terms of how to value companies that are pre-revenue, you look at the size of the total addressable market and what percent you think they're going to get of that TAM, meaning total addressable market longer term. And the way to come up with a total addressable market is you can do a search for total addressable market of whatever sector it is.
And a lot of times, great consulting firms like Forrester, Gartner, McKinsey, Boston Consulting Group, Accenture, a lot of times those affirmations consulting firms and many others will write these lengthy reports on industries and they'll release excerpts of it meaning the total addressable market and if you can't find it that way then look at the top 25 companies in a sector and add up the annual revenue for the top 25 companies because that's a good enough proxy for the size of the total addressable market then when you once you feel comfortable with the tam the total addressable market and the management team of course once you feel comfortable with those two factors the next step is to create a financial model. In the financial model, you're going to, the company is going to have revenue in your model. And I teach you my MBA degree program in the Venture Capital Bootcamp in the third of four semesters. I teach you in the third semester how to create financial models for companies that don't have revenue at all. Because you will prognosticate or project through a pro forma financial statement how much money the company's going to make in revenue longer term.
And then eventually earnings. And I always look. Look out five or 10 years whenever I analyze companies when it comes to financial modeling, of which I've done a lot of.
And I'll teach you the greatest hits of that in the MBA degree program.