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Venture Capital Unlocked (Stanford) / Venture Capital 2.0

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Dave McClure
Dave McClure

slides for my "Venture Capital 2.0" opening talk at Stanford School Continuing Studies, VC101 class "Venture Capital Unlocked" #VCunlocked #500startups

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@DaveMcClure @500Startups http://500.co Stanford Univ - Feb 2016 Venture Capital 2.0 Make Lots of Little Bets. Expect Most to Fail.
Dave McClure
 Founding Partner, 500 Startups 00’s & 10’s: • VC: Founders Fund, Facebook fbFund, 500 Startups • Angel: Mashery, Mint.com, SlideShare, Twilio, Wildfire, SendGrid • Marketing: PayPal, Simply Hired, Mint.com, O’Reilly 80’s & 90’s: • Entrepreneur: Aslan Computing (acq’d by Servinet/Panurgy) • Developer: Windows / SQL DB consultant (Intel, MSFT) • Engineer: Johns Hopkins‘88, BS Eng / Applied Math
How to Become a VC • Option 1: Go to Harvard/Stanford/Wharton, Get MBA, Become VC Associate, Work at McKinsey / Google / Facebook, Re-Join VC as Junior Partner or Partner • Option 2: Start a Startup, Grow Really Big, Sell for $1B+, Join VC as Partner • Option 3: Wander around lost in the forest, Work Your Ass Off for 25 yrs, do some angel investing, Start your own Firm
• What is 500? – $220M silicon valley VC fund + startup accelerator – 100 people / 30 partners / 25 languages / 20 countries – 1500+ Companies / 3000+ Founders / 200+ Mentors – Investment, Accelerator, Distro, Marketing, Events, Education – Community + Content + Conferences • 1500+ Co’s / 50+ Countries – Credit Karma ($3.5B) – Twilio ($1B+) – GrabTaxi ($1B+) – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Behance (acq Adobe, $150M) – Simple (acq BBVA, $117M) – Sunrise (acq MSFT, $100M) – Udemy – Ipsy – TalkDesk – Intercom 500 Startups
 Global Seed Fund & Startup Accelerator
Re-inventing a 50 year old sport: Venture Capital 2.0
Football West Coast Offense Baseball MoneyBall Basketball 3 point revolution Venture Capital 500 Startups “Lots of little bets” 500 Strategy: MoneyBall for Startups Re-inventing a 50-year old sport
500 Startups… WTF?
500 Startups Mission 1. Find Smart People. 2. Give Them Money. 3. Wait for Good Shit to Happen.
Building Startup Ecosystems
500 Startups Mission • Provide capital, community, education to smart people (founders, investors) • Build functional startup ecosystems (founders, team, angels, accelerators, VC funds, capital, exits, liquidity, etc) • #HFGSD: Have Fun, Get Shit Done.
500 Startups History: What a Long Strange Trip It’s Been
Year People Locations AUM $ Companies 2010 5 MV 10 75 2011 10 BRZ 30 250 2012 15 MX, IND 50 450 2013 30 CHN, SEA 75 650 2014 50 SF, MENA 125 900 2015 100 Korea, UK, Thailand, Vietnam, Germany, E.EU, Israel, Japan, Turkey 200 1400 2016 150+ +10-20 More ??? 2000+ 500 Startups History: What a Long Strange Trip It’s Been
500 Startups: a Platform made of People #500STRONG #500LOVE #HFGSD
100 People, 20 Countries, 25 Languages
500 Startups: “Full-Stack” VC
Legal review Partner approval Angel Pre-Seed Seed Post-Seed Series A/B Growth Accelerator Seed “Distro" Follow-On Selection Criteria – Data-Driven Process Based on Pre-defined Metrics • Product or service solves a problem for a specific target customer • Capital-efficient business; operational at less than $1M in external financing • Scalable internet-based distribution (search, social, mobile) or proven ability to scale sales • Functional prototype required before investing (or previous product success) • Measurable traction: engaged users, some revenue, and attractive unit economics • Cross-functional team with design, engineering and marketing expertise How 500 Invests: Accelerator, Seed, Distro
http://bit.ly/99VCProblems
Portfolio Diversification “Spray, not Pray”
Venture Capital Unlocked (Stanford) / Venture Capital 2.0
Q: Chances of spotting unicorn?/ a) 1% b) 2% c) 5% d) 10% e) ZERO
Chances of spotting unicorn = ~1%/
If portfolio size = 15 companies/
/ If portfolio size = 30 companies
/ If portfolio size = 100 companies
500 Strategy: Lots of Little Bets* 1) make lots of little bets on pre-traction, early-stage startups 3) wait 5-10 years for returns: -10-20% small exits @1-5X ($5-25M+) -5-10% larger exits @5-20X ($25-250M+) -1-2% unicorns @20-50X+ ($250M-1B+) *See Peter Sims book: “Little Bets” 2) over the next five years, double-down on top 20-30% ~500 co’s @ $100K 1st checks 100-200 co’s @ $200-500K 2nd/3rd checks (target 25-50 exits @ $100M+) (assume high failure rate ~50-80%)
Startup Risk Reduction Concept Early Customer Usage Scalable Customer Acquisition [about to be] Profitable Unit Economics Scalable Profitable Business Functional Prototype PRODUCT MARKET REVENUE Exit? When 500 Likes to Invest
Investor Ecosystem Angels & Incubators ($0-10M) “Micro-VC” Funds ($10-100M) “Big” VC Funds ($100-500M) “Mega” VC Funds (>$500M) Incubation 0-$100K Seed $100K-$2M Series A/B $2-10M Series B/C $10-50M Bootstrap, KickStarter, AngelList, Crowdfunding stage where 500 writes first checks stage where 500 doubles-down (maybe)
[ This Talk ] • Changes in Building Technology Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Investment Workshop: “VC101 in 60m” • Q&A
Changes in Tech Startups • LESS Capital required to build product, get to market – Dramatically reduced cost for servers, software, bandwidth – Funding Platforms: KickStarter, Angel List, Funders Club, etc – Access to online platforms for 100M-1B+ consumers, smallbiz, etc • MORE Customers via ONLINE platforms (100M+ users) – Search (Google, Baidu) – Social (Facebook, Twitter, LinkedIn) – Mobile (Apple, Android) – E-Commerce (Amazon, PayPal, Alibaba) – Media (YouTube, Pinterest, Instagram) – Comm/Msgs (WeChat, WhatsApp, SnapChat, Email, Voice, SMS, etc) • LOTS of little bets: Accelerators, Angels, Angel List, Small Exits – Capital + Co-working + Mentoring -> Design, Data, Distribution – “Fast, Cheap Fail”, network effects, quantitative + iterative investments
Platforms 2.0
 Search, Social, Mobile, Video, Messaging
Before & After 2 Dot-Com Crashes
 LEAN Startup: Simpler, Faster, Cheaper, Smarter Before 2000 ”Big, Fat, Dinosaur Startup” • Sun Servers • Oracle DB • Exodus Hosting • 12-24mo dev cycle • 6-18mo sales cycle • <100M people online • $1-2M seed round • $3-5M Series A • Sand Hill Road crawl After 2008 ”Lean, Little, Cockroach Startup” • AWS, Google, PayPal, FB, TW • Cloud + Open Source SW • Lean Startup / Startup Wknd • 3-90d dev cycle • SaaS / online sales • >3B people online • <$100K incub + <$1M seed • $1-3M Series A • Angel List global visibility
Startup Education • Business Plans / Revenue Projections • Software + Design/UX • Lean Startups + Continuous Deploy (Iterate) • Metrics Framework + Continuous Testing • Functional Prototypes / Customer Development • Scalable [Internet] Marketing & Sales • Cash-Flow Positive Unit Economics • Pitching + Fundraising (Angel List) • Monetization + Payments • Customer Service + Support 32
[ This Talk ] • Changes in Building Technology Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Investment Workshop: “VC101 in 60m” • Q&A
Industry Changes • Financial Market Crises (2000, 2008) • Startup Efficiency, Lean Startup Movement, Reduced Capital Costs • Growing Market, Global Distribution Platforms, “Growth Hacking” • Improved Monetization, Payments Infrastructure • Developing Startup Ecosystems, Global M&A • Micro VC: Seed Funds (ex: First Round Capital) • Incubators & Accelerators (ex: Y Combinator, 500 Startups) • Funding Platforms (ex: Angel List, Kickstarter) • Global Market of Angel Investors, Accelerators, Seed Funds more info: http://PreMoney.co
SV Investor Ecosystem Angels & Incubators ($0-10M) “Micro-VC” Funds ($10-100M) “Big” VC Funds ($100-500M) “Mega” VC Funds (>$500M) First Round A16Z Y-Combinator SoftTech (Clavier) Felicis (Senkut) SV Angel Sequoia Union Square Incubation Seed/A Series A/B Series B/C Bootstrap, KickStarter, AngelList, Crowdfunding
Angel List: Platform for Investors + Startups • Startups + Metrics • Founders + Bios • Investors + Syndicates • Accelerators + Online Applications • Jobs + Talent 36
Investor Education • Startups are NOT Real Estate • Most Startups Fail / Power Law Returns • Portfolio Approach (20-100+ investments) • Legal Structure, Financial Structure • Syndication + Co-Investment • Access to Downstream Capital • Exits & Liquidity 37
Critical Ecosystem Factors • Optimism & Belief (“Silicon Valley”) • Mentorship + Education (Knowledge) • Universities + Companies (People) • Capital, Legal, Finance (Infrastructure) • Engineering + Design / UX (Product) • Platforms + Distribution (Customers) • Online Payments (Monetization) • IPO / M&A Market (Exits) 38
[ This Talk ] • Changes in Building Technology Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Investment Workshop: “VC101 in 60m” • Q&A
Building Startup Ecosystems
500 Strategy: Lots of Little Bets* 1) make lots of little bets on pre-traction, early-stage startups 3) wait 5-10 years for returns: -10-20% small exits @1-5X ($5-25M+) -5-10% larger exits @5-20X ($25-250M+) -1-2% unicorns @20-50X+ ($250M-1B+) *See Peter Sims book: “Little Bets” 2) over the next five years, double-down on top 20-30% ~500 co’s @ $100K 1st checks 100-200 co’s @ $200-500K 2nd/3rd checks (target 25-50 exits @ $100M+) (assume high failure rate ~50-80%)
The Lean Investor Make lots of little bets: • Start with many small “experiments” • Filter out failures + small wins • Double-down on stuff that looks like it’s working • Incubation: $0-100K (“Build & Validate Product”) • Seed: $100K-$1M (“Test & Grow Marketing Channels””) • Venture: $1M-$10M (“Maximize Growth & Revenue”)
Investment Stage #1: 
 Product Validation + Customer Usage • Structure – 1-3 founders – $0-$100K investment – Incubator environment: multiple peers, mentors/advisors • Test Functional Prototype / “Minimum Viable Product” (MVP): – Prototype->Alpha, ~3-6 months – Develop Minimal Critical Feature Set => Get to “It Works! Someone Uses It.” – Improve Design & Usability, Setup Conversion Metrics – Test Small-Scale Customer Adoption (10-1000 users) • Demonstrate Concept, Reduce Product Risk, Test Functional Use • Develop Metrics & Filter for Possible Future Investment
Investment Stage #2: 
 Market Validation + Revenue Testing • Structure – 2-10 person team – $100K-$1M investment – Syndicate of Angel Investors / Small VC Funds • Improve Product, Expand Customers, Test Revenue: – Alpha->Beta, ~6-12 months – Scale Customer Adoption => “Many People Use It, & They Pay.” – Test Marketing Campaigns, Customer Acquisition Channels + Cost – Test Revenue Generation, Find Profitable Customer Segments • Prove Solution/Benefit, Assess Market Size • Test Channel Cost, Revenue Opportunity • Determine Org Structure, Key Hires
Investment Stage #3: 
 Revenue Validation + Growth • Structure – 5-25 person team – $1M-$10M investment – Seed & Venture Investors • Make Money (or Go Big), Get to Sustainability: – Beta->Production, 12-24 months – Revenue / Growth => “We Can Make (a lot of) Money!” – Mktg Plan => Predictable Channels / Campaigns + Budget – Scalability & Infrastructure, Customer Service & Operations – Connect with Distribution Partners, Expand Growth • Prove/Expand Market, Operationalize Business • Future Milestones: Profitable/Sustainable, Exit Options
[ This Talk ] • Changes in Building Technology Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Investment Workshop: “VC101 in 60m” • Q&A
Investing Workshop • General Strategy • Investment Thesis & Model • Helping Companies Succeed • Generating Dealflow • Selecting / Evaluating Opportunities • Deal Terms / Deal Memo • Follow-On Strategy • Investing Resources 47
Startup Investment Stages • Concept • Product • Functional Prototype • Early Users/Customers • Other Investors • Profitable Unit Economics? • Scalable Cust Acquisition? • Profitable Business • Scalable Organization • Exit / Liquidity? 48
Startup Risk Reduction Concept Early Customer Usage Scalable Customer Acquisition [about to be] Profitable Unit Economics Scalable Profitable Business Functional Prototype PRODUCT MARKET REVENUE Exit? When 500 Likes to Invest
Investment Thesis + Model • Define Investment Thesis (geography, technology, customer segment, investment stage, etc) • What’s Your Unique Insight / Advantage? Show some proof or evidence of why you’re not crazy (or at least not always wrong, occasionally…) • Build Model of Potential Investments vs Returns 50
Helping Companies Succeed • Advice (Product, Design, Marketing, etc) • Recruiting • Advisor / Mentor Intros • Growth Consulting • Next Round / Investor Intros • Exits? M&A Consulting? 51
Investment Allocation Strategy • How long will companies take to exit / reach liquidity? (3-7 yrs) • How long is your investment cycle? (ex: 3-5 yrs) • When will capital be returned? (1X in 5-8 yrs, 2-5X in 8-12 yrs) • Simple allocation for $10M investment budget over first 5 years • 50% 1st checks + 50% 2nd/3rd checks • ~100 1st checks @ $50K each ($5M), ~20 checks / yr • ~10-20 2nd checks @ $250-500K each ($5M), ~3 checks / yr 1 2 3 54 7 8 109 11 12 13 15146 1 5432 50 15 .. .. ..
Generating Dealflow • Writing / Speaking • Attend (or Run!) User Groups / Conferences • Networking / Referrals / LinkedIn / Email • Angel List / other funding platforms • 500 / YC / TechStars / StartX / other acc • Sand Hill Angels / angel investing clubs • Domain Focus: What’s Your Thesis? • Community: Founders / Mentors 53
Writing / Speaking 54
Selecting/Evaluating 55
Deal Terms, Deal Memos • Summarize Opportunity: • Concept, Product, Problem, Market, Traction, Team, Terms, IP, Users, Revenue, Other Investors, Conviction • [Summary of Previous Investments made + % ownership] • Pre-Money Valuation or Cap + Discount (Ask for Min 2x?) • Ask for Info Rights? (YES) Ask for Pro-Rata / Follow-On Rights? • Major Investor Status? (Usually Info Rights + Pro-Rata Rights) • Do You Have Leverage (or Not)? 56
The Flat, The Elbow, The Wall • Invest @ “The Flat” when prices are low • Double-down if/when you detect “The Elbow” (if valuation isn’t crazy) • Don’t invest @ “The Wall” unless capital is infinite — if valuation starts running away, you usually can’t buy any meaningful ownership relative to existing. Time Revenue, Growth Startup W Startup L Startup K “The Flat” “The Elbow” “The Wall” 1 2 3 3
Investing Resources • The Venture Capital Cycle (Gompers, Lerner) • Venture Deals (Feld, Mendelson) • Angel Investing (Rose) • Venture Hacks (Naval, Nivi) • blogs: Fred Wilson, Brad Feld, Mark Suster • Quora: Jason Lemkin, David Rose, etc 58
Questions? Comments? • More Info? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund) – Dave McClure, @DaveMcClure
Appendix
500 Startups to 500 VCs
We live in a World of ABUNDANCE • There are LOTS of talented people in the world • There are LOTS of entrepreneurs everywhere • There is a LOT of capital sitting around, BUT…. • Not much is available for un-tested entrepreneurs :( • 500 Startups plans to change that.
Who, What is an Entrepreneur?
Who/What is an Entrepreneur? • someone who WANTS to start a business • someone who can RUN a business • someone who can run a SUSTAINABLE business • someone who can run a PROFITABLE business that creates VALUE & employs LARGE # people • someone who can run a $10M/yr business that employs 100+people
How Big Is The Market? Q: How Many Entrepreneurs? • How Many People = 7,000,000,000 on earth • 1% of Humanity is Entrepreneurial = 70,000,000 founders • Live 70 years, try at least once = 1,000,000 founders / year • How Much Do They Need? Zero? $100K? $1M? $10M? • How Big is the Market = 1M founders x $10M = $10 TRILLION / year • Come on, REALLY? (ok Divide by 100) • 100,000 founders / year * $1M each = $100 BILLION / year
How Many VCs? • How Many Founders? 1,000,000 founders / year • (ok, divide by 100, let’s say 10,000 founders / year) • 1 VC can make 20 investments / year • 10,000 founders / 20 deals per VC = 500 VCs

More Related Content

Venture Capital Unlocked (Stanford) / Venture Capital 2.0

  • 1. @DaveMcClure @500Startups http://500.co Stanford Univ - Feb 2016 Venture Capital 2.0 Make Lots of Little Bets. Expect Most to Fail.
  • 2. Dave McClure
 Founding Partner, 500 Startups 00’s & 10’s: • VC: Founders Fund, Facebook fbFund, 500 Startups • Angel: Mashery, Mint.com, SlideShare, Twilio, Wildfire, SendGrid • Marketing: PayPal, Simply Hired, Mint.com, O’Reilly 80’s & 90’s: • Entrepreneur: Aslan Computing (acq’d by Servinet/Panurgy) • Developer: Windows / SQL DB consultant (Intel, MSFT) • Engineer: Johns Hopkins‘88, BS Eng / Applied Math
  • 3. How to Become a VC • Option 1: Go to Harvard/Stanford/Wharton, Get MBA, Become VC Associate, Work at McKinsey / Google / Facebook, Re-Join VC as Junior Partner or Partner • Option 2: Start a Startup, Grow Really Big, Sell for $1B+, Join VC as Partner • Option 3: Wander around lost in the forest, Work Your Ass Off for 25 yrs, do some angel investing, Start your own Firm
  • 4. • What is 500? – $220M silicon valley VC fund + startup accelerator – 100 people / 30 partners / 25 languages / 20 countries – 1500+ Companies / 3000+ Founders / 200+ Mentors – Investment, Accelerator, Distro, Marketing, Events, Education – Community + Content + Conferences • 1500+ Co’s / 50+ Countries – Credit Karma ($3.5B) – Twilio ($1B+) – GrabTaxi ($1B+) – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Behance (acq Adobe, $150M) – Simple (acq BBVA, $117M) – Sunrise (acq MSFT, $100M) – Udemy – Ipsy – TalkDesk – Intercom 500 Startups
 Global Seed Fund & Startup Accelerator
  • 5. Re-inventing a 50 year old sport: Venture Capital 2.0
  • 6. Football West Coast Offense Baseball MoneyBall Basketball 3 point revolution Venture Capital 500 Startups “Lots of little bets” 500 Strategy: MoneyBall for Startups Re-inventing a 50-year old sport
  • 8. 500 Startups Mission 1. Find Smart People. 2. Give Them Money. 3. Wait for Good Shit to Happen.
  • 10. 500 Startups Mission • Provide capital, community, education to smart people (founders, investors) • Build functional startup ecosystems (founders, team, angels, accelerators, VC funds, capital, exits, liquidity, etc) • #HFGSD: Have Fun, Get Shit Done.
  • 11. 500 Startups History: What a Long Strange Trip It’s Been
  • 12. Year People Locations AUM $ Companies 2010 5 MV 10 75 2011 10 BRZ 30 250 2012 15 MX, IND 50 450 2013 30 CHN, SEA 75 650 2014 50 SF, MENA 125 900 2015 100 Korea, UK, Thailand, Vietnam, Germany, E.EU, Israel, Japan, Turkey 200 1400 2016 150+ +10-20 More ??? 2000+ 500 Startups History: What a Long Strange Trip It’s Been
  • 13. 500 Startups: a Platform made of People #500STRONG #500LOVE #HFGSD
  • 14. 100 People, 20 Countries, 25 Languages
  • 16. Legal review Partner approval Angel Pre-Seed Seed Post-Seed Series A/B Growth Accelerator Seed “Distro" Follow-On Selection Criteria – Data-Driven Process Based on Pre-defined Metrics • Product or service solves a problem for a specific target customer • Capital-efficient business; operational at less than $1M in external financing • Scalable internet-based distribution (search, social, mobile) or proven ability to scale sales • Functional prototype required before investing (or previous product success) • Measurable traction: engaged users, some revenue, and attractive unit economics • Cross-functional team with design, engineering and marketing expertise How 500 Invests: Accelerator, Seed, Distro
  • 20. Q: Chances of spotting unicorn?/ a) 1% b) 2% c) 5% d) 10% e) ZERO
  • 22. If portfolio size = 15 companies/
  • 23. / If portfolio size = 30 companies
  • 24. / If portfolio size = 100 companies
  • 25. 500 Strategy: Lots of Little Bets* 1) make lots of little bets on pre-traction, early-stage startups 3) wait 5-10 years for returns: -10-20% small exits @1-5X ($5-25M+) -5-10% larger exits @5-20X ($25-250M+) -1-2% unicorns @20-50X+ ($250M-1B+) *See Peter Sims book: “Little Bets” 2) over the next five years, double-down on top 20-30% ~500 co’s @ $100K 1st checks 100-200 co’s @ $200-500K 2nd/3rd checks (target 25-50 exits @ $100M+) (assume high failure rate ~50-80%)
  • 26. Startup Risk Reduction Concept Early Customer Usage Scalable Customer Acquisition [about to be] Profitable Unit Economics Scalable Profitable Business Functional Prototype PRODUCT MARKET REVENUE Exit? When 500 Likes to Invest
  • 27. Investor Ecosystem Angels & Incubators ($0-10M) “Micro-VC” Funds ($10-100M) “Big” VC Funds ($100-500M) “Mega” VC Funds (>$500M) Incubation 0-$100K Seed $100K-$2M Series A/B $2-10M Series B/C $10-50M Bootstrap, KickStarter, AngelList, Crowdfunding stage where 500 writes first checks stage where 500 doubles-down (maybe)
  • 28. [ This Talk ] • Changes in Building Technology Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Investment Workshop: “VC101 in 60m” • Q&A
  • 29. Changes in Tech Startups • LESS Capital required to build product, get to market – Dramatically reduced cost for servers, software, bandwidth – Funding Platforms: KickStarter, Angel List, Funders Club, etc – Access to online platforms for 100M-1B+ consumers, smallbiz, etc • MORE Customers via ONLINE platforms (100M+ users) – Search (Google, Baidu) – Social (Facebook, Twitter, LinkedIn) – Mobile (Apple, Android) – E-Commerce (Amazon, PayPal, Alibaba) – Media (YouTube, Pinterest, Instagram) – Comm/Msgs (WeChat, WhatsApp, SnapChat, Email, Voice, SMS, etc) • LOTS of little bets: Accelerators, Angels, Angel List, Small Exits – Capital + Co-working + Mentoring -> Design, Data, Distribution – “Fast, Cheap Fail”, network effects, quantitative + iterative investments
  • 30. Platforms 2.0
 Search, Social, Mobile, Video, Messaging
  • 31. Before & After 2 Dot-Com Crashes
 LEAN Startup: Simpler, Faster, Cheaper, Smarter Before 2000 ”Big, Fat, Dinosaur Startup” • Sun Servers • Oracle DB • Exodus Hosting • 12-24mo dev cycle • 6-18mo sales cycle • <100M people online • $1-2M seed round • $3-5M Series A • Sand Hill Road crawl After 2008 ”Lean, Little, Cockroach Startup” • AWS, Google, PayPal, FB, TW • Cloud + Open Source SW • Lean Startup / Startup Wknd • 3-90d dev cycle • SaaS / online sales • >3B people online • <$100K incub + <$1M seed • $1-3M Series A • Angel List global visibility
  • 32. Startup Education • Business Plans / Revenue Projections • Software + Design/UX • Lean Startups + Continuous Deploy (Iterate) • Metrics Framework + Continuous Testing • Functional Prototypes / Customer Development • Scalable [Internet] Marketing & Sales • Cash-Flow Positive Unit Economics • Pitching + Fundraising (Angel List) • Monetization + Payments • Customer Service + Support 32
  • 33. [ This Talk ] • Changes in Building Technology Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Investment Workshop: “VC101 in 60m” • Q&A
  • 34. Industry Changes • Financial Market Crises (2000, 2008) • Startup Efficiency, Lean Startup Movement, Reduced Capital Costs • Growing Market, Global Distribution Platforms, “Growth Hacking” • Improved Monetization, Payments Infrastructure • Developing Startup Ecosystems, Global M&A • Micro VC: Seed Funds (ex: First Round Capital) • Incubators & Accelerators (ex: Y Combinator, 500 Startups) • Funding Platforms (ex: Angel List, Kickstarter) • Global Market of Angel Investors, Accelerators, Seed Funds more info: http://PreMoney.co
  • 35. SV Investor Ecosystem Angels & Incubators ($0-10M) “Micro-VC” Funds ($10-100M) “Big” VC Funds ($100-500M) “Mega” VC Funds (>$500M) First Round A16Z Y-Combinator SoftTech (Clavier) Felicis (Senkut) SV Angel Sequoia Union Square Incubation Seed/A Series A/B Series B/C Bootstrap, KickStarter, AngelList, Crowdfunding
  • 36. Angel List: Platform for Investors + Startups • Startups + Metrics • Founders + Bios • Investors + Syndicates • Accelerators + Online Applications • Jobs + Talent 36
  • 37. Investor Education • Startups are NOT Real Estate • Most Startups Fail / Power Law Returns • Portfolio Approach (20-100+ investments) • Legal Structure, Financial Structure • Syndication + Co-Investment • Access to Downstream Capital • Exits & Liquidity 37
  • 38. Critical Ecosystem Factors • Optimism & Belief (“Silicon Valley”) • Mentorship + Education (Knowledge) • Universities + Companies (People) • Capital, Legal, Finance (Infrastructure) • Engineering + Design / UX (Product) • Platforms + Distribution (Customers) • Online Payments (Monetization) • IPO / M&A Market (Exits) 38
  • 39. [ This Talk ] • Changes in Building Technology Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Investment Workshop: “VC101 in 60m” • Q&A
  • 41. 500 Strategy: Lots of Little Bets* 1) make lots of little bets on pre-traction, early-stage startups 3) wait 5-10 years for returns: -10-20% small exits @1-5X ($5-25M+) -5-10% larger exits @5-20X ($25-250M+) -1-2% unicorns @20-50X+ ($250M-1B+) *See Peter Sims book: “Little Bets” 2) over the next five years, double-down on top 20-30% ~500 co’s @ $100K 1st checks 100-200 co’s @ $200-500K 2nd/3rd checks (target 25-50 exits @ $100M+) (assume high failure rate ~50-80%)
  • 42. The Lean Investor Make lots of little bets: • Start with many small “experiments” • Filter out failures + small wins • Double-down on stuff that looks like it’s working • Incubation: $0-100K (“Build & Validate Product”) • Seed: $100K-$1M (“Test & Grow Marketing Channels””) • Venture: $1M-$10M (“Maximize Growth & Revenue”)
  • 43. Investment Stage #1: 
 Product Validation + Customer Usage • Structure – 1-3 founders – $0-$100K investment – Incubator environment: multiple peers, mentors/advisors • Test Functional Prototype / “Minimum Viable Product” (MVP): – Prototype->Alpha, ~3-6 months – Develop Minimal Critical Feature Set => Get to “It Works! Someone Uses It.” – Improve Design & Usability, Setup Conversion Metrics – Test Small-Scale Customer Adoption (10-1000 users) • Demonstrate Concept, Reduce Product Risk, Test Functional Use • Develop Metrics & Filter for Possible Future Investment
  • 44. Investment Stage #2: 
 Market Validation + Revenue Testing • Structure – 2-10 person team – $100K-$1M investment – Syndicate of Angel Investors / Small VC Funds • Improve Product, Expand Customers, Test Revenue: – Alpha->Beta, ~6-12 months – Scale Customer Adoption => “Many People Use It, & They Pay.” – Test Marketing Campaigns, Customer Acquisition Channels + Cost – Test Revenue Generation, Find Profitable Customer Segments • Prove Solution/Benefit, Assess Market Size • Test Channel Cost, Revenue Opportunity • Determine Org Structure, Key Hires
  • 45. Investment Stage #3: 
 Revenue Validation + Growth • Structure – 5-25 person team – $1M-$10M investment – Seed & Venture Investors • Make Money (or Go Big), Get to Sustainability: – Beta->Production, 12-24 months – Revenue / Growth => “We Can Make (a lot of) Money!” – Mktg Plan => Predictable Channels / Campaigns + Budget – Scalability & Infrastructure, Customer Service & Operations – Connect with Distribution Partners, Expand Growth • Prove/Expand Market, Operationalize Business • Future Milestones: Profitable/Sustainable, Exit Options
  • 46. [ This Talk ] • Changes in Building Technology Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Investment Workshop: “VC101 in 60m” • Q&A
  • 47. Investing Workshop • General Strategy • Investment Thesis & Model • Helping Companies Succeed • Generating Dealflow • Selecting / Evaluating Opportunities • Deal Terms / Deal Memo • Follow-On Strategy • Investing Resources 47
  • 48. Startup Investment Stages • Concept • Product • Functional Prototype • Early Users/Customers • Other Investors • Profitable Unit Economics? • Scalable Cust Acquisition? • Profitable Business • Scalable Organization • Exit / Liquidity? 48
  • 49. Startup Risk Reduction Concept Early Customer Usage Scalable Customer Acquisition [about to be] Profitable Unit Economics Scalable Profitable Business Functional Prototype PRODUCT MARKET REVENUE Exit? When 500 Likes to Invest
  • 50. Investment Thesis + Model • Define Investment Thesis (geography, technology, customer segment, investment stage, etc) • What’s Your Unique Insight / Advantage? Show some proof or evidence of why you’re not crazy (or at least not always wrong, occasionally…) • Build Model of Potential Investments vs Returns 50
  • 51. Helping Companies Succeed • Advice (Product, Design, Marketing, etc) • Recruiting • Advisor / Mentor Intros • Growth Consulting • Next Round / Investor Intros • Exits? M&A Consulting? 51
  • 52. Investment Allocation Strategy • How long will companies take to exit / reach liquidity? (3-7 yrs) • How long is your investment cycle? (ex: 3-5 yrs) • When will capital be returned? (1X in 5-8 yrs, 2-5X in 8-12 yrs) • Simple allocation for $10M investment budget over first 5 years • 50% 1st checks + 50% 2nd/3rd checks • ~100 1st checks @ $50K each ($5M), ~20 checks / yr • ~10-20 2nd checks @ $250-500K each ($5M), ~3 checks / yr 1 2 3 54 7 8 109 11 12 13 15146 1 5432 50 15 .. .. ..
  • 53. Generating Dealflow • Writing / Speaking • Attend (or Run!) User Groups / Conferences • Networking / Referrals / LinkedIn / Email • Angel List / other funding platforms • 500 / YC / TechStars / StartX / other acc • Sand Hill Angels / angel investing clubs • Domain Focus: What’s Your Thesis? • Community: Founders / Mentors 53
  • 56. Deal Terms, Deal Memos • Summarize Opportunity: • Concept, Product, Problem, Market, Traction, Team, Terms, IP, Users, Revenue, Other Investors, Conviction • [Summary of Previous Investments made + % ownership] • Pre-Money Valuation or Cap + Discount (Ask for Min 2x?) • Ask for Info Rights? (YES) Ask for Pro-Rata / Follow-On Rights? • Major Investor Status? (Usually Info Rights + Pro-Rata Rights) • Do You Have Leverage (or Not)? 56
  • 57. The Flat, The Elbow, The Wall • Invest @ “The Flat” when prices are low • Double-down if/when you detect “The Elbow” (if valuation isn’t crazy) • Don’t invest @ “The Wall” unless capital is infinite — if valuation starts running away, you usually can’t buy any meaningful ownership relative to existing. Time Revenue, Growth Startup W Startup L Startup K “The Flat” “The Elbow” “The Wall” 1 2 3 3
  • 58. Investing Resources • The Venture Capital Cycle (Gompers, Lerner) • Venture Deals (Feld, Mendelson) • Angel Investing (Rose) • Venture Hacks (Naval, Nivi) • blogs: Fred Wilson, Brad Feld, Mark Suster • Quora: Jason Lemkin, David Rose, etc 58
  • 59. Questions? Comments? • More Info? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund) – Dave McClure, @DaveMcClure
  • 62. We live in a World of ABUNDANCE • There are LOTS of talented people in the world • There are LOTS of entrepreneurs everywhere • There is a LOT of capital sitting around, BUT…. • Not much is available for un-tested entrepreneurs :( • 500 Startups plans to change that.
  • 63. Who, What is an Entrepreneur?
  • 64. Who/What is an Entrepreneur? • someone who WANTS to start a business • someone who can RUN a business • someone who can run a SUSTAINABLE business • someone who can run a PROFITABLE business that creates VALUE & employs LARGE # people • someone who can run a $10M/yr business that employs 100+people
  • 65. How Big Is The Market? Q: How Many Entrepreneurs? • How Many People = 7,000,000,000 on earth • 1% of Humanity is Entrepreneurial = 70,000,000 founders • Live 70 years, try at least once = 1,000,000 founders / year • How Much Do They Need? Zero? $100K? $1M? $10M? • How Big is the Market = 1M founders x $10M = $10 TRILLION / year • Come on, REALLY? (ok Divide by 100) • 100,000 founders / year * $1M each = $100 BILLION / year
  • 66. How Many VCs? • How Many Founders? 1,000,000 founders / year • (ok, divide by 100, let’s say 10,000 founders / year) • 1 VC can make 20 investments / year • 10,000 founders / 20 deals per VC = 500 VCs