final san diego venture group keynote 2016
TRANSCRIPT
San Diego Venture Group - Keynote
@msuster msuster
Mark Suster
BothSidesofTheTable.com
1 Basecamp - Choosing Your Market
2 Funding the Expedition
3 How Venture Capital Actually Works
4 Picking Your Crew
2
Startup Journey
Basecamp
3
4
The first step for a startup should be to focus on basecamp.
Many investors are too focused on the peak.
5
Experienced climbers have the luxury of skipping basecamp as they know the mountain
-Academic breakthroughs -Industry knowledge -Worked with VC investors before -History of exits
6
If there’s one thought I’d like to leave you with about planning an Internet business it’s that at scale the Internet drives deflationary economics.
Unit Price of a Good
Time
Deflation
7
But in dramatically increasing the market reach / size the Internet has created enormous companies that scale quickly.
Unit Price of a Good
Time
Deflation
Market Size
Market
8
The most successful new entrants enter the market with less functionality but massively cheaper prices - The Innovator’s Dilemma.
Performance/ Functionality
Time
New EntrantIncumbent
9
This is the most misunderstood thing about “disruption” - it’s a combination of 4 factors in which incumbents literally can’t respond
PricePerformance/ Functionality Margin
Market Size
10
Initially incumbent's customers’ requirements are high enough that the startup can’t meet their needs. Eventually startup is good enough and market trades down
Time
Performance/
Functionality
Incumbent
New Entrant
Incumbent
Customer
Requirements
Market trades down. Performance
good enough
11
Nearly every major Internet success story is built on the principal of deflationary economics
12
And disruptive technologies that have a structural advantage form the basis of many of our best investments
New Entrants Incumbents with Innovator’s Dilemma
13
I would encourage you to think about solving harder problems in bigger markets with fewer startups.
Defense/ Intelligence Education Healthcare
ProvisionHealthcare Back-End
Virtual Reality Transportation Manufacturing
Food Production/ Distribution
Funding the Expedition
14
Angels & Seed Accelerators
Crowd funding/Angellist
The 3 F’s: Friends, Family &
Fools
15
The good news is the sources of capital have increased dramatically in the past 5 years
16
At the earliest stage it is almost certain that your capital will need to be local - unless you’re going straight to venture / seed. The table stakes in 2016 are;
Product (or prototype)
1
Team
2
Engineering capabilities in-
house
3
17
The most important part of funding is finding your initial “anchor” investor
Then leveraging to find more
18
Create a sense of urgency
Under promise, over deliver
Show results
19
Prove you can ship product
20
Start building relationships early. When we first meet, you’re just a “dot” to me.
Performance
Time
The first time we meet
21
If I got excited on the basis of our first meeting I am really only judging your
presentation skills
That’s why Demo Days are artificial
22
Over time I start to see a pattern and get to know who you are. It’s much easier to invest when you understand somebody’s character.
Performance
Time
Meet investors early / often
23
How to find angels?
Take 50 Coffee Meetings
How Venture Capital Actually Works
24
25
VCs raise money on the expectations of delivering at least a 4x gross return (3x net)
$300m
$1.2Bn
Fund Size Expected Returns
4x
LP’s• Universities • Personal Funds • Insurance • Corporates
26
>80% of our returns are driven by <20% of our investments, following the Power Law
Retu
rns
10X
20X
30X
40X
50X
Deals
5-6 Deals 24 - 25 Deals
≤1X
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Let’s take what by most standard is considered an amazing outcome - an $80 million exit in 5 years.
$10M Post
$80M Acquisition
Initial Investment Exit
$2M$8M
$16M
$64M
+ Additional $2M over 5 years to keep pro rata
20%
20%
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The press will write about what a great outcome this is. Friends will congratulate us on our spectacular 4x. For us this is literally “average.”
$4M
$16M
4x
Invested Returned
29
It represents just 5% of our fund returned and 1.33% of our expected returns. This doesn’t even make a dent in venture.
$16M
$16M
$300M
$16M
$1.2B
~5% of fund returned 1.33% of expectations
30
Now let’s imagine a whopping $800 million exit.
$10M Post
$800M Acquisition
Initial Investment Exit
$2M
$8M
$160M
$640M
+ Additional $8M over 7-10
years
20%
20%
Even at 16x, returning $160 million is still just half of our fund and only 13% of our expected returns.
$10M
$160M
16x $160M
$300M
$160M
$1.2B
>50% of fund returned
13.33% of return expectations
Invested Returned
32
Which is why the VC model is really about the $3Bn+ outcomes
$10M Post
$3Bn Exit
Initial Investment
$2M
$8M
$450M
$2.55B
+ Additional $13M over 7-10
years
15%
20%
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And even still this would just be 33% of our expected returns. Venture is truly only aligned with enormous outcomes. That’s the business.
$15M
$450M
33x
$450M
$300M
$450M
$1.2B
150% of fund returned
>1/3 of return expectations
Invested Returned
Understanding what drives VC investment decisions can help you determine if right for you
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Picking Your Crew
35
36
There’s a huge premium for taking
the first leap
37
Short people shouldn’t hire
short people
38
Hire people that punch above their
weight class
39
You Can’t Build a World-Class Restaurant Without a World-Class Chef
Tech is no different
40
You need missionaries over
mercenaries
41
Stay lean for as long as you can
San Diego Venture Group - Keynote
Thank You