venture capital unlocked (stanford) / venture capital 2.0

@DaveMcClure @500Startups http://500.co

Stanford Univ - Feb 2016

Venture Capital 2.0 Make Lots of Little Bets.

Expect Most to Fail.

http://500.co

Dave McClureFounding Partner, 500 Startups

00s & 10s: VC: Founders Fund, Facebook fbFund, 500 Startups Angel: Mashery, Mint.com, SlideShare, Twilio, Wildfire, SendGrid Marketing: PayPal, Simply Hired, Mint.com, OReilly

80s & 90s: Entrepreneur: Aslan Computing (acqd by Servinet/Panurgy) Developer: Windows / SQL DB consultant (Intel, MSFT) Engineer: Johns Hopkins88, 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+ Cos / 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 StartupsRe-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 Its 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 Its 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 approvalAngel 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

http://bit.ly/99VCProblemshttp://bit.ly/99VCProblems

Portfolio Diversification Spray, not Pray

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 cos @ $100K 1st checks

100-200 cos @ $200-500K 2nd/3rd checks

(target 25-50 exits @ $100M+)

(assume high failure rate ~50-80%)

http://petersims.com/book/

Startup Risk Reduction

ConceptEarly

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 CrashesLEAN 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 3B people online

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

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 cos @ $100