@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

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[ 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)

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[ 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 @ $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/

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 its 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

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

Investment Thesis + Model

Define Investment Thesis (geography, technology, customer segment, investment stage, etc)

Whats Your Unique Insight / Advantage? Show some proof or evidence of why youre not crazy (or at least not always wrong, occasionally)

Build Model of Potential Investments vs Returns

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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: Whats Your Thesis? Community: Founders / Mentors

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Writing / Speaking

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Selecting/Evaluating

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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)?

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The Flat, The Elbow, The Wall Invest @ The Flat

when prices are low

Double-down if/when you detect The Elbow (if valuation isnt crazy)

Dont invest @ The Wall unless capital is infinite if valuation starts running away, you usually cant 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

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http://www.amazon.com/Venture-Capital-Cycle-Paul-Gompers/dp/0262572389http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616https://www.goodreads.com/book/show/18702908-angel-investinghttp://venturehacks.com/

Questions? Comments?

More Info? http://500.co (our company) http://500hats.com (my blog) https://angel.co/500startups (our fund) Dave McClure, @DaveMcClure

http://500.cohttp://500hats.comhttps://angel.co/500startups

Appendix

500 Startupsto 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, lets say 10,000 founders / year)

1 VC can make 20 investments / year

10,000 founders / 20 deals per VC = 500 VCs