slides for my "Venture Capital 2.0" opening talk at Stanford School Continuing Studies, VC101 class "Venture Capital Unlocked" #VCunlocked #500startups
2. Dave McClureâ¨
Founding Partner, 500 Startups
00âs & 10âs:
⢠VC: Founders Fund, Facebook fbFund, 500 Startups
⢠Angel: Mashery, Mint.com, SlideShare, Twilio, Wildfire, SendGrid
⢠Marketing: PayPal, Simply Hired, Mint.com, OâReilly
80âs & 90âs:
⢠Entrepreneur: Aslan Computing (acqâd by Servinet/Panurgy)
⢠Developer: Windows / SQL DB consultant (Intel, MSFT)
⢠Engineer: Johns Hopkinsâ88, 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?
â $220M silicon valley VC fund + startup accelerator
â 100 people / 30 partners / 25 languages / 20 countries
â 1500+ Companies / 3000+ Founders / 200+ Mentors
â Investment, Accelerator, Distro, Marketing, Events, Education
â Community + Content + Conferences
⢠1500+ Coâs / 50+ Countries
â Credit Karma ($3.5B)
â Twilio ($1B+)
â GrabTaxi ($1B+)
â Wildfire (acq GOOG, $350M)
â MakerBot (acq SSYS, $400M)
â Viki (acq Rakuten, $200M)
â Behance (acq Adobe, $150M)
â Simple (acq BBVA, $117M)
â Sunrise (acq MSFT, $100M)
â Udemy
â Ipsy
â TalkDesk
â Intercom
500 Startupsâ¨
Global Seed Fund & Startup Accelerator
16. Legal review Partner approval
Angel Pre-Seed Seed Post-Seed Series A/B Growth
Accelerator
Seed
âDistro"
Follow-On
Selection Criteria â 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
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: âLittle Betsâ
2) over the next five years,
double-down on top 20-30%
~500 coâs @ $100K 1st checks
100-200 coâs @ $200-500K
2nd/3rd checks
(target 25-50 exits @ $100M+)
(assume high failure rate ~50-80%)
27. Investor Ecosystem
Angels &
Incubators
($0-10M)
âMicro-VCâ Funds
($10-100M)
âBigâ VC Funds
($100-500M)
âMegaâ 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 âLeanâ Investor + Portfolio Approach
⢠Investment Workshop: âVC101 in 60mâ
⢠Q&A
29. Changes in Tech Startups
⢠LESS Capital required to build product, get to market
â Dramatically reduced cost for servers, software, bandwidth
â Funding Platforms: KickStarter, Angel List, Funders Club, etc
â Access to online platforms for 100M-1B+ consumers, smallbiz, etc
⢠MORE Customers via ONLINE platforms (100M+ users)
â Search (Google, Baidu)
â Social (Facebook, Twitter, LinkedIn)
â Mobile (Apple, Android)
â E-Commerce (Amazon, PayPal, Alibaba)
â Media (YouTube, Pinterest, Instagram)
â Comm/Msgs (WeChat, WhatsApp, SnapChat, Email, Voice, SMS, etc)
⢠LOTS of little bets: Accelerators, Angels, Angel List, Small Exits
â Capital + Co-working + Mentoring -> Design, Data, Distribution
â âFast, Cheap Failâ, network effects, quantitative + iterative investments
33. [ This Talk ]
⢠Changes in Building Technology Startups
⢠Changes in Venture Capital Investing
⢠The âLeanâ Investor + Portfolio Approach
⢠Investment Workshop: âVC101 in 60mâ
⢠Q&A
34. Industry Changes
⢠Financial Market Crises (2000, 2008)
⢠Startup Efficiency, Lean Startup Movement, Reduced Capital Costs
⢠Growing Market, Global Distribution Platforms, âGrowth Hackingâ
⢠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
39. [ This Talk ]
⢠Changes in Building Technology Startups
⢠Changes in Venture Capital Investing
⢠The âLeanâ Investor + Portfolio Approach
⢠Investment Workshop: âVC101 in 60mâ
⢠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: âLittle Betsâ
2) over the next five years,
double-down on top 20-30%
~500 coâs @ $100K 1st checks
100-200 coâs @ $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 âexperimentsâ
⢠Filter out failures + small wins
⢠Double-down on stuff that looks like itâs working
⢠Incubation: $0-100K (âBuild & Validate Productâ)
⢠Seed: $100K-$1M (âTest & Grow Marketing Channelsââ)
⢠Venture: $1M-$10M (âMaximize Growth & Revenueâ)
43. Investment Stage #1: â¨
Product Validation + Customer Usage
⢠Structure
â 1-3 founders
â $0-$100K investment
â Incubator environment: multiple peers, mentors/advisors
⢠Test Functional Prototype / âMinimum Viable Productâ (MVP):
â Prototype->Alpha, ~3-6 months
â Develop Minimal Critical Feature Set => Get to âIt Works! Someone Uses It.â
â Improve Design & Usability, Setup Conversion Metrics
â 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: â¨
Market Validation + Revenue Testing
⢠Structure
â 2-10 person team
â $100K-$1M investment
â Syndicate of Angel Investors / Small VC Funds
⢠Improve Product, Expand Customers, Test Revenue:
â Alpha->Beta, ~6-12 months
â Scale Customer Adoption => âMany People Use It, & They Pay.â
â Test Marketing Campaigns, Customer Acquisition Channels + Cost
â 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: â¨
Revenue Validation + Growth
⢠Structure
â 5-25 person team
â $1M-$10M investment
â Seed & Venture Investors
⢠Make Money (or Go Big), Get to Sustainability:
â Beta->Production, 12-24 months
â Revenue / Growth => âWe Can Make (a lot of) Money!â
â Mktg Plan => Predictable Channels / Campaigns + Budget
â Scalability & Infrastructure, Customer Service & Operations
â 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 âLeanâ Investor + Portfolio Approach
⢠Investment Workshop: âVC101 in 60mâ
⢠Q&A
50. Investment Thesis + Model
⢠Define Investment Thesis (geography, technology,
customer segment, investment stage, etc)
⢠Whatâs Your Unique Insight / Advantage? Show
some proof or evidence of why youâre not crazy
(or at least not always wrong, occasionallyâŚ)
⢠Build Model of Potential Investments vs Returns
50
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: Whatâs 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 @ âThe Flatâ
when prices are low
⢠Double-down if/when
you detect âThe Elbowâ
(if valuation isnât crazy)
⢠Donât invest @ âThe
Wallâ unless capital is
infinite â if valuation
starts running away, you
usually canât buy any
meaningful ownership
relative to existing. Time
Revenue,
Growth Startup W
Startup L
Startup K
âThe Flatâ
âThe Elbowâ
âThe Wallâ
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
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, BUTâŚ.
⢠Not much is available for un-tested entrepreneurs :(
⢠500 Startups plans to change that.
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, letâs say 10,000 founders / year)
⢠1 VC can make 20 investments / year
⢠10,000 founders / 20 deals per VC = 500 VCs