Before & After 2 Dot-Com From 500 Startups to 500 VCs

500 Startups to 500 VCs Dave McClure January 2016 Honolulu, HI

Dave McClure  Founding Partner & Troublemaker, 500 Startups 00’s & 10’s: • VC: Founders Fund, Facebook fbFund, 500 Startups • Angel: Mashery, Mint.com, SlideShare, Twilio • Marketing: PayPal, Simply Hired, Mint.com 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

500 Startups  Global Seed VC Fund & Startup Accelerator • What is 500? • $200M under management • 100+ people / 20 Countries • 3,000+ Founders / 250+ Mentors • Capital, Education, Community • #500STRONG • 1400+ Portfolio Co’s / 50+ Countries • 3 Unicorns ($1B+) • Credit Karma • GrabTaxi • Twilio • 50+ exits • Wildfire (acq GOOG, $350M) • MakerBot (acq SSYS, $400M) • Viki (acq Rakuten, $200M) • 30+ Centaurs ($100M+) • Udemy • Ipsy • SendGrid • VivaReal • The RealReal • TalkDesk • Intercom • Virool • BarkBox

This Talk is About… • Re-inventing a 50 year old sport • 500 Startups… WTF? • 99 VC Problems, But a Batch Ain’t 1 • MoneyBall for Startups: Lots of Little Bets • 500 VCs, 500 Funds

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

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

Platforms 2.0  Search, Social, Mobile, Video, Messaging

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, SnapChat, Instagram) – Mobile (Apple, Android) – E-Commerce (Amazon, Ebay/PayPal, Alibaba) – Media (YouTube, Pinterest, Instagram) – Comm/Msgs (WeChat, WhatsApp, Line, 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

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, Israel, MENA, Japan, Turkey, E. EU 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

http://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: MoneyBall for Startups “Lots of Little Bets”

500 Strategy: Lots of Little Bets* 1) make lots (>100) of investments in early- stage startups 3) wait 3-10 years for returns: -10-20% small exits @1-5X (<25M+) -5-10% larger exits @5-20X ($25-250M+) -1-2% unicorns @20-50X+ (>$250M-1B+) *See Peter Sims book: “Little Bets” 2) over next 2 years, double- down on top 20%

Building Tech Startups 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”)

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 Stage #1:   Product Validation + Customer Usage • Structure – 1-3 founders – $25-$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 / Unit Economics, Find Profitable Customer Segments • Prove Solution/Benefit, Assess Market Size • Test Channel Cost, Unit Economics, 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

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

500 VCs, 500 Funds

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

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

500 Startups + Stanford University Investor Education Program #Venture Capital Unlocked: Learn best practices of Silicon Valley Investing #Startup Accelerator: Build your own accelerator with 500 Startups #VC/Angel 101: How to build an early-stage investment thesis #500VCs

How to build investment thesis Meet REAL startup founders and conduct selection Connection with Silicon Valley investors and mentors Legal docs: cap table and standard terms How to generate deal flow Trends and relevant area of investments 500 Startups + Stanford University Investor Education Program #500VCs

Feb 8th-19th 2016 @ Stanford+500 signup NOW:   http://500.vc 500 Startups + Stanford University Investor Education Program #500VCs

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