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Investment Thesis Fundamentals (April 2016)

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Investment Thesis
Fundamentals
@DaveMcClure
500 Startups 500.co
500hats.com
April 2016
Dave McClure

Founding Partner & Troublemaker, 500 Startups
00’s & 10’s:
• VC: Founders Fund, Facebook fbFund, 500 Startups
• Angel: Mashery, Mint, SlideShare, Twilio, Lyft, Wildfire, Credit Karma
• Marketing: PayPal, Simply Hired, Mint.com, O’Reilly
80’s & 90’s:
• Entrepreneur: Aslan Computing (acq’d by Servinet)
• Developer: Windows / SQL DB consultant (Intel, MSFT)
• Engineer: Johns Hopkins‘88, BS Eng / Applied Math
• What is 500?
– $250M silicon valley VC fund + startup accelerator
– 120 people / 30 partners / 25 languages / 20 countries
– 1500+ Companies / 3000+ Founders / 200+ Mentors
– Investment, Accelerator, Distro, Marketing, Events, Education
– Community + Content + Conferences
• 1500+ Co’s / 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
VC Lifecycle
(warning: 10+ years every fund)
Raise Capital Call Capital
Generate
Dealflow
Select, Make
Investments
Monitor,
Support
Investments
Decide If/
When to
Follow-on
Sell, Harvest
Investments
Recycle and/
or Return
Capital to
LPs
Get To Carry!
Rinse,
Repeat
first 1-2
years
(or, forever)
years 1-4
first 3 years
(or, forever)
first 3-5
years
FOREVER
years 2-5
(and, 6-10)
5-15 years 5-15 years
year 8-15?
(or never)
year 3-5
What’s my thesis?
• “I’m investing in connected hardware that help
make homes smarter & more energy efficient”
• “I’m investing in fintech startups that focus on
emerging market consumers with limited access to
traditional banks but have mobile phones”
• “I’m investing in black & hispanic minority founders
in the US with limited access to VC, yet address
markets that represent >30% of US consumers”
Thesis Fundamentals
• Elevator Pitch: high-level description of strategy & approach
• Brand/Marketing: how to generate dealflow
• Team & Roles: investment team, back office, other
• Basic filter & criteria for evaluating investments
• Number, size, frequency, distribution of investments
• Target capital raise; model of investment returns (how to get 3X?)
• Other services: education, community, recruiting, physical office
space, acctg/legal/HR, growth hacking, PR, ETC

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Investment Thesis Fundamentals (April 2016)

  • 2. Dave McClure
 Founding Partner & Troublemaker, 500 Startups 00’s & 10’s: • VC: Founders Fund, Facebook fbFund, 500 Startups • Angel: Mashery, Mint, SlideShare, Twilio, Lyft, Wildfire, Credit Karma • Marketing: PayPal, Simply Hired, Mint.com, O’Reilly 80’s & 90’s: • Entrepreneur: Aslan Computing (acq’d by Servinet) • Developer: Windows / SQL DB consultant (Intel, MSFT) • Engineer: Johns Hopkins‘88, BS Eng / Applied Math
  • 3. • What is 500? – $250M silicon valley VC fund + startup accelerator – 120 people / 30 partners / 25 languages / 20 countries – 1500+ Companies / 3000+ Founders / 200+ Mentors – Investment, Accelerator, Distro, Marketing, Events, Education – Community + Content + Conferences • 1500+ Co’s / 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
  • 4. VC Lifecycle (warning: 10+ years every fund) Raise Capital Call Capital Generate Dealflow Select, Make Investments Monitor, Support Investments Decide If/ When to Follow-on Sell, Harvest Investments Recycle and/ or Return Capital to LPs Get To Carry! Rinse, Repeat first 1-2 years (or, forever) years 1-4 first 3 years (or, forever) first 3-5 years FOREVER years 2-5 (and, 6-10) 5-15 years 5-15 years year 8-15? (or never) year 3-5
  • 5. What’s my thesis? • “I’m investing in connected hardware that help make homes smarter & more energy efficient” • “I’m investing in fintech startups that focus on emerging market consumers with limited access to traditional banks but have mobile phones” • “I’m investing in black & hispanic minority founders in the US with limited access to VC, yet address markets that represent >30% of US consumers”
  • 6. Thesis Fundamentals • Elevator Pitch: high-level description of strategy & approach • Brand/Marketing: how to generate dealflow • Team & Roles: investment team, back office, other • Basic filter & criteria for evaluating investments • Number, size, frequency, distribution of investments • Target capital raise; model of investment returns (how to get 3X?) • Other services: education, community, recruiting, physical office space, acctg/legal/HR, growth hacking, PR, ETC
  • 7. What / Why / Who / How? • What is your Unique / Pointed Observation or Hypothesis? • Why are YOU well-positioned to execute the strategy? • Has this been done before? If not, why now? If so, why can you do it as well if not better than others doing similar? • What is required to be true for you to be successful? What critical assumptions are you making? What if they aren’t correct? • What kind of team / org is required to execute on this strategy? Do you have such a team / can you build one? • What [historical] evidence do you have that you can do this?
  • 8. 500 Investment Thesis: Cheap, Global, Scalable, Platforms CONFIDENTIAL / / FEBRUARY23,2016PAGE17 / • Cost of starting a company has decreased ~100X, essentially as a consequence of open source software and cloud computing.1 • Internet usage among American adults went from 14% to 86%.2 • Online speeds in the United States are over 120X faster.3 1. http://www.bothsidesofthetable.com/2012/05/23/its-morning-in-venture-capital/ 2. http://www.pewinternet.org/data-trend/internet-use/internet-use-over-time/ 3. http://www.zdnet.com/the-internet-is-getting-faster-7000002402/ Global platforms are available for marketing, distribution, and monetization 1995 vs 2015 Significant decrease in the cost of startups1 Appendix - A New Ecosystem: Lower Costs and Lots of Scale
  • 9. Branding & Marketing • How do you plan to generate/access dealflow? • What kind of brand / image do you stand for? • Name, logo, graphics, related content, etc • Do you have a story about your market, about yourself? How to develop & market that story? • Who on your team is responsible for marketing/PR? • Content, Community, Events, etc
  • 10. Generating Dealflow • Founder Hunt: Where to find awesome founders? • Tell Your Story: Writing / Speaking / Events • Networking: Referrals / LinkedIn / Email/ etc • Alumni: Company, University, other Networks • Events: Attend (or Run) User Groups & Conf’s • Platforms: Angel List / Product Hunt / YC / 500 / StartX / Kickstarter / other • Community: Founders / Mentors, other Investors • ETC: Sports, DayCare, Carpool, Tinder, whatEVER… 10
  • 11. Investment Filter • What does a target investment look like? (type of company, founder(s)/team, traction, stage, check size, location, etc) • What Qs will you ask where the answers clearly determine a yes or no decision? • Are you looking for experienced founders? where will you find them? will they take your capital? why? • How do you define “traction”? Have you seen it before? • How will you decide when/whether to follow-on?
  • 12. Startup Investment Stages • Concept • Product • Functional Prototype • Early Users/Customers • Other Investors • Profitable Unit Economics? • Scalable Cust Acquisition? • Profitable Business • Scalable Organization • Exit / Liquidity? 12
  • 13. Startup LifeCycle Concept Early Customer Usage Scalable Customer Acquisition [about to be] Profitable Unit Economics Scalable Profitable Business Functional Prototype PRODUCT MARKET REVENUE Exit?
  • 14. # Investments & Pace • How many investments at what size/stage will you make? • How much are you reserving for follow-on investments? • How fast do you plan to call & deploy capital? • What Qs will you ask where the answers clearly determine a yes or no decision? • How do you define “traction”? Do others agree with your definition? Have you seen it before? • What % of investments do you expect to get to next round? what % do you expect to follow-on? what % do you expect to exit? • How many small / med / large exits do you expect & when will they exit?
  • 15. Investment Allocation Strategy • How long will companies take to exit / reach liquidity? (3-10+ yrs) • How long is your investment cycle? (ex: 3-5 yrs) • When will capital be returned? (1X in 5-10 yrs, 2-5X in 8-15 yrs) • Simple allocation for $10M investment budget over first 5 years • 50% initial investment + 50% reserved for follow-on • ~100 1st checks @ $50K each ($5M), ~20 checks / yr • ~20 2nd checks @ $250K each ($5M), ~4 checks / yr 1 2 3 54 7 8 109 11 12 13 15146 1 5432 50 15 .. .. ..
  • 16. Returns Model • How many exits / what size do you expect and when? CONFIDENTIAL / / FEBRUARY23,2016PAGE4 Legal review Return Multiple (Blended) Gross Exit Value Per Company % of Companies that Yield Return Multiple at Exit Number of Companies Potential Returns2 50X $500M+ 2% 18 $360,000,000 20X $100M+ 5% 45 $360,000,000 5X $20M+ 10% 90 $180,000,000 1X $3M 23% 207 $31,050,000 0X $0 60% 540 $0 Total Returns $931,050,000 Fund Multiple 4.7X Theoretical Model Assumptions: • Fund Size: $200M • Total Invested Capital: $174M • Number of Portfolio Companies: 900 Lots of Little Bets: we believe a large, diversified portfolio of early-stage investments reduces risk and maximizespotential return relative to “traditional” VC funds 1. Model is theoretical and is provided for illustrative purposes only. Model is not based on past performance and makes certain material assumptions and projections which may or may not prove accurate. Model does not purport to guarantee future returns, and returns for investors in Fund IV may be less or more than the returns reflected in this model. “Estimated Returns” and “Fund Multiple” represent theoretically possible results for Fund IV in the aggregate and do not account for carry and certain other deductions and expenses, which would reduce the amountsreturned to investors. 2. Potential Returns = (Number of Companies) x (Average InvestmentPer Company) x (Return Multiple). Theoretical Fund Returns Model1 • Generally investing between $50,000 to $250,000 on the first check • Follow-on investments in top-performing companies, ~ 20% of the portfolio
  • 20. 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 20
  • 21. Questions? Comments? • More Info? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund) – Dave McClure, @DaveMcClure
  • 23. 500 Startups • “Lots of little bets”: large portfolio of co’s (>200/fund) • Silicon Valley pedigree: PayPal/Google alumni, geek evangelism • Global Approach: Silicon Valley HQ + Multi-Country Team/Reach • Focus on seed-stage, sw + internet startups, post-MVP / pre-A • Accelerator: 25-50 co’s, structured curriculum, office, support staff, founder/mentor community, investor intros, pitch prep, demo days • Dedicated consulting svcs for customer acq (“Growth Hacking”) • Conferences, Events, Education, Community, Content, CULT.
  • 24. 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 co’s @ $100K 1st checks 100-200 co’s @ $200-500K 2nd/3rd checks (target 25-50 exits @ $100M+) (assume high failure rate ~50-80%)
  • 25. 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, Japan, Turkey 200 1400 2016 150+ ??? 300+ 2000+ 500 Startups History
  • 26. 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
  • 27. “MicroFund” Strategy CONFIDENTIAL / / AUGUST19,2015PAGE‹#› Micro funds and Main funds Global Fund Seed, A, B Access to regional/vertical expertise Access to regional/vertical deal flow Co-investment/follow-on opportunities The co-investment strategy shown represents  500 Startups and Fund IV’s current investment strategy and may vary at the discretion of 500 Startups Management or Fund IV’s general partner. Co-invest Fund Series C, D, … GeographicMicroFunds MENA EEU Turkey VietnamNordic Africa LatAm SEA Thailand Korea Japan India VerticalMicroFunds Mobile E-com Fintech SaaS IoT Video Edtech Health- tech Fashion +Beauty Real Estate
  • 29. 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 it’s working • Incubation: $0-100K (“Build & Validate Product”) • Seed: $100K-$1M (“Test & Grow Marketing Channels””) • Venture: $1M-$10M (“Maximize Growth & Revenue”)
  • 30. 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
  • 31. 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
  • 32. 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