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Final san diego venture group keynote 2016

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A keynote presentation I gave to the SDVG with advice about starting a company and understanding the venture capital industry

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Final san diego venture group keynote 2016

  1. San Diego Venture Group - Keynote @msuster msuster Mark Suster BothSidesofTheTable.com
  2. 1 Basecamp - Choosing Your Market 2 Funding the Expedition 3 How Venture Capital Actually Works 4 Picking Your Crew 2 Startup Journey
  3. Basecamp 3
  4. 4 The first step for a startup should be to focus on basecamp. Many investors are too focused on the peak.
  5. 5 Experienced climbers have the luxury of skipping basecamp as they know the mountain -Academic breakthroughs -Industry knowledge -Worked with VC investors before -History of exits
  6. 6 If there’s one thought I’d like to leave you with about planning an Internet business it’s that at scale the Internet drives deflationary economics. Unit Price of a Good Time Deflation
  7. 7 But in dramatically increasing the market reach / size the Internet has created enormous companies that scale quickly. Unit Price of a Good Time Deflation Market Size Market
  8. 8 The most successful new entrants enter the market with less functionality but massively cheaper prices - The Innovator’s Dilemma. Performance/ Functionality Time New Entrant Incumbent
  9. 9 This is the most misunderstood thing about “disruption” - it’s a combination of 4 factors in which incumbents literally can’t respond Price Performance/ Functionality Margin Market Size
  10. 10 Initially incumbent's customers’ requirements are high enough that the startup can’t meet their needs. Eventually startup is good enough and market trades down Time Performance / Functionality Incumbent New Entrant Incumbent Customer Requirements Market trades down. Performance good enough
  11. 11 Nearly every major Internet success story is built on the principal of deflationary economics
  12. 12 And disruptive technologies that have a structural advantage form the basis of many of our best investments New Entrants Incumbents with Innovator’s Dilemma
  13. 13 I would encourage you to think about solving harder problems in bigger markets with fewer startups. Defense/ Intelligence Education Healthcare Provision Healthcare Back-End Virtual Reality Transportation Manufacturing Food Production/ Distribution
  14. Funding the Expedition 14
  15. Angels & Seed Accelerators Crowd funding/ Angellist The 3 F’s: Friends, Family & Fools 15 The good news is the sources of capital have increased dramatically in the past 5 years
  16. 16 At the earliest stage it is almost certain that your capital will need to be local - unless you’re going straight to venture / seed. The table stakes in 2016 are; Product (or prototype) 1 Team 2 Engineering capabilities in- house 3
  17. 17 The most important part of funding is finding your initial “anchor” investor Then leveraging to find more
  18. 18 Create a sense of urgency Under promise, over deliver Show results
  19. 19 Prove you can ship product
  20. 20 Start building relationships early. When we first meet, you’re just a “dot” to me. Performance Time The first time we meet
  21. 21 If I got excited on the basis of our first meeting I am really only judging your presentation skills That’s why Demo Days are artificial
  22. 22 Over time I start to see a pattern and get to know who you are. It’s much easier to invest when you understand somebody’s character. Performance Time Meet investors early / often
  23. 23 How to find angels? Take 50 Coffee Meetings
  24. How Venture Capital Actually Works 24
  25. 25 VCs raise money on the expectations of delivering at least a 4x gross return (3x net) $300m $1.2Bn Fund Size Expected Returns 4x LP’s • Universities • Personal Funds • Insurance • Corporates
  26. 26 >80% of our returns are driven by <20% of our investments, following the Power Law Returns 10X 20X 30X 40X 50X Deals 5-6 Deals 24 - 25 Deals ≤1X
  27. 27 Let’s take what by most standard is considered an amazing outcome - an $80 million exit in 5 years. $10M Post $80M Acquisition Initial Investment Exit $2M $8M $16M $64M + Additional $2M over 5 years to keep pro rata 20% 20%
  28. 28 The press will write about what a great outcome this is. Friends will congratulate us on our spectacular 4x. For us this is literally “average.” $4M $16M 4x Invested Returned
  29. 29 It represents just 5% of our fund returned and 1.33% of our expected returns. This doesn’t even make a dent in venture. $16M $16M $300M $16M $1.2B ~5% of fund returned 1.33% of expectations
  30. 30 Now let’s imagine a whopping $800 million exit. $10M Post $800M Acquisition Initial Investment Exit $2M $8M $160M $640M + Additional $8M over 7-10 years 20% 20%
  31. Even at 16x, returning $160 million is still just half of our fund and only 13% of our expected returns. $10M $160M 16x $160M $300M $160M $1.2B >50% of fund returned 13.33% of return expectations Invested Returned
  32. 32 Which is why the VC model is really about the $3Bn+ outcomes $10M Post $3Bn Exit Initial Investment $2M $8M $450M $2.55B + Additional $13M over 7-10 years 15% 20%
  33. 33 And even still this would just be 33% of our expected returns. Venture is truly only aligned with enormous outcomes. That’s the business. $15M $450M 33x $450M $300M $450M $1.2B 150% of fund returned >1/3 of return expectations Invested Returned
  34. Understanding what drives VC investment decisions can help you determine if right for you 34
  35. Picking Your Crew 35
  36. 36 There’s a huge premium for taking the first leap
  37. 37 Short people shouldn’t hire short people
  38. 38 Hire people that punch above their weight class
  39. 39 You Can’t Build a World-Class Restaurant Without a World-Class Chef Tech is no different
  40. 40 You need missionaries over mercenaries
  41. 41 Stay lean for as long as you can
  42. San Diego Venture Group - Keynote Thank You

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