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San Diego Venture Group - Keynote
@msuster msuster
Mark Suster
BothSidesofTheTable.com
1 Basecamp - Choosing Your Market
2 Funding the Expedition
3 How Venture Capital Actually Works
4 Picking Your Crew
2
Startup Journey
Basecamp
3
4
The first step for a startup should be to
focus on basecamp.
Many investors are too focused on the
peak.
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
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
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
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
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
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
Nearly every major Internet success story is built on the principal of
deflationary economics
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
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
Funding the Expedition
14
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
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
The most important part of funding is
finding your initial “anchor” investor
Then leveraging to find more
18
Create a sense of urgency
Under promise, over deliver
Show results
19
Prove you can ship product
20
Start building relationships early. When we first meet, you’re just a
“dot” to me.
Performance
Time
The first time
we meet
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
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
How to find angels?
Take 50 Coffee Meetings
How Venture Capital Actually Works
24
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
>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
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
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
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
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%
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
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
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
Understanding what drives VC investment
decisions can help you determine if right for you
34
Picking Your Crew
35
36
There’s a huge
premium for taking
the first leap
37
Short people shouldn’t hire
short people
38
Hire people that
punch above their
weight class
39
You Can’t Build a World-Class Restaurant
Without a World-Class Chef
Tech is no different
40
You need
missionaries over
mercenaries
41
Stay lean for as long as you can
San Diego Venture Group - Keynote
Thank You

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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
  • 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
  • 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
  • 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
  • 41. 41 Stay lean for as long as you can
  • 42. San Diego Venture Group - Keynote Thank You