Investment Thesis
Fundamentals
@DaveMcClure
500 Startups 500.co
500hats.com
April 2016
Dave McClure
Founding Partner & Troublemaker, 500 Startups
00s & 10s:
VC: Founders Fund, Facebook fbFund, 500 Startups
Angel: Mashery, Mint, SlideShare, Twilio, Lyft, Wildfire, Credit Karma
Marketing: PayPal, Simply Hired, Mint.com, OReilly
80s & 90s:
Entrepreneur: Aslan Computing (acqd by Servinet)
Developer: Windows / SQL DB consultant (Intel, MSFT)
Engineer: Johns Hopkins88, BS Eng / Applied Math
500 Startups
Global Seed Fund & Startup Accelerator
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+ Cos / 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
VC Lifecycle
(warning: 10+ years every fund)
Raise Capital
Call Capital
Generate
Dealflow
Select, Make
Investments
Monitor,
Support
Investments
first 1-2
years
(or, forever)
years 1-4
first 3 years
(or, forever)
first 3-5
years
FOREVER
Decide If/
When to
Follow-on
Sell, Harvest
Investments
years 2-5
(and, 6-10)
5-15 years
Recycle and/
or Return
Get To Carry!
Capital to
LPs
5-15 years
year 8-15?
(or never)
Rinse,
Repeat
year 3-5
Whats my thesis?
Im investing in connected hardware that help
make homes smarter & more energy efficient
Im investing in fintech startups that focus on
emerging market consumers with limited access to
traditional banks but have mobile phones
Im 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
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 arent 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?
500 Investment Thesis:
Cheap, Global, Scalable, Platforms
Appendix - A New Ecosystem: Lower Costs and Lots of Scale
1995 vs 2015
Significant decrease in the
cost of startups1
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
Global platforms are available for marketing, distribution, and monetization
CONFIDENTIAL
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/
FEBRUARY 23, 2016 PAGE 17
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
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 & Confs
Platforms: Angel List / Product Hunt / YC / 500 /
StartX / Kickstarter / other
Community: Founders / Mentors, other Investors
ETC: Sports, DayCare, Carpool, Tinder, whatEVER
10
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?
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
Startup LifeCycle
PRODUCT
Early
Customer
Usage
Functional
Prototype
Concept
MARKET
[about to be]
Scalable
Customer
Acquisition
Profitable
Unit
Economics
REVENUE
Scalable
Profitable
Business
Exit?
# 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?
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
10
11
12
13
14
15
..
..
..
50
15
Returns Model
How many
exits
/ what
size do you expect and when?
Fund
Returns
Model
/ Theoretical
1
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
CONFIDENTIAL
Legal
review on the first check
Generally investing between $50,000
to $250,000
Follow-on investments in top-performing companies, ~ 20% of the portfolio
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 Multip le 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 amounts returned to investors.
2. Potential Returns = (Number of Companies) x (Average Investment Per Company) x (Return Multiple).
FEBRUARY 23, 2016 PAGE 4
Lots of Little Bets: we believe a large, diversified portfolio of early-stage investments
reduces risk and maximizes potential return relative to traditional VC funds
Portfolio Diversification
Spray, not Pray
http://bit.ly/99VCProblems
Chances of spotting
unicorn = ~1%
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
Questions? Comments?
More Info?
http://500.co (our company)
http://500hats.com (my blog)
https://angel.co/500startups (our fund)
Dave McClure, @DaveMcClure
Appendix
500 Startups
Lots of little bets: large portfolio of cos (>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 cos, 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.
500 Strategy: Lots of Little Bets*
~500 cos @ $100K 1st checks
1) make lots of little bets
on pre-traction, earlystage startups
2) over the next five years, doubledown on top 20-30%
(assume high failure rate ~50-80%)
100-200 cos @ $200-500K
2nd/3rd checks
(target 25-50 exits @ $100M+)
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
500 Startups History
Year
People
Locations
AUM $
Companies
2010
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+
How 500 Invests:
Accelerator, Seed, Distro
Seed
Angel
Pre-Seed
Accelerator
Seed
Follow-On
Post-Seed
Legal review
Series A/B
Growth
Partner approval
Distro"
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
Micro funds and Main funds
Co-invest Fund
Vertical Micro Funds
Series C, D,
Global Fund
Seed, A, B
Geographic Micro Funds
LatAm
MENA
CONFIDENTIAL
SEA
EEU
Thailand
Nordic
Korea
Turkey
Japan
Vietnam
India
Africa
Mobile
SaaS
E-com
IoT
Fintech
Video
Edtech
Healthtech
Fashion
+ Beauty
Real
Estate
AUGUST 19, 2015 PAGE #
MicroFund Strategy
Access to regional/vertical expertise
Access to regional/vertical deal flow
Co-investment/follow-on opportunities
The co-investment strategy shown represents 500Startups and Fund IVs current investment strategy and may vary at the discretion of500Startups Management or Fund IVs general partner.
Investor Ecosystem
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 its working
Incubation: $0-100K (Build & Validate Product)
Seed: $100K-$1M (Test & Grow Marketing Channels)
Venture: $1M-$10M (Maximize Growth & Revenue)
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
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
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
