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)

Recycle and/
Monitor, Decide If/
Generate Select, Make Sell, Harvest or Return Rinse,
Raise Capital Call Capital Support When to Get To Carry!
Dealflow Investments Investments Capital to Repeat
Investments Follow-on
LPs

first 1-2
first 3 years first 3-5 years 2-5 year 8-15?
years years 1-4 FOREVER 5-15 years 5-15 years year 3-5
(or, forever) years (and, 6-10) (or never)
(or, forever)
 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

FEBRUARY 23, 2016 PAGE 17

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/
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
Functional
Concept Customer
Prototype
Usage

MARKET
[about to be]
Scalable Profitable
Customer Unit
Acquisition Economics

REVENUE

Scalable
Profitable Exit?
Business
 # 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

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 .. .. .. 50

1 2 3 4 5 15
 Returns Model
/ Theoretical
How many exits
Fund / what
Returns size do you expect and when?
Model 1

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

Return Multiple Gross Exit Value Per % of Companies that Yield

Number of Companies Potential Returns2
(Blended) Company Return Multiple at Exit

FEBRUARY 23, 2016 PAGE 4

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 Legal
Generally investing between $50,000 review on the first check
to $250,000
Total Invested Capital: $174M Follow-on investments in top-performing companies, ~ 20% of the portfolio
Number of Portfolio Companies: 900

/
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.
CONFIDENTIAL 2. Potential Returns = (Number of Companies) x (Average Investment Per Company) x (Return Multiple).
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
(assume high failure rate ~50-80%)
on pre-traction, early-
stage startups

2) over the next five years, double- 100-200 cos @ $200-500K

down on top 20-30% 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 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, 200 1400
Vietnam, Germany, Israel,
Japan, Turkey
2016 150+ ??? 300+ 2000+
 How 500 Invests:
Accelerator, Seed, Distro

Seed Follow-On

Angel Pre-Seed Seed Post-Seed Series A/B Growth

Legal review Partner approval

Accelerator 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
 MicroFund Strategy
/ Micro funds and Main funds
Co-invest Fund Mobile SaaS
Series C, D,

Vertical Micro Funds

E-com IoT

Global Fund

AUGUST 19, 2015 PAGE #

Fintech Video
Seed, A, B
Health-
Edtech
tech
Geographic Micro Funds
Fashion Real
+ Beauty Estate
LatAm SEA Thailand Korea Japan India

Access to regional/vertical expertise

MENA EEU Nordic Turkey Vietnam Africa Access to regional/vertical deal flow
Co-investment/follow-on opportunities

CONFIDENTIAL / 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