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