6* things about angel investing i wish i knew before i made 500 of them *you won t believe #4!!!

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1 @DaveMcClure 500 Startups 500.co 500hats.com June * things about angel investing i wish i knew before i made 500 of them *you won t believe #4!!!

2 Dave McClure Founding Partner & Troublemaker, 500 Startups 00 s & 10 s: VC: Founders Fund, Facebook fbfund, 500 Startups Angel: Mashery, Mint, SlideShare, Twilio, Lyft, Wildfire, Credit Karma Marketing: PayPal, Simply Hired, Mint.com, O Reilly 80 s & 90 s: Entrepreneur: Aslan Computing (acq d by Servinet) Developer: Windows / SQL DB consultant (Intel, MSFT) Engineer: Johns Hopkins 88, BS Eng / Applied Math

3 What is 500? $350M silicon valley VC fund + startup accelerator 150 people / 25 languages / 20 countries Companies / Founders / 200+ Mentors Investment, Accelerator, Distro, Marketing, Events, Education Community + Content + Conferences Co s / 50+ Countries Twilio NYSE:TWLO (>$2B) Credit Karma (>$3B) GrabTaxi (>$5B) 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 Intercom TalkDesk 500 Startups Global Seed Fund & Startup Accelerator

4 500 Startups Lots of little bets : large portfolio of co s (>200/fund) Silicon Valley nerds: PayPal/Google alumni, geek evangelism Global Approach: Silicon Valley HQ + Multi-Country Team/Reach Seed stage: tech/internet startups (post-mvp / pre-a) Accelerator: co s, 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.

5 VC Lifecycle (warning: 10+ years every fund) Raise Capital Call Capital Generate Dealflow Select, Make Investments Monitor, Support Investments Decide If/ When to Follow-on Sell, Harvest Investments Recycle and/ or Return Capital to LPs Get To Carry! Rinse, Repeat first 1-2 years (or, forever) years 1-4 first 3 years (or, forever) first 3-5 years FOREVER years 2-5 (and, 6-10) 5-15 years 5-15 years year 8-15? (or never) year 3-5

6 What s my thesis? I m investing in connected hardware that help make homes smarter & more energy efficient I m investing in fintech startups that focus on emerging market consumers with limited access to traditional banks but have mobile phones I m investing in black & hispanic minority founders in the US with limited access to VC, yet address markets that represent >30% of US consumers

7 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 aren t 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?

8 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

9 Portfolio Diversification Spray, not Pray

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12 / Chances of spotting unicorn = ~1%

13 / If portfolio size = 15 companies

14 / If portfolio size = 30 companies

15 / If portfolio size = 100 companies

16 A Tale of 2 Squirrels

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20 500 Strategy: Lots of Little Bets* 1) make lots of little bets on pre-traction, earlystage startups ~500 co $100K 1st checks (assume high failure rate ~50-80%) 2) over the next five years, doubledown on top 20-30% co $ K 2nd/3rd checks (target $100M+) 3) wait 5-10 years for returns: % small ($5-25M+) -5-10% larger ($25-250M+) -1-2% ($250M-1B+) *See Peter Sims book: Little Bets

21 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

22 Generating Dealflow Founder Hunt: Where to find awesome founders? Tell Your Story: Writing / Speaking / Events Networking: Referrals / LinkedIn / / etc Alumni: Company, University, other Networks Events: Attend (or Run) User Groups & Conf s Platforms: Angel List / Product Hunt / YC / 500 / StartX / Kickstarter / other Community: Founders / Mentors, other Investors ETC: Sports, DayCare, Carpool, Tinder, whatever 22

23 Writing / Speaking / Events 23

24 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? What % of investments will get to next round? what % will you follow-on? what % will exit? what % will be BIG exits?

25 Startup Investment Stages Concept Product Functional Prototype Early Users/Customers Other Investors Profitable Unit Economics? Scalable Cust Acquisition? Profitable Business Scalable Organization Exit / Liquidity? 25

26 Investor Ecosystem

27 Startup LifeCycle Concept Functional Prototype Early Customer Usage PRODUCT Scalable Customer Acquisition [about to be] Profitable Unit Economics MARKET REVENUE Scalable Profitable Business Exit?

28 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 it s working Incubation: $0-100K ( Build & Validate Product ) Seed: $100K-$1M ( Test & Grow Marketing Channels ) Venture: $1M-$10M ( Maximize Growth & Revenue )

29 Structure Investment Stage #1: Product Validation + Customer Usage 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 ( users) Demonstrate Concept, Reduce Product Risk, Test Functional Use Develop Metrics & Filter for Possible Future Investment

30 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

31 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, 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

32 Returns Model How many exits / what size do you expect and when? 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 (Blended) Gross Exit Value Per Company % of Companies that Yield Return Multiple at Exit Number of Companies Potential Returns 2 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 Legal review Generally investing between $50,000 to $250,000 on the first check Follow-on investments in top-performing companies, ~ 20% of the portfolio /

33 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 33

34 Questions? Comments? More Info? (our company) (my blog) (our fund) Dave