@DaveMcClure @500Startups http://500.co

Lima - April 2016

Build Your Own Valley Creating Startup + Investor Ecosystems In Emerging Markets Around the World

• What is 500? – $250M silicon valley VC fund + startup accelerator – 125 people / 30 partners / 25 languages / 20 countries – 1500+ Companies / 3000+ Founders / 200+ Mentors – Investment, Accelerator, Distro, Marketing, Events, Education – Community + Content + Conferences

• 1500+ Co’s / 50+ Countries – Credit Karma ($3.5B) – Twilio ($1B+) – Grab ($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 – CinePapaya

500 Startups Global Seed Fund & Startup Accelerator

500 LatAm: People

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Dave McClureFOUNDING PARTNER

Bedy YangMANAGING PARTNER

GLOBAL / SILICON VALLEY

Santiago ZavalaPARTNER

LATAM/MEXICOLATAM/BRAZIL

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• Viva Real: $10M revenue, raised $50M

• Conta Azul: $3M revenue, raised $10M

• Descomplica: $3M revenue, raised $8M

• Sentisis: $1M revenue, raised $1.3M

• Conekta: $1M revenue, raised $1.5M

• Konfio: $1M revenue, raised $1.6M

• Cinepapaya: $10M revenue, raised $3M

500 LatAm: Top Companies

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5 yrs: 107 co’s, $8.4M invested, $17M FMV

CinePapaya• 3M monthly visitors / 1,000 cinemas • 2M tickets sold, >$1M/mo (@ +20% MoM) • tickets in 5 countries; content in 29 • $3M Seed + Series A; Series B in DD • 65 employees in Peru & Colombia; hiring MX

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[ This Talk ]

• What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Engineering Investor Ecosystems in Emerging Markets • Q&A

Re-engineering a 50 year old sport:Venture Capital 2.0

Football

West Coast Offense

Baseball

MoneyBall

Basketball

3 point revolution

Venture Capital

500 Startups

“Lots of little bets”

500 Strategy: MoneyBall for StartupsRe-inventing a 50-year old sport

How DMC Became a VC

• Option 1: Go to Harvard/Stanford MBA, Become Associate, Work at McKinsey / Google / Facebook, Re-Join VC as Partner, Kick Back & Play Golf

• Option 2: Start Unicorn, Grow Big, Sell for $1B+, Join VC

• Option 3: Wander around Silicon Valley for 25 years as geek, entrepreneur, marketer, angel, then start your own VC firm

Dave McClureFounding Partner, 500 Startups

00’s & 10’s: • VC: Founders Fund, Facebook fbFund, 500 Startups • Angel: Mashery, Mint.com, SlideShare, Twilio, Wildfire, SendGrid • Marketing: PayPal, Simply Hired, Mint.com, O’Reilly

80’s & 90’s: • Entrepreneur: Aslan Computing (acq’d by Servinet/Panurgy) • Developer: Windows / SQL DB consultant (Intel, MSFT) • Engineer: Johns Hopkins‘88, BS Eng / Applied Math

500 Startups Mission

1. Find Smart People.

2. Give Them Money.

3. Wait for Good Sh*t to Happen.

500 Startups: a Platform made of People#500STRONG #500LOVE #HFGSD

100 People, 20 Countries, 25 Languages

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, Vietnam, Germany, EU, Israel, Japan, Turkey

200 1400

2016 150+ +10-20 More ??? 2000+

500 Startups History: What a Long Strange Trip It’s Been

Building Startup Ecosystems

Investor Ecosystem

Angels & Incubators ($0-10M)

“Micro-VC” Funds ($10-100M)

“Big” VC Funds ($100-500M)

“Mega” VC Funds (>$500M)

Incubation 0-$100K

Seed $100K-$2M

Series A/B $2-10M

Series B/C $10-50M

Bootstrap, KickStarter, AngelList, Crowdfunding

stage where 500 writes first checks

stage where 500 doubles-down

(maybe)

500 Startups Mission

• Provide capital, community, education to smart people (founders, investors)

• Build functional startup ecosystems (founders, team, angels, accelerators, VC funds, capital, exits, liquidity, etc)

• #HFGSD: Have Fun, Get Sh*t Done.

500 Startups: “Full-Stack” VC

[ This Talk ]

• What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Engineering Investor Ecosystems in Emerging Markets • Q&A

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

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Changes in Tech Startups• LESS Capital required to build product, get to market

– Dramatically reduced cost for servers, software, bandwidth – Funding Platforms: KickStarter, Angel List, Funders Club, etc – Access to online platforms for 100M-1B+ consumers, smallbiz, etc

• MORE Customers via ONLINE platforms (100M+ users) – Search (Google, Baidu) – Social (Facebook, Twitter, LinkedIn) – Mobile (Apple, Android) – E-Commerce (Amazon, PayPal, Alibaba) – Media (YouTube, Pinterest, Instagram) – Comm/Msgs (WeChat, WhatsApp, SnapChat, Email, Voice, SMS, etc)

• LOTS of little bets: Accelerators, Angels, Angel List, Small Exits – Capital + Co-working + Mentoring -> Design, Data, Distribution – “Fast, Cheap Fail”, network effects, quantitative + iterative investments

Before & After 2 Dot-Com CrashesLEAN Startup: Simpler, Faster, Cheaper, Smarter

Before 2000 ”Big, Fat, Dinosaur Startup” • Sun Servers • Oracle DB • Exodus Hosting • 12-24mo dev cycle • 6-18mo sales cycle • <100M people online • $1-2M seed round • $3-5M Series A • Sand Hill Road crawl

After 2008 ”Lean, Little, Cockroach Startup” • AWS, Google, PayPal, FB, TW • Cloud + Open Source SW • Lean Startup / Startup Wknd • 3-90d dev cycle • SaaS / online sales • >3B people online • <$100K incub + <$1M seed • $1-3M Series A • Angel List global visibility

Platforms 2.0 Search, Social, Mobile,

Video, Messaging

Startup Risk Reduction

ConceptEarly

Customer Usage

Scalable Customer

Acquisition

[about to be] Profitable

Unit Economics

Scalable Profitable Business

Functional Prototype

PRODUCT

MARKET

REVENUE

Exit?

When 500 Likes to Invest

Startup Education• Business Plans / Revenue Projections • Software + Design/UX • Lean Startups + Continuous Deploy (Iterate) • Metrics Framework + Continuous Testing • Functional Prototypes / Customer Development • Scalable [Internet] Marketing & Sales • Cash-Flow Positive Unit Economics • Pitching + Fundraising (Angel List) • Monetization + Payments • Customer Service + Support

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[ This Talk ]

• What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Engineering Investor Ecosystems in Emerging Markets • Q&A

Industry Changes• Financial Market Crises (2000, 2008) • Startup Efficiency, Lean Startup Movement, Reduced Capital Costs • Growing Market, Global Distribution Platforms, “Growth Hacking” • Improved Monetization, Payments Infrastructure • Developing Startup Ecosystems, Global M&A

• Micro VC: Seed Funds (ex: First Round Capital) • Incubators & Accelerators (ex: Y Combinator, 500 Startups) • Funding Platforms (ex: Angel List, Kickstarter) • Global Market of Angel Investors, Accelerators, Seed Funds

more info: http://PreMoney.co

Investor Education• Startups are NOT Real Estate • Most Startups Fail / Power Law Returns • Portfolio Approach (20-100+ investments) • Legal Structure, Financial Structure • Syndication + Co-Investment • Access to Downstream Capital • Exits & Liquidity

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http://bit.ly/99VCProblems

Portfolio Diversification “Spray, not Pray”

Q: Chances of spotting unicorn? /

a) 1% b) 2% c) 5% d) 10% e) ZERO

Chances of spotting unicorn = ~1%/

If portfolio size = 15 companies /

/ If portfolio size = 30 companies

/ If portfolio size = 100 companies

500 Strategy: Lots of Little Bets*

1) make lots of little bets on pre-traction, early-stage startups

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”

2) over the next five years, double-down on top 20-30%

~500 co’s @ $100K 1st checks

100-200 co’s @ $200-500K 2nd/3rd checks

(target 25-50 exits @ $100M+)

(assume high failure rate ~50-80%)

[ This Talk ]

• What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Engineering Investor Ecosystems in Emerging Markets • Q&A

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

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Startup Risk Reduction

ConceptEarly

Customer Usage

Scalable Customer

Acquisition

[about to be] Profitable

Unit Economics

Scalable Profitable Business

Functional Prototype

PRODUCT

MARKET

REVENUE

Exit?

When 500 Likes to Invest

Legal review Partner approvalAngel Pre-Seed Seed Post-Seed Series A/B Growth

Accelerator

Seed

“Distro"

Follow-On

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

How 500 Invests: Accelerator, Seed, Distro

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”)

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

Investment Allocation Strategy

• How long will companies take to exit / reach liquidity? (3-7 yrs)

• How long is your investment cycle? (ex: 3-5 yrs)

• When will capital be returned? (1X in 5-8 yrs, 2-5X in 8-12 yrs)

• Simple allocation for $10M investment budget over first 5 years • 50% 1st checks + 50% 2nd/3rd checks • ~100 1st checks @ $50K each ($5M), ~20 checks / yr

• ~10-20 2nd checks @ $250-500K each ($5M), ~3 checks / yr

1 2 3 54 7 8 109 11 12 13 15146

1 5432

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.. .. ..

[ This Talk ]

• What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Engineering Investor Ecosystems in Emerging Markets • Q&A

500 Startupsto 500 VCs

Critical Ecosystem Factors

• Optimism & Belief (“Silicon Valley”) • Mentorship + Education (Knowledge) • Universities + Companies (People) • Capital, Legal, Finance (Infrastructure) • Engineering + Design / UX (Product) • Platforms + Distribution (Customers) • Online Payments (Monetization) • IPO / M&A Market (Exits)

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We live in a World of ABUNDANCE

• There are LOTS of talented people in the world

• There are LOTS of entrepreneurs everywhere

• There is a LOT of capital sitting around, BUT….

• Not much is available for un-tested entrepreneurs :(

• 500 Startups plans to change that.

Who, What is an Entrepreneur?

Who/What is an Entrepreneur?

• someone who WANTS to start a business

• someone who can RUN a business

• someone who can run a SUSTAINABLE business

• someone who can run a PROFITABLE business that creates VALUE & employs LARGE # people

• someone who can run a $10M/yr business that employs 100+people

Building Startup Ecosystems

Challenges for VCs & Angels in Emerging Markets

• Smaller Markets than USA, UK/EU, CH/JPN • Limited Internet / Mobile / Smartphone • Tough Online Payments / Physical Logistics

• Small # of Early-Stage Capital / Firms • Long Time to Exits /Liquidity (7-10 years) • Small # IPOs (0?) / Small # Local Acquirers

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Solutions for VCs & Angels in Emerging Markets

• Increase #, frequency of early-stage investors • Increase portfolio size, Decrease check size • Increase #, frequency of acquirers

• Fund of Funds for Countries / Regions • Liquidity Funds for Repurchase of Series A/B • Use of Real Estate as Hedge / Synthetic Liquidity • Tax Incentives for Global, Local Acquirers • Tax Incentives for Investing in Startups, Innovation

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How Big Is The Market?Q: How Many Entrepreneurs?

• How Many People = 7,000,000,000 on earth

• 1% of Humanity is Entrepreneurial = 70,000,000 founders

• Live 70 years, try at least once = 1,000,000 founders / year

• How Much Do They Need? Zero? $100K? $1M? $10M?

• How Big is the Market = 1M founders x $10M = $10 TRILLION / year

• Come on, REALLY? (ok Divide by 100)

• 100,000 founders / year * $1M each = $100 BILLION / year

How Many VCs?

• How Many Founders? 1,000,000 founders / year

• (ok, divide by 100, let’s say 10,000 founders / year)

• 1 VC can make 20 investments / year

• 10,000 founders / 20 deals per VC = 500 VCs

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

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Questions? Comments?

• More Info? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund) – Dave McClure, @DaveMcClure