San Diego Venture Group - Keynote

@msuster msuster

Mark Suster

BothSidesofTheTable.com

1 Basecamp - Choosing Your Market

2 Funding the Expedition

3 How Venture Capital Actually Works

4 Picking Your Crew

2

Startup Journey

Basecamp

3

4

The first step for a startup should be to focus on basecamp.

Many investors are too focused on the peak.

5

Experienced climbers have the luxury of skipping basecamp as they know the mountain

-Academic breakthroughs -Industry knowledge -Worked with VC investors before -History of exits

6

If there’s one thought I’d like to leave you with about planning an Internet business it’s that at scale the Internet drives deflationary economics.

Unit Price of a Good

Time

Deflation

7

But in dramatically increasing the market reach / size the Internet has created enormous companies that scale quickly.

Unit Price of a Good

Time

Deflation

Market Size

Market

8

The most successful new entrants enter the market with less functionality but massively cheaper prices - The Innovator’s Dilemma.

Performance/ Functionality

Time

New EntrantIncumbent

9

This is the most misunderstood thing about “disruption” - it’s a combination of 4 factors in which incumbents literally can’t respond

PricePerformance/ Functionality Margin

Market Size

10

Initially incumbent's customers’ requirements are high enough that the startup can’t meet their needs. Eventually startup is good enough and market trades down

Time

Performance/

Functionality

Incumbent

New Entrant

Incumbent

Customer

Requirements

Market trades down. Performance

good enough

11

Nearly every major Internet success story is built on the principal of deflationary economics

12

And disruptive technologies that have a structural advantage form the basis of many of our best investments

New Entrants Incumbents with Innovator’s Dilemma

13

I would encourage you to think about solving harder problems in bigger markets with fewer startups.

Defense/ Intelligence Education Healthcare

ProvisionHealthcare Back-End

Virtual Reality Transportation Manufacturing

Food Production/ Distribution

Funding the Expedition

14

Angels & Seed Accelerators

Crowd funding/Angellist

The 3 F’s: Friends, Family &

Fools

15

The good news is the sources of capital have increased dramatically in the past 5 years

16

At the earliest stage it is almost certain that your capital will need to be local - unless you’re going straight to venture / seed. The table stakes in 2016 are;

Product (or prototype)

1

Team

2

Engineering capabilities in-

house

3

17

The most important part of funding is finding your initial “anchor” investor

Then leveraging to find more

18

Create a sense of urgency

Under promise, over deliver

Show results

19

Prove you can ship product

20

Start building relationships early. When we first meet, you’re just a “dot” to me.

Performance

Time

The first time we meet

21

If I got excited on the basis of our first meeting I am really only judging your

presentation skills

That’s why Demo Days are artificial

22

Over time I start to see a pattern and get to know who you are. It’s much easier to invest when you understand somebody’s character.

Performance

Time

Meet investors early / often

23

How to find angels?

Take 50 Coffee Meetings

How Venture Capital Actually Works

24

25

VCs raise money on the expectations of delivering at least a 4x gross return (3x net)

$300m

$1.2Bn

Fund Size Expected Returns

4x

LP’s• Universities • Personal Funds • Insurance • Corporates

26

>80% of our returns are driven by <20% of our investments, following the Power Law

Retu

rns

10X

20X

30X

40X

50X

Deals

5-6 Deals 24 - 25 Deals

≤1X

27

Let’s take what by most standard is considered an amazing outcome - an $80 million exit in 5 years.

$10M Post

$80M Acquisition

Initial Investment Exit

$2M$8M

$16M

$64M

+ Additional $2M over 5 years to keep pro rata

20%

20%

28

The press will write about what a great outcome this is. Friends will congratulate us on our spectacular 4x. For us this is literally “average.”

$4M

$16M

4x

Invested Returned

29

It represents just 5% of our fund returned and 1.33% of our expected returns. This doesn’t even make a dent in venture.

$16M

$16M

$300M

$16M

$1.2B

~5% of fund returned 1.33% of expectations

30

Now let’s imagine a whopping $800 million exit.

$10M Post

$800M Acquisition

Initial Investment Exit

$2M

$8M

$160M

$640M

+ Additional $8M over 7-10

years

20%

20%

Even at 16x, returning $160 million is still just half of our fund and only 13% of our expected returns.

$10M

$160M

16x $160M

$300M

$160M

$1.2B

>50% of fund returned

13.33% of return expectations

Invested Returned

32

Which is why the VC model is really about the $3Bn+ outcomes

$10M Post

$3Bn Exit

Initial Investment

$2M

$8M

$450M

$2.55B

+ Additional $13M over 7-10

years

15%

20%

33

And even still this would just be 33% of our expected returns. Venture is truly only aligned with enormous outcomes. That’s the business.

$15M

$450M

33x

$450M

$300M

$450M

$1.2B

150% of fund returned

>1/3 of return expectations

Invested Returned

Understanding what drives VC investment decisions can help you determine if right for you

34

Picking Your Crew

35

36

There’s a huge premium for taking

the first leap

37

Short people shouldn’t hire

short people

38

Hire people that punch above their

weight class

39

You Can’t Build a World-Class Restaurant Without a World-Class Chef

Tech is no different

40

You need missionaries over

mercenaries

41

Stay lean for as long as you can

San Diego Venture Group - Keynote

Thank You