How 500 Startups picks investments

How do you evaluate a potential startup investment?

This is inevitably one of the first questions I’m asked when talking to aspiring VCs at industry events and programs like VC Unlocked: Deal Camp, and rightfully so.

Ask around and you’ll hear about the hours clocked and the expensive mistakes a VC has to make in order to develop the muscle memory and pattern recognition to succeed in this industry. Throw in the influx of capital chasing fewer high-potential startups, and it becomes increasingly clear that early stage investors need to arm themselves with something stronger than gut instinct.

For investors looking to break into the industry, that means honing in on their opportunity assessment framework and filters that allow them to mitigate risk and maximize returns.

Opportunity Assessment

Let’s start by defining opportunity assessment: simply put, it’s a set of criteria or questions that will make you say yes or no to an investment.

Opportunity assessment is a foundational discipline for any VC, and often one that takes the longest to hone. It’s particularly hard for early stage investments when you don’t have financials to project. By approaching your evaluation of new investments in a more systematic way, you’ll save yourself some war stories down the road.

With over 1,800 investments under our belt, we like to think we’ve learned a thing or two about opportunity assessment. Here’s how we evaluate early stage investment opportunities:

At 500, we’re pretty transparent about our investment thesis. Compared to more traditional VC firms on Sand Hill Road, we prefer a large, diversified portfolio of early-stage investments that reduces risk and maximizes potential return. In other words, we advocate lots of little bets.

lots of little bets

 

 

 

 

Now once you have that thesis, how do you put it into practice? That’s where your frameworks and filters come in. Every firm’s framework is different, depending on their area of focus, and each is crucial to their success (or lack thereof).

Over the course of seven years, we’ve built a data-driven process based on a selection of pre-defined metrics.

Kickass Team

Ideally, we’re looking for a cross-functional team with design, engineering and marketing expertise. In our experience, bringing together technical team members and talented product and distribution pros is a winning combination.

Solving a problem

The product or service you’re investing in should solve a problem for a specific target customer. In many cases, that goes hand in hand with a market shift and means solving a problem that wasn’t obvious before.

Capital-efficient business

We’re looking for companies that are operational at less than $1M in external financing. Their CAPEX needs to be low, or we need to see revenue ticking upwards. Watch that burn rate!

Path to Series A

If you’re running out of money and trying to raise again, chances are you’re already too late. As early-stage investors, we need to know whether you can raise the next round. Startups die for one reason…

Functional prototype

We need to see a functional prototype before investing, or previous product success at the very least. Early customer usage is another bonus.

Measurable traction

Beware of vanity metrics. We’re looking for engaged users, some revenue, and attractive unit economics that are trending upwards.

Scalability

One a company has product market fit, they should have either scalable internet-based distribution (search, social, mobile) or a proven ability to scale sales. 500 has an in-house distro team of growth marketing experts that specializes in advising post-seed companies preparing to raise their Series A round.

When 500 Startups likes to invest:

sweet spot for 500

So there you have it, a high-level overview of how we evaluate new venture opportunities. Once you’ve decided on your framework on whether to invest in a company or not, it’s time to move on and focus on pricing and terms.

If you’d like to learn more and deep dive into specific case studies, hear first-hand from founders, and more, check out our upcoming Venture Capital Unlocked: Deal Camp at Berkeley from October 23-36.

VC Unlocked: Deal Camp @ Berkeley

Deal Camp is a four-day intensive program focused on the nuts and bolts of deal making for investors who want to improve their ability to define, negotiate, and execute early-stage investments. Participants will work with leading UC Berkeley faculty and 500 Partners to develop strategies to structure deals in order to maximize investment return.

VC Unlocked: Deal Camp at Berkeley

Submit your application today!

500 Investors

We recently wrapped up our first-ever investor training in partnership with Stanford Center for Professional Development.

Our full class brought together 34 impressively awesome participants — 16 women and 18 men from 14 countries around the world.

500 Invest stats on global investor reach

Participants’ backgrounds included prominent existing tech investors looking to break into new global markets, family offices getting ready to launch into tech investing and accelerator-building, multilateral organizations looking to set up venture capital as asset class, young entrepreneurs setting up funds in universities, and active angel investors looking to sharpen their existing investment thesis and scale the volume and reach of their investment activity.

Our 50/50 Scholarship brought 16 women to the table, making up a class that was almost 50% women investors. We see this as a huge win and step forward in changing the gender ratio in venture, and want to extend an extra thanks to the community — and to Stanford — for supporting the scholarship initiative.

500 Invest angel investor meetup
We covered a LOT of material during our two week program, with every day including classroom time, meet and greet sessions, pitches, and in-depth and heated startup assessments following 500’s Batch 12 Demo Day. The course was taught by Mike Lyons, Mike Lepech, Pedram Mokriam, Dave McClure and Bedy Yang with several guest speakers such as Jason Calacanis, Mari Baker and James Currier.

This course will allow you to wrap your your head around why and how this asset class works in the Valley, thanks to top notch faculty with libraries of knowledge.

— Fares Ghandour, Investment Manager at MENA Venture Investments

I was really fortunate to be in this first batch of the program. I found the course the be very relevant for many reasons; it was conducted jointly with Stanford whose faculties are themselves industry practitioners and have been in the industry for a long time. Then, there is the additional appeal to the program, as half of the participants are from outside the US and almost equally, were made up of women. It was a good mix of angel investors, VCs and even a university professor! Then there is a good mix of lectures as well as real-life experience thrown in for us to engage with real companies and real issues faced by them. We even attended 500 Startups Demo Day for its Batch 12!

Well done 500 Startups and Stanford!. I don’t think I can find the same experience elsewhere in the world.

— Jalamudin Bujang, CEO at MAVCAP

Participating in IGSVI gave me more insight into investing in Silicon Valley and has extended my network further not only with VC’s in the US but also with VC’s and angel investors around the world.

— Sigurdur Arnljotsson, General Partner at SA Framtak VC

The IGSVI program brought clarity to how I can most effectively run a Venture Capital Firm, more so than any blog, book, mentor, or past experience ever could. By bringing together the brightest emerging early stage investors from around the world to Silicon Valley for a jam-packed two week experience, IGSVI provided us with the opportunity to build a professional network that will work together to fuel entrepreneurship on a global scale.

— Elizabeth Galbut, Founding Partner at A-Level Capital

The IGSVI program hosted by 500 Startups at Stanford has been extremely valuable and worth-while in the critical stages of building the foundation of my investment career. In 10 days, I learned more and gained more Silicon Valley insider connections than I would have in 6 months or more on my own. 500 Startups has truly found a way to “accelerate” the work of emerging fund managers much like they’ve done for hundreds of startups. The teaching staff was top notch, no logistical detail was left to chance, and instructors were hands-on and available. Our class was made up of people from every corner of the earth, and made the experience more enjoyable than I could have ever imagined. I have made some life-long friends, and learned a ton in the process.

— Arlan Hamilton, Founding Partner at Backstage Capital

I came in wanting to invest in every angel investment deal that came my way. I left with an understanding of my area of expertise and a clear investment thesis.

The highlight for me was the commitment that Dave, Bedy and the the entire 500 team had for each of the participants to get significant value. In fact at times I caught myself thinking that how could Dave reveal all his secrets and learnings gained from his experience of investing in almost 1000 startups. The diversity of the 35 participants was equally impressive with only 20% from the U.S. and the balance from all over the world. Needless to say that it was a very valuable 2 weeks and it’s for sure saved me a ton of money which I would have wasted in investing outside my area of competence and outside my thesis.

— Piyush Chawla, Angel Investor

We walked away with new connections and new friendships — people we’re excited to support not just as investors but as friends.

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IGSVI was a huge success, and, in classic 500 style, it’s something we’re doing again — probably sooner than is sensible or sane.

From short workshops in your region to the NEXT IGSVI later this year, learn more about 500’s upcoming investor training programs at http://500.vc

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CALLING ALL WOMEN INVESTORS

We recently announced an investor training program in partnership with Stanford Center for Professional Development called Insider’s Guide to Silicon Valley Investing (May 4th to May 15th). It is a training program to work with angels, corporates and family offices who want to learn the playbook of 500 Startups and become savvy tech investors.

We’ve been thrilled with the quality and number of applicants so far. It ranges from fund managers, successful founders to family business owners who would like to develop their venture practice. Although we are truly satisfied with the quality, we saw a gender disbalance of the pool of applicants. Given that only 6% of venture capital consists of women partners, this is something we want to change.

At 500 Startups, we are committed to balancing the gender ratio on both sides of the table – founders AND investors. Our management team is 50% women, as is the rest of the company. We’ve also created 500 Women, an AngelList syndicate which invests in strong companies led by women founders.

Change doesn’t happen overnight, but we are committed to enacting change to reach “50/50” for founders and investors. To do that, we need your support.

That’s why today we’re announcing a 50% Tuition Scholarship for our IGSVI program. Women applicants will be eligible to be considered for 50% tuition to join our 2 week program. We are calling ALL founders, mentors and investors to help us find amazing women to be part of this inaugural class. Refer 1 woman whom you would like to see as your investor and we will reach out to them to offer a 50% scholarship for the program.

3 EASY WAYS YOU CAN HELP:

1. Nominate an awesome woman to join the IGSVI program and share on Facebook and Twitter:

#50/50 FOR #500WOMEN — I recommend [AWESOME WOMAN] for 50% scholarship to http://.500.vc

2. Contact amazing women in your network and encourage them to apply themselves at http://500.vc/apply. (It’ll help if they include “#50/50 #500women” in their application.”  If YOU’RE an amazing woman who wants to apply yourself, do it!

3. Email Bedy Yang, Managing Partner at 500, directly with referrals at bedy@500.co

We’re long overdue for a world with more women investors, and it starts right now.

Thanks to #500women #500strong team who continue to inspire me, Susan for her contributions to this post and Christine, my partner in crime on the 500 Management team.