Venture Capital na teoria e prática [Portuguese]

[Editor’s Note] This is a guest post from Gabriela de Salles van der Linden, a participant in our recent Venture Capital Unlocked program at Stanford CPD. Gabriela has 10 years of work experience in the Brazilian venture capital industry, most recently as an executive partner of CRP Companhia de Participaçōes.

O que aprendi no curso da 500 Startups em conjunto com Stanford University

Quando tive conhecimento sobre o curso da 500 Startups em conjunto com Stanford University, o VC Unlocked, me perguntei se de fato um curso com tais características poderia ampliar minha visão depois de quase 10 anos trabalhando com venture capital no Brasil. Seria essa uma boa oportunidade para refletir e atualizar sobre o que está acontecendo sob uma perspectiva global?

Diversidade, Teoria e Prática

O curso une os  aprendizados do Vale do Silício à experiência internacional trazida pelos participantes – ao todo, foram 32 pessoas, das quais 74% de fora dos EUA. O ambiente não poderia ser mais adequado para propiciar um tempo de reflexão, discussão dos principais desafios e, em especial, ver na prática como esse ambiente foi construído e as principais mudanças e tendências.

Class at Venture Capital Unlocked

Pela primeira vez participei de um curso de educação executiva onde quase 50% dos participantes eram mulheres. Além disso, todos os continentes estavam muito bem representados com uma variedade de países, de Rússia ao Hawaii, de Austrália a África, passando também por Colômbia, Índia, China, México, Arábia Saudita. Aqui foi a maior riqueza da discussão – misturar os segredos de VC no Vale do Silício com as diferentes e riquíssimas experiências ao redor do mundo.

A parceria 500+Stanford foi uma ótima combinação entre teoria e prática. A experiência do time de Stanford foi implacável para traduzir o que aconteceu no Vale do Silício e seu histórico de inovação, não só em tecnologia mas também em formas de investimento. Em paralelo, a abordagem da 500 foi de mostrar como a empresa vem fazendo para se diferenciar neste mercado complexo e competitivo. Em sete anos, investiram em mais de 1,7 mil startups globalmente, hoje com três unicórnios no portfólio e dezenas de empresas com valuations que já atingem centenas de milhões de dólares.

Refletindo sobre o curso, não tenho dúvida que a educação é uma iniciativa fundamental para a construção de novos ecossistemas fortes de empreendedorismo, investimento e inovação. Viajar, fazer benchmark, aprender com os mais experientes e sob outras perspectivas é fundamental para vencer os inúmeros obstáculos na vida do venture capitalist. Sai do Brasil buscando essa oxigenação e volto mais convicta de alguns princípios básicos para a formação de negócios de sucesso.

Existe uma fórmula para o sucesso?

Os retornos extraordinários são para poucos. Poucos, porém existem e atuam com características próprias, únicas e que de fato os diferenciam. Embora não exista uma fórmula para o sucesso, alguns elementos são imprescindíveis. Dentre eles, os que acredito serem mais importantes são:

IT’S ALL ABOUT PEOPLE

Selecionar, desenvolver, cultivar relações saudáveis e transparentes. Um time que se entende e compartilha dos mesmos princípios e visões é fundamental para trilhar esta jornada.

O melhor time é construído com alinhamento de valores, princípios e uma complementaridade muito forte.  A formação do time resulta na reputação da empresa. O dia a dia, desde os primeiros contatos com os empreendedores, a condução das negociações e o acompanhamento das investidas vai refletir na forma como a empresa é vista, na atratividade dos empreendedores e investidores para a sustentabilidade do negócio.

Workshop at Venture Capital Unlocked

Nesse aspecto, tivemos a oportunidade de visitar a Andreesen Horowitz. Com uma equipe de mais de 150 pessoas, número bastante atípico para uma gestora puramente de VC, há um foco bastante forte em ter especialistas, time técnico de análise e suporte das investidas. Condição para poucos, considerando o custo para uma estrutura nestes moldes. Entretanto, a preocupação com a qualidade é tanta que um indicador relevante que monitoram é o NPS, o qual avalia  atendimento daqueles empreendedores que tiveram o processo declinado pelo fundo. Esses mesmos empreendedores podem ser amigos de um próximo empreendedor de sucesso ou mesmo virem a ser um em alguns anos. Mantenha a melhor reputação, sempre!

FOCO

É para muito poucos o benefício de ser muito bom em diversos mercados ou estágios. Se você não está neste seleto grupo, simplifique e foque.

A especialização – regional, setorial ou por estágio – nos coloca em outro patamar de conhecimento, com capacidade de identificar as transformações e direcionamentos do mercado. Nos permite a construção de uma rede de parceiros, conselheiros, advisors, executivos de ponta.

Tivemos a oportunidade de ouvir e aprender com a experiência de de convidados ao longo do curso. Gestores de VC e investidores anjo com teses bastante distintas como Andy McLoughlin, SoftTech VC, que investe em early stage, Renata Quintini, Lux Capital, focada em ciência e tecnologias emergentes, e Allen Taylor, Endeavor Catalyst. Em comum, todos afirmam: nós investimos naquilo que a gente conhece.

Renata Quintini

NETWORKING

O acesso às melhores oportunidades, aos melhores profissionais e investidores é a combinação de fazer muito bem o seu trabalho e conectar com as pessoas certas.

Seja em um mercado altamente promissor e competitivo ou naqueles ainda em desenvolvimento, com escassez de oportunidades, vence aquele que acessar primeiro as startups e tiver a capacidade de identificar o potencial – correr o risco na direção certa. Para isso, é fundamental ter uma agenda dedicada a constantemente conhecer pessoas, ouvir, trocar experiências, observar e ajudar.

Temos que manter os nossos bancos sempre muito bem atualizados, sejam de talentos – (CTOs, CFOs, CMOs, etc), de potenciais compradores e coinvestidores, sendo este último aqueles que irão participar do plano de crescimento da investida e ajudar a potencializar o retorno – seja por expertise técnica, atuação em novos mercados ou outra complementaridade de recursos.

Team Potluck at Venture Capital Unlocked

Conclusões

Desvendar os segredos do Vale do Silício é um exercício de constante inquietação e inspiração. É inegável a existência de características únicas desse ecossistema. Mas também é inegável a oportunidade que está sendo criada em novos mercados. Mercados grandes, com potencial consumidor ascendente e cada vez mais pessoas qualificadas para inovar e executar. O Brasil é, sem dúvida, uma destas oportunidades. Há dez anos, não falávamos em aceleradoras, rodadas de investimento, coinvestimento, etc… Hoje temos grupos de investidores anjo, aceleradoras e inúmeros fundos de venture capital que estão cada vez mais qualificados para a construção do nosso ecossistema de empreendedorismo, inovação e investimento de nível global. A jornada ainda é longa e desafiadora, mas vejo que estamos no caminho certo.

Obrigada 500 Startups pela oportunidade e pelo incentivo a educação e a diversidade, acredito nessas iniciativas, abertas e colaborativas, para a evolução do o venture capital no mundo.

Interested in learning more about early stage investing? Check out our next program, Venture Capital Unlocked: Deal Camp at Berkeley from October 23-26, 2017. Deal Camp is an intensive four-day course for investors who want to improve their ability to define, negotiate, and execute early-stage investments. Apply today

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!

Edith Yeung’s 2017 China internet report

Our very own 500 China partner Edith Yeung just released her China internet report. This 67-page report includes everything you need to know about China internet landscape including China vs. US internet by the numbers, China internet market size, top China startup cities, venture capital, smartphone landscape, major Chinese internet trends including messaging, mobile payment, Cryptocurrency, shopping, bike sharing, live streaming. gaming, eSport, artificial intelligence, and education.

Here are some of our takeaways:

  1. China internet future is really bright…
  2. China is the leader of messaging, mobile payment, bike-sharing, gaming, eSport, live streaming and online education industries.
  3. China’s domestic market for mobile payment, bike-sharing, gaming, eSport, live streaming and online education is big enough that many players are not looking outside of China.
  4. Government support is instrumental China wants to dominate artificial intelligence and the government is pushing hard to make this happen.
  5. To experience China, you need to spend time in Beijing, Shanghai, Guangzhou, Shenzhen and Hangzhou
  6. China is the world’s largest education market with 144 Million online users.
  7. China is the world’s largest cryptocurrency market and is developing its own digital currency.
  8. WeChat is Facebook, WhatsApp, Tinder, Paypal and Slack combined.

 


Edith Yeung is the head of 500 Startups Greater China and partner of 500 Mobile Collective Fund. Edith invested in over 40 mobile, VR, AR, AI and machine learning startups, including Hooked,, DayDayCook, Fleksy (acquired by Pinterest), Human (acquired by Mapbox), AISense, and many more. Before 500, Edith worked with companies like Dolphin Browser, Siebel, AMS, AT&T Wireless and Autodesk. For more from Edith, you can follow her on Twitter and Linkedin and newsletter

Looking back at VC Unlocked 2017

After two weeks of intense coursework, six guest lectures, 32 investment thesis presentations, and a mind-boggling amount of coffee, another successful VC Unlocked Program with the Stanford Center for Professional Development is officially a wrap.

With over 200 applicants, this was our most competitive application process yet. We’ve covered the amazing diversity and background of the class in a previous post, but suffice to say that we had several contenders for The Most Interesting Woman (and Man) in the World.

Now that we’ve had some time to catch up on some sleep (and email), we’ll recap a few of the many highlights from the latest installment of our flagship educational program.

Setting the framework

“Whether they’re new to angel investing or an experienced practitioner, we want participants to come away from VC Unlocked with an insider’s perspective on Silicon Valley investing. It’s about empowering participants with better resources and insights that they can apply to their investing back home,” said Bedy Yang, managing partner at 500 and the mastermind behind VC Unlocked.

That thinking is reflected in the structure of the curriculum. The first week was grounded in academic theory and VC fundamentals. Stanford University faculty and 500 partners covered topics including building an investment thesis, VC structure and returns, attracting deal flow, opportunity assessment, and how to raise a fund.

“The beginning of the course provides a theoretical foundation for the practice of venture capital investing,” said Michael Lepech, Associate Professor at Stanford University.

Prominent VCs joined our afternoon sessions throughout the week for candid discussions. Marlon Nichols discussed his investment approach at Cross Culture Ventures and experience as a Kauffman fellow. SoftTech’s Andy McCoughlin shared 12 lessons from 12 years of investing, including “beware the quick pass.”

Renata Quintini at VC Unlocked

Renata Quintini of Lux, a member of Forbes’ Midas Brink list, talked about her path across the table from the Stanford Endowment fund to frontier investing, and how her experience as a karate champ shaped her approach to business.

Finally, Capria’s Will Poole wrapped up the first week with a prediction that “impact investing will become a strategy employed by all investors.”

VC Unlocked Potluck

Credit: Paula Barrientos

Applying Concepts

During week two, participants applied those concepts with more practical, action-based exercises and in-depth lectures.

As always, one of the highlights of the program was our visit to 500’s DemoDay in Mountain View, where participants got a front-row look at our Batch 22 accelerator companies. During an investment committee simulation with 500 partners, participants also got the chance to meet a few of those startups and drill down on their businesses.

500 Startups DemoDay

In-class case studies on valuations and M&A, where participants split into groups and simulated both sides of an acquisition offer, were two of the most fun and interactive sessions.

Interactive Sessions at VC Unlocked

This year also included a trip down Sand Hill Road to visit the Andreesen-Horowitz office and learn more about their investment approach from investment partner, Li Jin.

Angel investor and one-man Shark Tank, Jason Calacanis, joined for his infamous “founder interviews” session.

Jason Calacanis at VC Unlocked

Rick Marini of Dragonfly Partners talked about war stories from angel investing and the importance of finding a path to Series A. Lightspeed’s Jeremy Liew spoke about consumer tech trends and rubbing elbows with Will.i.am and Gwyneth Paltrow on the set of Planet of the Apps.

Rick Marini of Dragonfly Partners

The course culminated in participants’ investment thesis presentations, honed after two weeks of coursework. It was a great opportunity for participants to incorporate feedback from faculty and fellow peers and stress-test their latest thinking. 78% of the class said their investment thesis had changed over the course of the program.

Last day of the program!

Testimonials

“VC Unlocked is an insider’s guide to an asset class filled with mystery and risk. I feel more confident and informed about my decision making process after this rigorous two weeks. Thank you 500 Startups & Stanford!”

  • Vivek Shah, Equanimity Ventures LLP

“The most important thing in venture capital is your network. The people I met in the program – classmates, instructors, 500 team – are amazing. They’ll be professional contacts and personal friends forever, which is truly invaluable.”

  • Jules Miller, LunaCap

Applications for Next Year

Interested in attending the next VC Unlocked program?

Join our email list to stay updated on the latest news. We’re finalizing exact dates for next year and will let you know as soon as it’s official.

Announcing VC Unlocked: Deal Camp at Berkeley

Applications are now open for VC Unlocked: Deal Camp at Berkeley!

Deal Camp is our four-day program for investors who want to hone their ability to define, negotiate, and execute early-stage investments. This is the third time we’ve run Deal Camp with UC Berkeley, one of the top universities in the world, and we’re really excited about the upcoming program. Go Bears!

Participants will work with leading UC Berkeley faculty and 500 Startups partners to develop strategies to structure deals in order to maximize investment returns. At the end of the week, participants will walk away with a Certificate from UC Berkeley Law, an expanded global network, the confidence and practical know-how to make better investments…and some #500Strong swag!

The program is scheduled to take place from Monday, October 23rd to Thursday, October 26th.

A reminder that space is limited so sign up today to secure your spot.

Program

Our instructors use a project-based learning approach which takes participants outside the classroom to take part in a negotiation simulation with real companies fresh from a pitch at 500 Startups Preview Day.

Course topics include: “Scaling your Portfolio,” “The Art of Valuation,” and “Team Sheet Olympics.”

We’ve recruited amazing lecturers from the 500 staff, including Christine Tsai, Bedy Yang, and Amit Bhatti, as well as Adam Sterling, Robert Bartlett, and Steven Davidoff Solomon of UC Berkeley. We also have a great lineup of top VCs who will join the class for special sessions.

For attorneys interested in attending the program, up to 16 hours MCLE credit is being offered by Berkeley Law. The grant of MCLE credit is within the purview of the states, and they will provide a certificate of attendance and other materials to use in seeking continuing education credits. Berkeley Law certifies that this activity has been approved for 16 hours MCLE credit by the State Bar of California.

Testimonials

Deal Camp is one of our most popular courses, with NPS scores as high as 100. Participants come from angel investing, VC, legal, and government backgrounds. Here’s what a few past participants had to say:

“Whether you’re considering starting a fund or have already done so, VC Unlocked is a tremendous help. From fine-tuning an investment thesis to validating cap tables and negotiating term sheets, there really is something for everyone. The team put together a powerhouse lineup of speakers including the 500 executives themselves, some of the other most prominent VC firms in the valley, and great faculty representation from UC Berkeley. I’d recommend VC Unlocked to anyone remotely serious about venture capital.”

Ben Brasher, Blacktop VC

“The VC Unlocked was essential for me as a tech lawyer. I gained insider tips on the dynamics of the top VC and industry leaders in Silicon Valley. The program provides a comprehensive overview of the venture capital investment cycle, talks on the latest practices and trends in the startup world, and workshops on structuring legal documents such as term sheets and convertible notes.”

Tatiana Nehme, Nehme and Associates

Details & Logistics

The intensive four-day program of lectures and workshops takes place on the UC Berkeley Campus. Participants will also be invited to attend the 500 Startups Preview Day in San Francisco.

The program fee is $9,200 and covers tuition, all course materials, most meals, and admission and transport to DemoDay. Travel and accommodations are not included. There is a discounted rate available for VC Unlocked and UC Berkeley alumni.

We accept qualified candidates on a rolling basis and space is limited, so we encourage you to apply early.

Who Should Apply

Angel investors, VCs, fund managers and attorneys looking to improve their ability to define, negotiate, and execute early stage investments.

Learn more about previous programs from some of our recent posts:

Venture Capital Unlocked Deal Camp Yields 100% Satisfaction

Here’s What Happened at Deal Camp at Berkeley

Space is running out so apply today

Kicking off VC Unlocked, and a New Website!

Big news! It’s the first week of VC Unlocked!

We’re welcoming an awesome new group to the Stanford campus this week. They’ve traveled from as far as Lagos and Melbourne to be with us here in Silicon Valley and we couldn’t be more thrilled.

In the spirit of #500Strong, we wanted to share some fun facts about the participants and the exciting program we have planned. Here goes:

  • 47% of participants are women
  • 74% are based internationally, representing 17 countries including Brazil, Nigeria, Russia, Colombia, and the UAE
  • Participants have made 250+ investments in total
  • Areas of investment focus include FinTech, BioTech, telecom, FoodTech, and more
  • Participants come from family funds, government offices, startup accelerators, and private equity backgrounds
Participants from the July/Aug 2016 cohort of VC Unlocked on Stanford Campus

In addition to our stellar lineup of Stanford University professors and 500 Startups partners, we’ve also recruited some of the top VCs from Silicon Valley. Guest speakers this year include Renata Quintini (Lux Capital), Jason Calacanis (INSIDE.com) Jeremy Liew (Lightspeed VP), Marlon Nichols (Cross Culture Ventures), Andy McLoughlin (SoftTech VC), and Rick Marini (Dragonfly Partners).

We’ve got a packed schedule for the next two weeks. Lecture topics run the gamut, from “Understanding Cap Tables and Ownership” to “Attracting Deal Flow,” as well as practical and action-based exercises, including founder interviews, opportunity assessments, and more.

Outside the classroom, we’ve also planned special visits to Andreesen-Horowitz, class dinners, and, drumroll please, our invite-only DemoDay!

Guest lecturer Jason Calacanis presenting to participants in 2016

Oh, and one more thing. We also launched a new site for VC Unlocked today!

It’s an updated visual design that showcases more information about the program, attendees, and instructors. We think it will be a great resource for prospective students and past participants alike and we’re excited to share it today. Let us know what you think!

Tune in over the next few weeks where we’ll feature guest posts from current participants as well as a fun recap that summarizes some of the key takeaways from the program’s lectures and events.

 

Announcing “Silicon Valley Secrets for Investing in Asia” with INSEAD

We’re excited to announce that applications are now open for our newest course, “Silicon Valley Secrets for Investing in Asia.” We’ve teamed up with INSEAD, a leading global business school, to offer investors a one-week deep dive on how to apply Silicon Valley investing expertise to Asia-based startups.

After the huge success of our VC Unlocked programs in the Bay Area, this marks the first time we’re taking one of our programs outside the U.S. The course will be held at INSEAD’s Asia campus in Singapore from November 6 – 10, 2017.

For AIPAC investors, that means the same unrivaled access to our Silicon Valley network, investing know-how, and extensive Asia knowledge, minus the 12-hour flight and jetlag.

Sound good? Apply today to be part of the inaugural class in November 2017.

Course Overview

During the course, participants will work directly with INSEAD faculty and 500 Startups partners to explore startup investing trends across different markets in Asia. The program will explore topics relevant for venture capital, such as honing and evaluating investment theses, structuring early stage tech investments, and raising your next fund.

As part of the course, participants will also meet with top VCs from China, India, Japan, South Korea, and Southeast Asia. Admission also includes exclusive access to a special DemoDay, where participants will have the chance to evaluate real startups from the 500 Startups portfolio.

Other key benefits include:

  • Connecting with other Asia-focused startup investors as well as INSEAD alumni
  • Getting feedback on your investment thesis from world-renowned INSEAD faculty specialized in VC and entrepreneurship and 500 Startups Managing Partners
  • Getting fundraising tips and tools for structuring a fund from top VCs in the region
  • Improving your ability to identify and evaluate top startups for your portfolio
  • Building your deal flow
  • Earning a Certificate of Completion from INSEAD

 

VC Unlocked 2016

500 Startups in Asia

Here at 500 Startups, we pride ourselves on helping build viable startup ecosystems around the world. Since our inception in 2010, we’ve invested in over 1,800 companies and 3,000 founders in more than 60 countries, including Southeast Asian companies like Grab and Viki, which was acquired by Rakuten in 2012.

Geeks on a Plane, East Asia, Tokyo 2016

With $36B invested in startups and tech deals last year, Asia has emerged as a new hub of VC activity. Our decision to launch the first VC Unlocked program outside of Silicon Valley in Singapore is yet another example of our commitment to the Asian market.

We recently doubled down on Southeast Asia with a new $50M Durians Fund, launched a new $10M fund in Vietnam, and appointed a new head of business for China

About INSEAD

With three campuses (France, Singapore, Abu Dhabi), 145 faculty members from 40 countries, and 1,400 students in their PhD and degree programs, INSEAD is one of the world’s top graduate business schools.

They recently earned the top place in the Financial Times’ “Global MBA Ranking 2017” for the second year running.

INSEAD Asia Campus

Details & Logistics

We accept qualified candidates on a rolling basis. Space is limited so we encourage you to apply as soon as possible before the deadline of October 18, 2017.

The program fee of $9,800 USD covers tuition, course materials, most meals, admission to DemoDay, and transport to any site visits. Accommodations are not included but can be arranged for an additional fee.

If you have any questions about the program or would like to set up a call, feel free to reach out to Newton Davis at newton [at] 500startups.com.

 

What We’re Changing in Our Accelerator after #500BAM

Guest author –

Hi, I’m Michael Rivera. I’ve started (and exited) two companies in my career. I’ve been an early-stage venture investor, advisor and mentor. I’ve recently joined with three brilliant Stanford grads to launch an LA-based accelerator dedicated to consumer products in the health & wellness, toy, and home goods verticals. I just took 500 Startups Bootcamp for Accelerator Managers (April 24th – 28th) and here are some of my reflections. 

During the weeklong Bootcamp for Accelerator Managers, Dave McClure, Christine Tsai, Bedy Yang and the 500 Startups team shared all the successes and failures they’ve had after running 40+ accelerator programs. They were transparent, hilarious, and incredibly inspiring.

It. Was. Awesome.

(Except the part where Dave McClure told us we were crazy for running accelerators and would probably fail. The truth hurts! Thanks, Dave!)

Dave McClure presenting at BAM!

For five days, I sat with my batch mates as we learned about accelerator investment theses, accelerator marketing and positioning, and the accelerator application process among many topics in information-packed sessions. These sessions conveyed best-practices for every facet of accelerator operations and management.

Here are three of the changes we’re making to our program after attending #500BAM:

1. Shifting our mindset from an accelerator to a fund with services.

By starting a private accelerator, we’re really starting a Seed Fund with super-charged value-add components. We owe it to our investors, our strongest performing cohort companies, and ourselves, not to spend limited resources on the worst companies. It sounds harsh, but we’re accelerating the good companies and we’re accelerating the bad companies.

We understand this with greater clarity now so we’re developing internal metrics to identify our least promising cohort companies and develop a process to allocate resources to them accordingly during our program.

2. Paying more attention to timing.

We know that the success of the first fund will determine whether we raise a second fund. We hadn’t fully thought through the timing of LP capital calls and how that impacts fund IRR/LP ROI. So now we’re mapping LP capital calls against our cohort start dates and anticipated follow-on investment windows. Though this may seem like a minor point, any incremental improvement on IRR/ROI is critical, especially for a new fund.

The 2017 BAM! class

3. Engaging partners and sponsors.

We realized we were focused on our accelerator program to the detriment of our sponsors and partners program. As 500 Startups has proven in the private accelerator space, it is crucial to engage corporations, governments, and NGOs via sponsorships, partnerships, and events. If you’re not, you’re leaving tons of operational revenue on the table.

We’re now in the process of developing a fully integrated corporate outreach and sponsorship program. Not only will this strengthen us operationally, we’re further developing relationships with potential exit partners for our cohort companies. As Venture Partner Zafer Younis put it in his session on corporate partnerships, it’s a “win-win-win.”

Zafer Younis presenting at BAM!.

Although I think the challenges that face me and my team are going to be the hardest of my career, after my time at #500BAM, I feel energized and focused. I received invaluable, personalized advice from the very best accelerator operators in the world. I have #500BAM resources and materials to reference as we move forward. I am a part of the 500 Startups ecosystem.

Perhaps most importantly, I have a stronger support network of like-minded accelerator managers. My batch mates hailed from Europe, the Middle East, South America, Asia, and all corners of the United States. We are men and women coming from a mix of private, government, university and corporate accelerators.

BAM participants sharing their experiences.

Some of us have yet to welcome our first group of companies; others have been operating their accelerator for years. And yet our diversity – in all things – was our greatest strength. In truth, we learned as much from each other as we did from our friends at 500 Startups.

If you’re in the accelerator ecosystem, there is nothing else like #500BAM in the world. I encourage you to see for yourself next year.

Thank you to Michael Rivera for contributing to the 500 blog. For more insights from Michael, follow him on Twitter.

3 Questions Every Accelerator Manager Should Be Able to Answer

500 Startups just wrapped our second Bootcamp for Accelerator Managers, which brought 23 participants from Brazil, Colombia, Germany, Iran, Japan, Oman, Saudi Arabia, South Korea, Taiwan, United States, and Uruguay together to learn best practices in accelerator management.

From creating deal flow to connecting entrepreneurs to capital, BAM! participants learned tactics to improve investments and accelerator operations.

Reflecting on the program, we’ve compiled a list of three simple questions every effective accelerator manager should be able to answer.

 

What problem do you solve?

Are there gaping holes in UX/UI knowledge among entrepreneurs in your ecosystem? Do startups struggle to sell products internationally? Do you see too many founders fundraising the wrong way? Each ecosystem has it’s own set of challenges. Accelerator managers should know what ails entrepreneurs and bake solutions to their problems into their accelerator’s DNA.

Entrepreneurs relinquish equity in their company in return for cash, mentoring, and programing. Accelerators have a responsibility to equip them with the knowledge needed to fight, and win in the marketplace.

Accelerator managers know what entrepreneurs need, and then work relentlessly to provide it.

 

What’s your superpower?

We’ve been unapologetically loud about our growth hacking superpower. 500’s Seed Program focuses on marketing and fundraising strategies; our Series A Program cultivates the  metric-driven marketing techniques needed to raise and utilize Series A financings. Notice any similarities? Both lean heavily on our growth hacking superpower.

Before starting a new accelerator or changing the structure of your existing accelerator, make sure you clearly understand your superpower. What can founders say they definitively gain from being part of your program and network?

Accelerator managers know and exploit their superpowers.

 

How patient are you?

It takes time to witness the results of investing in early stage companies. How long will it take before your program proves itself? Do you have the bandwidth to survive until then?

Reflection and iteration are key to creating a great program. Over time, accelerators managers’ expertise will evolve, leading to better company selection and better financial outcomes. Accelerator managers are in it for the long term. They know their work will not always produce immediate results, but are patient and continue to iterate and evolve.

Accelerator managers know time is on their side.  


We look forward to sharing more insights learned from this year’s BAM! program in the coming months. Sign up for our mailing list at education.500.co/accelerator to keep up to date with the latest in accelerator manager education.

Our next program is planned for February 2018. We hope you’ll join us.

 

 

A Tale of Two Squirrels: The Not So Simple Math on Venture Portfolio Size

By now most VCs are familiar with Dave McClure’s theory of venture portfolio size. In short, he believes that at seed stage, it doesn’t make sense to have a fund with fewer than 50-100 companies, because venture returns depend on outliers and you need a big enough portfolio to consistently capture them.

In the post, he outlines a range of typical outcomes for a large portfolio of seed-stage investments. You can see some variation of this trend in most published venture returns data such as Crunchbase or PitchBook.

Range of Potential Venture Outcomes from Dave McClure’s “99 Problems” blog post (May 2015)
Fig. 1: Range of Potential Venture Outcomes from Dave McClure’s “99 Problems” blog post (May 2015)

These are large ranges (because there’s a lot of randomness in startups), and depending on where you end up in these ranges, you could make or lose a lot of money. Most investors prefer a bit more certainty.

Thankfully, statisticians have invented something called a Monte Carlo analysis, popularized by Nate Silver of 538 fame, to simulate the impact of this randomness by simulating a large range of possible outcomes. And my friend Yannick Roux (@yanroux, blog), a London-based VC, kindly built a Monte Carlo simulation in Excel to help me model the range of possible outcomes for venture portfolios.

The “Blind Squirrel” Portfolio

We have an expression “Even a blind squirrel finds a nut every once in a while.” In other words, any VC with decent deal flow and a reasonable selection process, if they write enough checks, should eventually pick a winner. I’m not saying that’s a good way to invest, but let’s do the math.

“Eew, this one tastes like Ad-Tech.”

Working with Yannick’s model, I plugged in some assumptions from the middle of the ranges above. This represents the “average” venture investor, hence with outcomes that fall in the middle of these ranges.

Then the Monte Carlo engine quickly ran through 10,000 simulated portfolios and listed the outcomes. I repeated this five times, changing only the portfolio size each time, and leaving all other variables constant (such as fund size average investment per company per outcome). These are the results:

Distribution of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Blind Squirrel” venture portfolios.
Fig. 2: Distribution of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Blind Squirrel” venture portfolios.

As you can see, the results for the three largest portfolios are almost identical, but the results for the 20- and 50-company portfolio are worse. That’s because, in this model, we’re only expecting big (e.g. >50X returns) winners to occur 1% of the time. And in a portfolio of 20 companies, 1% of 20 is, more often than not, zero. But in a portfolio of 200+ companies, you could pretty reliably see a couple 50X outcomes in each iteration of the portfolio.

Here’s a frequency distribution showing the breakdown of return multiples 10,000 simulated portfolios of 20 companies vs. 200 companies. It’s a bit easier to visualise this way.

Frequency distribution histogram of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Blind Squirrel” venture portfolios.
Fig. 3: Frequency distribution histogram of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Blind Squirrel” venture portfolios.

But We’re Not Average! Enter the Super Squirrel.

The “blind squirrel” portfolio was designed to match the outcomes of the venture universe in-general. These are the middle of our ranges – and a median return of 3.18X before fees and after a 10-year lock-up isn’t terrible.

But we should hope that a well-known venture fund with a recognized brand and a large team of experienced partners would attract better than average quality companies, and be better than average at picking and supporting winners. So I re-ran the model with input assumptions towards the higher end of our ranges, a different picture emerged: 20 companies is still not a great portfolio. But in this model, 200 companies can get you better than 4X before fees.

Distribution of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Super Squirrel” venture portfolios.
Fig. 4: Distribution of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Super Squirrel” venture portfolios.

Now these are much better returns. And in this model, the impact of portfolio size becomes much more pronounced. That’s because payoffs in venture are asymmetrical, meaning the impact of the losers (e.g. you lose 1X your investment) remains the same regardless of how amazing you are, but the impact of the winners is exaggerated for Super Squirrel VCs, because there are more bigger winners in Super Squirrel’s portfolio.

Frequency distribution histogram of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Super Squirrel” venture portfolios.
Fig. 5: Frequency distribution histogram of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Super Squirrel” venture portfolios.

What about the 50 company portfolio?

As you saw above, the 50 company portfolio doesn’t do badly. The top quartile returns more than 6.34X, which is better than the 100 company portfolio. But it carries a lot more risk, and you can see that in the shape of the curves:

Frequency distribution histogram of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Super Squirrel” venture portfolios with 50 or 200 companies
Fig. 6: Frequency distribution histogram of portfolio return multiples (gross of fees) from a Monte Carlo simulation of 10,000 “Super Squirrel” venture portfolios with 50 or 200 companies.

Notice that second gray hump on the right? That squirrel looks more like a camel! (a bi-modal, or Bactrian camel at that) That’s because your chance of hitting a “big winner” (50X – 100X) is about 1%. And in a 50 company portfolio, that will happen about half of the time. So the fund outcomes in the hump on the right have that one big winner in them, and the ones on the left don’t.

But in those great outcomes, it’s really down to that one big winner. If I re-run the Super Squirrel model and remove the top performing company in each scenario, then that whole second hump goes away. Notice below, the top quartile return for the 50 company fund drops by 49%, but the top quartile return for the 200 company fund only loses 20%.

Top Quartile returns for Super Squirrel funds with and without their single best performing company.
Fig. 7: Top Quartile returns for Super Squirrel funds with and without their single best performing company.

Now imagine you’re the manager of the 50 company fund. You’re six years in and you have that one company – late stage, growing fast, looking good. What if they “only” sell for $200M and you get crushed under a stack of liquidation preferences? What if Amazon goes after them? What if a similar company tries to IPO and it’s a disaster? What if the Wunderkind founder gets hit by a bus? Or suppose that company does well and you decide to raise another fund. Then you’ve got to convince your LPs that lightning will strike twice, and you’ll find another big winner again in your next fund. You explain that even though nearly half your returns from your last fund came from a single company, you’re sure you can pull that rabbit out of that hat again. These questions will haunt your dreams.

But We’re Not Squirrels!

It’s true, most VCs will tell you their investments are not random. They will claim they are able to access and carefully select the best companies in which to invest. So, as an LP in a 20 company fund, all you need to do is pick a fund manager who is consistently able to attract and consistently select the top 5% of seed stage startups.

But remember, if you have someone who can consistently select the top 5% of publicly-traded equities year after year, you have Charlie Munger of Berkshire Hathaway. That’s not a simple task!

And it’s theoretically easier to identify good companies in public markets, where you have decades of historical data, competitive data and armies of analysts poring over every available scrap of information. So the person who can consistently pick the top 5% of seed-stage startups is much smarter than Charlie Munger. (When you meet that person, please please please send her my way!)

But what about Sequoia Capital? Kleiner Perkins? Andreessen Horowitz?

Concentrated portfolios have been the venture game for the last few decades: Most institutional investors allocating into venture capital (representing at best a single digit percent of their asset allocation) have been fighting for allocations into a very small number of top-decile fund managers, typically based on Sand Hill Road.

How do we explain all those famous funds with concentrated portfolios that have done so well? It’s true, a few fund managers have done a great job of landing their outsized share of big winners fund after fund. So this must be possible.

We believe, the main difference is that these people are investing in later stages (Series A onwards). At later stages, a more concentrated portfolio might make more sense, as a higher proportion of your investments should be “winners” and fewer will go to zero. And in that case, your ability as a fund manager depends less on your ability to “select” winners and more on your ability to get into the best deals. That said, although companies in later stages may be 10X further along in traction and the likelihood of success may have improved somewhat vs. the prior stage, their pre-money valuations may have increased much more. (Our typical entry point on valuation for seed-stage is about $2.5M pre-money, whereas a Series A might start at $15-$20M pre-money and a Series B might be at $40M-$50M pre-money). Finally, entering at higher valuations means you need to exit at higher valuations to see a comparable multiple. For example, to get an Amazing (50X) outcome on an investment at $50M pre-money requires getting more than $2.5B exit valuation, whereas to get such an outcome on an investment at $2.5M pre-money requires getting only a $125M exit valuation (before dilution to simplify the math). The net of all of this is that, in our opinion, later-stage investing may have a worse risk-adjusted return profile than seed-stage investments, especially for fund managers who do not have the same kind of branding and deal access as the Legends of Sand Hill Road.

How Big Should My Portfolio Be?

We believe, if you’re 1) investing at seed stage, and 2) you are an average investor (in terms of deal flow & selection experience), and 3)  your main goal is maximizing financial returns, you’d want a minimum of 100 companies to get a decent shot at a 3X gross return. If you’re a really good investor, 50 companies might be enough. But if your one big winner doesn’t deliver hugely… that’s the risk. So, in our opinion, if you want consistent outperformance and unicorn failure insurance you should aim for 200 – 500 companies.

This is Not Revolutionary

I’m not the first person in the history of finance to suggest that diversification might be a good thing. And 500 Startups isn’t the first early-stage fund to favor a large portfolio. (That was Y Combinator, or Ron Conway before them). But we keep having this debate for some reason. So I wanted to unpack the math a bit.

Notes: I originally published this post on my Medium blogIf you’re seriously interested in learning more about early stage venture investing check out our investor education programs at education.500.co.


Acknowledgements

None of this math would have been possible without the portfolio Monte Carlo simulation engine developed by Yannick Roux, who also reviewed and improved drafts of the post. Plus great inspiration from @twentyminutevc in his great discussion with Josh Breinlinger and the ensuing tweetstorm. And many thanks to Dave McClure, Aman Verjee and Eddie Thai for all the feedback on drafts & constantly prodding the math. (And Yiying Liu for photoshopping the Patagonia vests on to the venture squirrels – priceless!) If you learned anything new from this post, it was truly from the shoulders of giants on which I stand.


About Matt Lerner

Matt Lerner, 500 Startups PartnerMatt Lerner (@matthlernerMedium blog) heads 500 Startups in the U.K. He has led over 30 early-stage  investments across Europe and the Middle East, and runs their “Series A” growth program for seed-stage startups. Prior to joining 500 Startups, Lerner worked as a Marketing Director and later Head of UK SME at PayPal. He built and managed growth teams that helped grow PayPal from an $800M business to an $8B business in 10 years. Lerner occasionally lectures on “growth hacking” at Stanford Business School and Imperial college.

 


LEGAL NOTICES

THE STATEMENTS HEREIN REPRESENT THE CURRENT OPINION AND BELIEFS OF THE AUTHOR.  UNDER NO CIRCUMSTANCES SHOULD ANYTHING IN THIS POST BE CONSTRUED AS INVESTMENT, LEGAL, TAX, REGULATORY, FINANCIAL, ACCOUNTING OR OTHER ADVICE BY 500 STARTUPS. THIS POST IS NOT INTENDED TO PROVIDE THE BASIS FOR ANY EVALUATION OF AN INVESTMENT IN A VENTURE CAPITAL FUND BY 500 STARTUPS OR ANY OF ITS REPRESENTATIVES OR AFFILIATES. THIS POST DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF INTEREST TO PURCHASE ANY SECURITIES BY 500 STARTUPS, OR ANY OF ITS REPRESENTATIVES OR AFFILIATES.

POTENTIAL RETURNS AND MODELS IN THIS POST ARE THEORETICAL AND PROVIDED FOR ILLUSTRATIVE PURPOSES ONLY.  THE PROJECTED RETURNS PRESENTED ARE NOT BASED ON PAST PERFORMANCE AND MAKE CERTAIN MATERIAL ASSUMPTIONS AND PROJECTIONS WHICH MAY OR MAY NOT PROVE ACCURATE. THE PROJECTED RETURNS HEREIN DO NOT PURPORT TO GUARANTEE FUTURE RETURNS, AND RETURNS FOR INVESTORS IN ANY 500 STARTUPS OR OTHER VENTURE FUND MAY BE LESS OR MORE THAN THE RETURNS REFLECTED IN THIS POST AND MAY DIFFER MATERIALLY FROM ANY PROJECTED RETURNS, PERFORMANCE EXPRESSED OR IMPLIED IN THIS POST.

THE VIEWS AND PROJECTED RETURN INFORMATION CONTAINED HEREIN HAVE NOT BEEN AUDITED OR VERIFIED BY ANY INDEPENDENT PARTY AND SHOULD NOT BE RELIED UPON IN MAKING ANY INVESTMENT DECISIONS.  NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, IS MADE BY 500 STARTUPS AS TO THE REASONABLENESS OR ACCURACY OF THE PROJECTIONS OR ESTIMATES CONTAINED HEREIN, AS A RESULT, SUCH PROJECTIONS AND ESTIMATES SHOULD BE VIEWED SOLELY AS AN ORDERLY REPRESENTATION OF ESTIMATED RESULTS IF UNDERLYING ASSUMPTIONS ARE REALIZED.

VENTURE CAPITAL INVESTMENTS ARE CHARACTERIZED BY A HIGH DEGREE OF RISK, VOLATILITY AND ILLIQUIDITY. THE PROJECTED PERFORMANCE HEREIN IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THERE CAN BE NO ASSURANCE THAT ANY 500 STARTUPS FUND WILL ACHIEVE COMPARABLE RESULTS, ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY