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!

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