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.

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.

 

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

 

Are there ghosts in your convertible notes?

Guest blogger – Adam Sterling is the executive director of the Berkeley Center for Law, Business and the Economy, co-founder of Startup@BerkeleyLaw, and a former venture capital and startup attorney.

Are you investing in convertible notes or securities? Do you know what a phantom liquidation preference is? Did you know it could cost you hundreds of thousands of dollars? Let’s illustrate how with a simple example…

Sally purchases a convertible note with a valuation cap of $5 million in Tuber Corporation for $100,000. Six months later, Tuber closes its Series A with a pre-money valuation of $10 million, selling new shares at $1/share. Thanks to its valuation cap, Sally’s convertible note converts at $0.50/share and she receives 200,000 shares of Series A stock. Sally’s very happy about this outcome.

Source www.billionbackrecords.com

A year later, Tuber is acquired. Unfortunately, the acquisition price is not enough to trigger a conversion of the preferred stock. Series A holders will just receive their liquidation preference. Assuming the Series A investors negotiated a standard liquidation preference, each Series A holder should receive the “original issue price” of their Series A stock. The question for Sally then becomes, is the “original issue price” of her Series A stock $0.50 share or $1.00 share?

Assuming Sally’s convertible notes were silent on this issue, Sally would most likely be entitled to receive a liquidation preference of $1.00/share in the above example or $200,000 (an outcome that greatly benefits Sally). This benefit to Sally, getting $1.00/share as opposed to $0.50/share (which ends up being worth $100,000), is known as a phantom liquidation preference.

While most investors would prefer to keep this phantom liquidation preference, many companies are drafting convertible notes to avoid it. Their argument is that investors are double-dipping — benefiting from the discount/valuation cap when their security converts and again with the liquidation preference. This argument may be valid, but as an investor you should at least be aware of it. As some investors successfully retain the preference, it could be worthwhile to fight to keep it. 

Understanding nuanced concepts like this can provide investors with a critical edge in the crowded venture capital space. To this end, UC Berkeley will be partnering with 500 Startups at Venture Capital Deal Camp in February to breakdown concepts like this and explore other mechanics of early-stage deal making. Deal Camp also features VIP access to 500’s famous Preview Day and simulated negotiations with real companies. Check it out and consider applying!

Thank you to Adam Sterling for contributing to the 500 blog. For more insights from Adam, follow him on Linkedin or Twitter.

Next, Final Frontier: Lessons Learned Investing in West & South Africa

During my time at global early stage seed fund, 500 Startups, I’ve led deals in agriculture marketplaces in Indonesia (iGrow), global workflow management software from Brazil (Pipefy), and even education or sewing marketplaces in “emerging markets” like the MidWest of the United States.
500 Startups has a culture of looking ahead to emerging markets, so I was encouraged to follow my investment thesis that there is massive opportunity in thinking ahead.
There were many haters, especially when I became interested in West Africa:

“These markets are too early.” 

or,

There’s no downstream capital for these companies.”

Initially, I was worried about whether I would be stranding these companies or whether it was too early for 500 Startups.

Over the last eight months, we have invested in four companies in South and West Africa through our accelerator program: Sweepsouth, (B14),  KudoBuzz (B14), mVendr (B16),  Podozi (B16), and just recently accepted SureGifts in Batch 18, one of the fastest growing loyalty technology companies in Nigeria and Kenya.

This piece is about what I learned investing in these markets, and why I think all serious investors should learn and be aware about what’s happening on the African continent.

Geeks On A Plane 2016 will be in Africa, so there is an amazing opportunity coming in March.

Here’s what I learned.

1) Why go to West or East or South Africa in the first place? The Future is African. 

This stat that blew my mind: “Sub-Saharan Africa will have a population boom from today’s 900 million people to 2.4 billion by 2050, with almost half of the world’s children being on the continent by 2100.”

There are 54 countries in Africa with unique individual cultures that are all geared for massive economic growth – 50% of the people on the continent are 19 or younger.

I read this right before my trip, and my mind was blown. There were talks of startups like Paga, ACE, Jobberman, Jumia, and increased funding:

“$400 million in VC funding for African startups in 2014. More than a billion dollars will be invested in Africa by 2018.”

Trends in “M-commerce”, B2B for growing SMEs, fintech, big data, and more have been covered in great pieces like this one from I-Dev International. But, you have to go. There’s nothing you can read in a book that will prepare you for feeling the energy and innovation building in the ecosystem, and we international tech investors have a lot to learn.

2) Mentorship is more rare than money, and foreign investors and entrepreneurs can add immense value.

Meltwater Entrepreneurial School of Technology – a two-year entrepreneurship funded school that finds and invests in entrepreneurs from Nigeria, Ghana, and Kenya invited me to visit after I made an accelerator investment in a graduate company called KudoBuzz, a SaaS tool for e-commerce companies.

I was blown away during my time giving a guest lecture and spending time with the entrepreneurs at MEST. What also blew me away was that Jorn, CEO and founder of multi-national SaaA company Meltwater,  spends time every single quarter mentoring young entrepreneurs.

It’s his time, not just the considerable capital Meltwater has invested, that makes MEST an amazing addition to the ecosystem.

At 500, the main areas we were able to help the startups were around understanding the fundraising process.

From our South African founder of Sweepsouth, Aisha Pandoor, called Sweepsouth’s experience in San Francisco in the accelerator a “game-changer for SweepSouth in the level of mentors and the network we’ve had exposure to, both of which would previously have been quite far out of reach for a startup based on the other side of the world.

As one of the first services marketplaces in Africa, it was hard to find local founders and mentors with enough experience to provide meaningful advice, and this is a conundrum for other disruptive African startups.”

3) The challenges are real, but they can be overcome (with time).

Last batch, I led our first accelerator investment in a Nigeria-based company called Podozi, a beauty e-commerce company, going after the exciting African women market who spends five times more on beauty and hair than other ethnic groups and will continue to grow.They had graduated from Savannah.vc, a Nairobi-based incubator.

My thesis around Podozi was around my conviction about the growing and interesting beauty market in Nigeria and across the continent, and in the founders, Teniola and Wale. Building an e-commerce beauty brand like Sephora will be challenging, but someone will win in this market. I believe Teni and Wale have the conviction and experience to win. However, their journey will be full of challenges.

Not only were there challenges with logistics, basic office management, and recruiting – the dropping value of Nigerian Naira made tracking metrics complicated and disheartening for them.

Then, there was the bleak downstream capital situation. Clayton Bryan, in the SF office, helped me connect Wale to local angels, as well as explore more downstream capital sources for African-based companies in the European VC scene in London, Dublin, and other hubs.

There are super early stage programs like MEST, Savannah Fund and then growth funds, but very few options in between, which is why Podozi and other startups must focus on revenue and growth until they reach the stage they can access capital in their markets or foreign investors.

Four months after making the bet on this team, I watched Teniola (TeniBeauty to friends) pitch at Demo Day stage with confidence.

.

3) Focus on founders – experienced founders are beginning to emerge

Since downstream capital is challenging to close in the ecosystem, so it makes sense to filter for scrappy founders and innovative, clever business models who can be more cashflow generating if they haven’t raised locally.

Other accelerators are beginning to take notice. While I was at MEST, I also had the chance to coach three Ghanaian and Nigerian women, all-technical team, building a social app for African hair calledTress. Nine months later, they were accepted into the YC fellowship program, and today they are raising a seed round to grow faster.

I’m very excited about the team that is joining me in San Francisco this coming week for the launch of Batch 18 – SureGifts. The founders are ex-Jumia (one of most successful e-commerce brands out of Rocket Internet) early team members and have already raised capital. They have already proven they can expand out of their local market and have scaled from Nigeria to Kenya.

These are the types of founders that we are getting at 500 Startups now, since we have been investing, learning, and building relationships and reputation early.

4) Community is key.

Many programs and accelerators in emerging markets are early and still figuring out how to provide value in their early ecosystems.

Many “angel investors” aren’t used to investing in technology startups and come from real estate or private equity, not operating backgrounds, which can create problems between the local investors and entrepreneurs.  It’s another example where money is less valuable than mentors and experience.

Our role is to support and identify  the best credible and local investors to co-invest with, as well as to provide perspective and mentorship to entrepreneurs on the ground. Even if your fund does not support international investments, you can begin to make the relationships.

Distrust between local investors and entrepreneurs can be complicated, but as foreign investors we can provide perspective about the importance of fair practices and terms for early stage technology investments, as well as encourage communities of entrepreneurs to share information, help each other, and build sustainable communities.

Trust is hard to build, but after my experiences with MEST, She Leads Africa, and other great organizations, I am confident these communities can become sustainable.

 5)  Just go and learn for yourself.

If you’re an early stage investor and have any plans to be a part of the emerging economies globally, you’re missing out if you continue to ignore (or overlook) the African markets – the only color we care about as investors is green.

Foreign investors can provide a lot of value through mentorship and spending time helping entrepreneurs who are solving problems in their communities.

I urge other investors to pay attention to what is happening on the African continent, from Lagos and Accra to Nairobi to Johannesburg.

Come join us at GOAP and find out for yourself.

Additional Resources:

How to Invest “Smart Money” — 4 Lessons Learned

I recently attended VC Unlocked: Secrets of Silicon Valley Investing, an investor training program run in partnership with 500 Startups and Stanford Center for Professional Development. The two-week program took place July 25th – August 5th, 2016, and a class of 28 participants dove deeply into the world of tech, understanding fund dynamics and hearing from seasoned experts.

My big takeaway was that along with all the attention and hype startups are garnering around the world, there is still a large gap in the knowledge available to investors entering the space.

We hear a lot about “dumb money” and to avoid it like the plague, but is that it? As a former educator I believe not – and so here are a handful of tips for new investors from VC Unlocked to make your money smarter:

1. Understand the market/ecosystem you are investing in

Copying and pasting a playbook from Silicon Valley directly into a different region will not get you the startup ecosystem you hope for. It’s taken a while for this message to make its rounds, but it’s important to know that building up the key components are what matters; Do smart founders, early and later stage capital, legal and other services, and exit opportunities exist in your market? If not, how will you as an investor traverse those voids?

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Bedy Yang and Mary Grove speak about building ecosystems around the world.

2. Educate yourself and peers on good etiquette and best practices

Unless you imagine yourself solely generating your own deal flow and funding your companies throughout their lifetimes, you will find yourself working alongside and benefiting from the participation of the rest of the startup community. It is in your best interest to play well with others, and this applies to how you manage the interests of and your relationships with LPs, fellow investors, and entrepreneurs.

Good behavior could be saying “No” quickly and kindly to founders that do not fall within your investment thesis, having a discussion with your LPs about recycling management fees, or understanding which terms are investor vs. founder friendly.

Your responsibilities as an investor will include:

  • knowing what you are buying
  • how to navigate and properly negotiate terms
  • what part you play in being a constructive board member beyond just writing a check

The good news is, there are many thought leaders and content around these topics that you can find online, and even better news is my colleague will be sharing a post devoted to the best ones!

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Jeff Clavier shares his fund’s journey.

3. Know your value proposition as an investor

“Why you?” is a question investors are often heard asking founders, but it is just as important for investors to ask themselves both for fundraising as well as deal flow. During one of the sessions, David Hornik of August Capital said, “If you don’t have dealflow, you don’t have anything.”  Echoed by Constance Freedman of Moderne Ventures, she pushed for differentiating yourself from other investors.

Whether it is your industry expertise, personal network, or unparalleled access, investors should be able to articulate how their assets power their investment criteria. Jeff Clavier of SoftTech VC encouraged everyone to have “a clear schtick” because at the end of the day smart founders will optimize for investor-market fit.

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Capturing a great session with Jason Calacanis

4. Be transparent with others, honest with yourself

This tip will go a long way, allowing you to attract the best relationships, utilize your time efficiently, and build your brand.

“Be clear about your investment filters and make sure they are known by founders, investors, everyone.”

Dave McClure tells us, “Be clear about your investment filters and make sure they are known by founders, investors, everyone.”

This will help you avoid pitfalls of herd mentality or just falling in love with the problem the company is solving, as well as not wasting meetings with founders you would never back.

Another area of transparency that requires some introspection was brought up by Mary Grove of Google for Entrepreneurs, who said that while it’s widely known that diversity fosters innovation, she pushes investors with the question of “What are you doing to brand yourself or understanding of your own biases?”

Lastly, Jason Calacanis of Inside.com and LAUNCH spoke to always giving back to founders with something constructive, regardless of his investment decision. For each meeting, Jason shared that he takes time to thoughtfully respond to the founder(s) with feedback on what was positive and candid concerns around potential challenges.

While this is not an exhaustive list of how to be a more valuable investor, it’s a start to what is a long journey journey ahead should you choose to become one.

As far as 500 Startups is concerned, this is the way we have guided ourselves in our various ecosystems and how I’ve tried to reestablish our presence in New York. It was never about blindly setting up an office, but rather working alongside all the other great organizations that are building up the meaningful pieces of the tech scene. The response has been wonderful so far, and I’m looking forward to bringing some of 500’s larger programs and resources to New York.

Keep your eyes out in the coming months for more announcements!

Our 2016 VC Unlocked class
Our 2016 VC Unlocked class

PreMoney 2016: The Global Investment Community Crosses Paths in San Francisco

PreMoney Brings Together US + International Angels, VCs, LPs

Eric Osiakwan, Managing Partner with Chanzo Capital in Accra, Ghana, traveled more than 7,600 miles to attend PreMoney San Francisco.

“The world is flat,” he said, sipping a Coke immediately after his panel discussion, “Crossborder Investing: Let’s Go Global, Baby.”

“When I started in tech in 1998, one of the terms that really rang in my ears was ‘the global village,'” said Osiakwan. “Today, it’s very real.”

Eric Osiakwan and Jill Ford
Eric Osiakwan and Jill Ford

How real?

Earlier in the day, Osiakwan bumped into Jill Ford, Head of Innovation & Entrepreneurship for City of Detroit. “We first met in Ghana in 2002,” he said. “I didn’t know she would be here! After I finished my lunch, I was walking out and said, ‘I know you!'”

“This was actually a wonderful surprise,” said Ford, a former Bay Area angel who now manages a team attracting and nurturing startups and SMBs in the Motor City.

“PreMoney should be mandatory for new investors.'”

– Jill Ford, Head of Innovation & Entrepreneurship, City of Detroit

“I’ve been a great supporter and a big fan of 500 Startups for a while,” she said, noting that she and Osiakwan would meet again the following day at the 2016 Global Entrepreneurship Summit. “I was very excited to add PreMoney to my trip, and I’m always so excited when I get to see the kind of content that we had today and a fascinating set of speakers.”

Although Ford has lived in Detroit for years, she said 500 Startups’ social media and events keep her connected to the latest startup news and trends.

“I’m very excited about what they’ve been doing to promote diversity in tech and also have a global reach with regard to connecting entrepreneurs and investors,” she said.

PreMoney should be mandatory for both new investors, and more experienced hands looking for insight, said Ford.

“This is the forum for bringing together entrepreneurs and investors from a large geographic scope to really be the launchpad for great innovation, great ideas and being able to grow startups,” she said.

Content From Global Investors

“This is my second PreMoney,” said Monique Woodard, Venture Partner with 500 Startups, “so I’ve come to expect a high caliber of content from some of the best investors in the business. That’s consistently what 500 and PreMoney delivers.”

Like every other person I spoke to, Woodard’s favorite session of the day was “the three generations of Drapers. Getting to see them interact as a family — and not as investors — was heartwarming and gave us a little insight into the family,” said Woodard.

“I also got a lot out of Jason Calcanis’ time,” she added. “Every time Jason talks, I learn something new.”

Who should attend PreMoney? “As a newbie investor, I would say any newbie investor,” answered Woodard. “You will learn a ton of stuff from a ton of people who have been doing this for a really long time.”

“Every time Jason (Calacanis) talks, I learn something new.”

– Monique Woodard, Venture Partner, 500 Startups

The June 2016 PreMoney gathering “really set the bar higher than the event I attended last year,” she added. “I enjoyed seeing some investors I know, hearing their thoughts on where the industry is going, and I expect to have a really good time at the party this evening.”

“I learned a lot, even being internal to 500,” said Sheel Mohnot, FinTech Partner at 500 Startups. “There was a panel on vertical funds that went very well, and it’s always entertaining to hear Jason Calcanis and Dave McClure. I just wish I could have gone to everything.”

Fireside Chat with Dave McClure + Dave Morin
Fireside Chat with Dave McClure + Dave Morin

“Recently, there’s been more of a focus on cross-border, which is I know, inherent to 500’s focus, but they’re bringing some interesting characters and players who are doing some interesting things that you don’t really see anywhere else, even in San Francisco,” said Mike Prasad, Managing Director for LA-based incubator VentureLab.  “I come here mainly for that, because it doesn’t really exist at the other events I’ve been to.”

“Increasingly, it’s becoming a globalized event, and it’s going to be the best thing that ever happened to Silicon Valley,”

“Increasingly, it’s becoming a globalized event, and it’s going to be the best thing that ever happened to Silicon Valley.” concurred Osiakwan.

“Casual Vibe” at PreMoney Encourages Learning & Relationships

“PreMoney San Francisco has one of the best mixes of people in the VC scene,” said Prasad, “Getting them all in one room, I can’t think of another event that has that kind of mix.”

“Investors of any type should attend,” Mohnot advised. “There’s so much to learn from what other people are doing. They’re clearly so much more fun and not boring,” he said. “You can actually stay awake during the whole thing.”

PreMoney is a great way to get the view from 30,000 feet, and also for doing deep dives, said Prasad. “It’s interesting to see what people are looking at and get the general feel of the room where their heads are at,” he said. “I don’t really know of another way to do that, short of talking to tons of people over the course of a year.”

“PreMoney is very useful for getting information and a good time out of the event, but it’s also something you can jump right into.”

– Mike Prasad, Managing Director, VentureLab

Additionally, Prasad said PreMoney is a unique networking opportunity. “All these people globally who are in VC are in town at one time, which is great.” The ability to participate in open discussions with other investors is also a strong draw, he said.

“You get someone on stage who’s looking at a trend, and then you get the immediate response from someone else, and seeing that dynamic is telling,” said Prasad.

Mike Prasad, VentureLabs
Mike Prasad, VentureLabs

“The last thing is relationship building,” he noted. “We don’t do any deals here per se, but historically, a lot of the relationships that we build here have led to that.”

Typical for a 500 Startups event, “it’s a casual vibe, but it’s not something like you feel it’s a joke,” said Prasad. “People are very serious and doing cool things, but it’s not like you can’t talk to people and have an open conversation. It feels very casual, because there’s no reservations per se.”

That openness creates a fertile environment for exchanging data and ideas, said Prasad. “If you’re someone who’s new to VC, it’s definitely a good event to get perspective for thinking about things you haven’t considered before,” he said. For more experienced investors, “the knowledge transfer there is also interesting.”

“PreMoney is very useful for getting information and a good time out of the event, but it’s also something you can jump right into,” said Prasad.

“I think it’s one of Dave’s best events.”

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