A keynote presentation I gave to the SDVG with advice about starting a company and understanding the venture capital industry

1. San Diego Venture Group - Keynote
@msuster msuster
Mark Suster
BothSidesofTheTable.com

2. 1 Basecamp - Choosing Your Market
2 Funding the Expedition
3 How Venture Capital Actually Works
4 Picking Your Crew
2
Startup Journey

3. Basecamp
3

4. 4
The first step for a startup should be to
focus on basecamp.
Many investors are too focused on the
peak.

5. 5
Experienced climbers have the luxury of
skipping basecamp as they know the mountain
-Academic breakthroughs
-Industry knowledge
-Worked with VC investors before
-History of exits

6. 6
If there’s one thought I’d like to leave you with about planning an Internet
business it’s that at scale the Internet drives deflationary economics.
Unit Price
of a Good
Time
Deflation

7. 7
But in dramatically increasing the market reach / size the Internet has
created enormous companies that scale quickly.
Unit Price
of a Good
Time
Deflation
Market
Size
Market

8. 8
The most successful new entrants enter the market with less
functionality but massively cheaper prices - The Innovator’s Dilemma.
Performance/
Functionality
Time
New Entrant
Incumbent

9. 9
This is the most misunderstood thing about “disruption” - it’s a
combination of 4 factors in which incumbents literally can’t respond
Price
Performance/
Functionality Margin
Market Size

10. 10
Initially incumbent's customers’ requirements are high enough that the startup can’t
meet their needs. Eventually startup is good enough and market trades down
Time
Performance
/
Functionality
Incumbent
New Entrant
Incumbent
Customer
Requirements
Market trades
down. Performance
good enough

11. 11
Nearly every major Internet success story is built on the principal of
deflationary economics

12. 12
And disruptive technologies that have a structural advantage form the
basis of many of our best investments
New Entrants Incumbents with Innovator’s Dilemma

13. 13
I would encourage you to think about solving harder problems in
bigger markets with fewer startups.
Defense/
Intelligence
Education
Healthcare
Provision
Healthcare
Back-End
Virtual
Reality
Transportation Manufacturing
Food
Production/
Distribution

14. Funding the Expedition
14

15. Angels &
Seed
Accelerators
Crowd
funding/
Angellist
The 3 F’s:
Friends,
Family &
Fools
15
The good news is the sources of capital have increased dramatically
in the past 5 years

16. 16
At the earliest stage it is almost certain that your capital will need to be local
- unless you’re going straight to venture / seed. The table stakes in 2016 are;
Product (or
prototype)
1
Team
2
Engineering
capabilities in-
house
3

17. 17
The most important part of funding is
finding your initial “anchor” investor
Then leveraging to find more

18. 18
Create a sense of urgency
Under promise, over deliver
Show results

19. 19
Prove you can ship product

20. 20
Start building relationships early. When we first meet, you’re just a
“dot” to me.
Performance
Time
The first time
we meet

21. 21
If I got excited on the basis of our first
meeting I am really only judging your
presentation skills
That’s why Demo Days are artificial

22. 22
Over time I start to see a pattern and get to know who you are. It’s
much easier to invest when you understand somebody’s character.
Performance
Time
Meet investors
early / often

23. 23
How to find angels?
Take 50 Coffee Meetings

24. How Venture Capital Actually Works
24

25. 25
VCs raise money on the expectations of delivering at least a 4x
gross return (3x net)
$300m
$1.2Bn
Fund Size Expected Returns
4x
LP’s
• Universities
• Personal Funds
• Insurance
• Corporates

26. 26
>80% of our returns are driven by <20% of our investments, following
the Power Law
Returns
10X
20X
30X
40X
50X
Deals
5-6 Deals 24 - 25 Deals
≤1X

27. 27
Let’s take what by most standard is considered an amazing outcome - an
$80 million exit in 5 years.
$10M
Post
$80M
Acquisition
Initial Investment Exit
$2M
$8M
$16M
$64M
+ Additional
$2M over 5 years
to keep pro rata
20%
20%

28. 28
The press will write about what a great outcome this is. Friends will
congratulate us on our spectacular 4x. For us this is literally “average.”
$4M
$16M
4x
Invested Returned

29. 29
It represents just 5% of our fund returned and 1.33% of our expected
returns. This doesn’t even make a dent in venture.
$16M
$16M
$300M
$16M
$1.2B
~5% of fund returned 1.33% of expectations

30. 30
Now let’s imagine a whopping $800 million exit.
$10M
Post
$800M
Acquisition
Initial Investment Exit
$2M
$8M
$160M
$640M
+ Additional
$8M over 7-10
years
20%
20%

31. Even at 16x, returning $160 million is still just half of our fund and only
13% of our expected returns.
$10M
$160M
16x $160M
$300M
$160M
$1.2B
>50% of fund
returned
13.33% of return
expectations
Invested Returned

32. 32
Which is why the VC model is really about the $3Bn+ outcomes
$10M
Post
$3Bn Exit
Initial Investment
$2M
$8M
$450M
$2.55B
+ Additional
$13M over 7-10
years
15%
20%

33. 33
And even still this would just be 33% of our expected returns. Venture
is truly only aligned with enormous outcomes. That’s the business.
$15M
$450M
33x
$450M
$300M
$450M
$1.2B
150% of fund
returned
>1/3 of return
expectations
Invested Returned

34. Understanding what drives VC investment
decisions can help you determine if right for you
34

35. Picking Your Crew
35

36. 36
There’s a huge
premium for taking
the first leap

37. 37
Short people shouldn’t hire
short people

38. 38
Hire people that
punch above their
weight class

39. 39
You Can’t Build a World-Class Restaurant
Without a World-Class Chef
Tech is no different

40. 40
You need
missionaries over
mercenaries

41. 41
Stay lean for as long as you can

42. San Diego Venture Group - Keynote
Thank You