View transcript
Thomas Madsen- The people that just stuck to it and really broke through. Since he is slightly jet lagged, I would like all of you to chant his name with me because nothing gets you more awake and alert than an angry mob yelling your name. So his name of course is Dave. He is the co-founder of 500 Startups. Can I get a Dave, Dave, Dave, Dave, Dave, Dave, Dave, Dave, Dave, Dave, Dave, Dave, Dave, Dave, Dave, Dave, Dave McClure everyone. It's a really good sound system and I don't feel like a fucking rock star so I'll try and be interesting. I'm going to sit down if you don't mind. My knee is a little fucked up from traveling. Can you guys all still see me? Alright. So this is the presentation where I brag to you about all the shit I've done over the last seven years or so. That's probably not completely true but we'll try it. That's my co-founder Christine. She's pretty awesome. We built this thing called 500 Startups about over the last six or seven years and that's a picture of where we have people on the ground actually. About half the people are in Silicon Valley, in Mountain View, in San Francisco and then the other half are spread across a lot of other places. And I spent about half my time in California and then half the time sort of around the rest of the world. So what are we? We're the most active seed investor in the world. That's not really a great bragging point. That just says that we can write a lot of checks. Hopefully some of those turn into interesting startups and maybe make us some money. Strangely, we're about 150 people. So we're kind of like a medium sized startup ourselves. About a third of those folks live outside the US and they speak about 25 other languages. We have a little under 300 million under management. In addition to our main fund, we have a bunch of other smaller vehicles that are either country or region based or sometimes industry vertical based. We've invested in a lot of companies and probably about a third of those went through our accelerator programs. And a little under a third are outside the US and a little under a third have women co-founders. Actually, I think that's probably around 300 or 400 with women CEOs and somewhere around 400 or 500 with women co-founders. So what do we do? We invest in companies. We run accelerator programs in California and actually also in Mexico City. But we do seed investing as well as we run accelerator programs. In the last couple of years, we have a group of people that do mostly growth consulting, about 10 or 15 people in our company just do that. After we had been running for four or five years, we realized there's a lot of other stuff to do that's not just on the entrepreneur side. We started running investor education courses. We've done a few of those at Stanford and at Berkeley. And then we started doing those for corporate programs and accelerators, other accelerators as well. We try and make as much of our content as possible available online on our blog and website. We stream in webcast. We have this thing called Marketing Hell Week. Every cohort that comes into our accelerator program, we kind of try and educate them around marketing and sales techniques, both online and offline. And we usually webcast all of that content. And we run events and conferences in California and around the world. Along the way, we've invested in a bunch of companies, and some of them have turned out to be pretty large. Actually, Twilio, which went public earlier this summer. A company called Credit Karma, which has been around for a few years, does credit score monitoring education. And Grab, which used to be Grab Taxi, it's an Uber and Lyft competitor out of Southeast Asia. Anyway, I can brag to you about a lot of this stuff, but the reality is that most startups probably fail, and even most of the ones that succeed don't get very big. So if we looked at our first, I would say, first five or six hundred companies in the first four years that we invested. We usually invested in Accelerator and Seed Stage. That's probably when there's about one to five people in the company. They might have some revenue, they might have some customers. About 25% of those companies will get to a Series A round. That might be anywhere from one to five million dollars. About half of those will get to a Series B round. That might be 10 to 25 million dollars. And then maybe half of those will get to a hundred million plus. That's kind of what we call that Centaur stage. So it turns out that really only about one or two percent of the companies we invest in become billion dollar or unicorn sort of stories. Maybe five to 10% get to be in that Centaur category. And if we're lucky, maybe some other ones will also exit. But the odds are pretty tough for a lot of founders and actually for investors as well. So a lot of times investors will act like they're God's gift to everything else in the startup community. And just because we're rich, sometimes a lot of times we think we're stupid. We're smart. The reality is most of the time that money isn't ours. It's other people's. And VCs fail probably about as frequently as entrepreneurs do. So we kind of both suck. Give yourselves a round of applause, ladies and gentlemen. No, it's not very inspiring really. So actually when I started doing investing, it was probably about 12 years ago, I started doing angel investing right as I was leaving PayPal. And I knew a reasonable amount about engineering. And a reasonable amount about marketing. But I really didn't know very much at all about angel investing. I didn't know legal terms. I didn't know how to do portfolio allocation. I really was kind of just a noob trying to figure all that stuff out. I did about 13 investments personally between 2004 and 2008. Three of those ended up working, Mint.com, Mashery, and SlideShare. But the other ones pretty much didn't work. Even though they might have had small exits, weren't really big returns. When I started investing for Founders Fund in 2008, actually I should say I tried to raise a venture capital fund in 2008. That was not the best time to be trying to raise a fund. For those of you who were wide awake at that time, Lehman and a bunch of other shit were blowing up. So I didn't raise a venture capital fund. My plan B was working for a couple billionaires, managing their money. So I invested about $3 million in about 30 or 40 companies. And again, most of my investments failed. It turns out about four or five years later, three of those investments ended up becoming billion dollar companies. Another two or three became hundred million dollar companies. So most people who get billion dollar outcomes or even hundred million dollar outcomes probably brag about that a lot and say that's really great. My realization from those investments was Jesus Christ, I missed fucking that up by just one or two companies. Really I was kind of lucky to get into those deals. As we started gathering the data about investing, we realized that venture capital is pretty much a hit business and it's not a very predictable hit business. That may not be what a lot of VCs tell you, but it's very, very unclear. Even when companies raise series A or series B capital, it's still not definite that they're going to be really big or really successful. Looking back at some of those companies that were really big for us, Twilio and Credit Karma at the time, even up until series A and B, it wasn't an easy thing to do. It was an easy road for them and sometimes they didn't have an easy time raising capital. So when we started 500, it really was trying to build a more mathematical and quantitative approach to how we invest. A lot of people, my persona on stage is not necessarily very traditional. I scream a lot. I yell profanities. I run around dressed in shit that doesn't look like what an investor would normally dress in. A lot of people think that what we do isn't very scientific. But it's really just kind of looking at the numbers and trying to come up with a model that's a little bit safer. Because we invest in so many companies, we're bound to find a few things that work. I'm sorry, I was supposed to be showing you this slide. I don't intentionally try and be an evil venture capitalist, but pretty much by necessity, sometimes I do evil things. I try and recognize that when I can and absolve myself of my sins later. But venture capitalists are trying to make money. For a lot of us, we're trying to make about a 3x or better return over a 10-year period. For those who are not familiar with how venture capital works, they're usually 10-year vehicles. They're illiquid, meaning you can't get your money out of those funds during that 10-year period. And again, like I said, probably about half of the venture capital industry doesn't even return 1x in capital. You probably didn't know that, right? Half of venture capitalists fuck up and don't even return $1 for the dollar that they invest. They do get to make management fees on that money, so they make about 2% per year for the money that they're managing. For most VCs that are managing $50 or $100 million or more, 2% actually isn't bad. So even if you're fucking up for 10 years, you can probably have enough money to pay the rent. But let's say that half of the industry doesn't return 1x. Another quarter of the industry returns maybe a little bit between 1 to 3x. That sounds okay. Except over a 10-year period, that really doesn't beat the market for risk-adjusted returns, especially in an illiquid asset class. So you'll hear that most VCs are really aiming for 3x or better. They're kind of aiming for 15% to 20% performance on an annual basis or better. Because you could make 5% to 10% in a liquid market where you can pull your money in and around. So it only turns out that about a quarter of VCs actually are able to do that on any individual fund. And probably less than 10% of them are able to do it on a conventional... ...consistent basis, one fund after another. So it's really only about 10% of the venture capital industry that's successful on a consistent basis in making a reasonable return for their investors. And I guess you would probably say that's about the same number that really become very large and successful entrepreneurs. So again, entrepreneurs and VCs probably successful a minority of the time. And most of us are fucking it up. And sorry, here's the slide again. I'm sort of fucking up on stage here, but not showing you the right slide. So this is what I was saying before. When we invest at pre-Series A through seed and accelerator, that's maybe about 600 companies in the first four years of our data. About 25% get to Series A. A little over 10% get to Series B. A little over 5% get to that 100 million Series C number. And maybe somewhere around 1% to 2% get to that elusive unicorn or billion dollar status. So how many of you are entrepreneurs in the audience? Okay. You fucking idiots. What are you thinking? Get a real job. Well, I hope some of you are crazy enough to continue to be entrepreneurs in the face of this data. Now, just because you don't raise capital at Series A or B doesn't mean that you're a failure. It doesn't mean that you might not make, you know, create a great company. A lot of people that are building a product, delivering a service, employing people on their team, they're learning a lot. They're doing a great service. And really, a lot of our business, a lot of people are doing a great service. And if you don't have people that do it, it may take a few times before you really figure it out. Yeah. So that's the numbers. Here's a few of our stories that ended up being really big wins. Twilio is a company that started about eight years ago. Jeff Lawson, really talented guy, started the company. He was an ex-Amazon product manager. He had also been CTO of StubHub. And I think he also did, I think it was a surfboard or skateboard company as well. So he realized that there's a market and opportunity for helping developers, web developers or enterprise application developers integrate web, voice and SMS. Unlike most other companies I've invested in, this company pretty much start to finish didn't really change the business model. They came up with a very simple way to convert text to web integration, text to SMS calls. They were really based on about five simple API calls. And that company has grown to over 600 employees. And almost 300 million in revenue. They went public earlier this year. And congrats to them. They've really busted their ass over a long period of time. Credit Karma I mentioned briefly before. How many people have ever used Credit Karma? Yeah, maybe 10% of the audience. So they provide a free service for credit score monitoring and education. They also match financial service providers with customers. Try and help people get a better deal on credit cards, on home insurance or on card cards. They've been pretty efficient about raising capital that companies valued somewhere north of $3 billion. They are also profitable, by the way. And then Grab, I mentioned before, formerly Grab Taxi. This is a competitor to Lyft and Uber that's out of Southeast Asia. The founder Anthony's family was in the taxi business. So actually, even though he started a company competing with Uber and Lyft, that was maybe only three years ago. His family had been in that business for quite a long time. And they may not be very well known here, but in Southeast Asia, they're the number one ride-sharing service. And they're competing in a very tough market, but they're doing pretty well. And this is another slide where I brag about other shit that we've done that has worked out. Along the way, we probably had about 100 companies exit. I mentioned that probably only about 40 or 50 of those exits were positive. So a lot of times we brag about exits, but sometimes we don't actually make that much money on all of our exits. These are ones where we made money. But there's a lot of times where both founders and investors like to tell a great story, and sometimes it's not always such a great story. And I guess I probably have a few minutes here if people want to ask a few questions. I should point out that I couldn't have done any of this without my co-founder Christine and without About. We have about 100 other people that have helped us along the way. We've raised money from a bunch of folks. Actually, I think at this point we have over 500 investors as well as over 1,000 companies. That was not easy. I've been raising capital for probably the last seven years constantly. I should mention we've tried to raise money from about 5,000 people. About over 4,000 of those didn't give us money, and I thank those people as well. They provided a lot of motivation. Along with that, several thousand founders and mentors who've helped us do what we do. We've tried to really build a large community. Even the people who aren't successful, we still consider part of that community. In fact, a lot of times we've hired people that have failed as founders, and it turns out they actually ended up being great team members for us. That's really about it. Thanks for listening to me. Thank you. Thank you so much, Dave. Now, Dave's walking off stage. I can tell you guys a little bit about Dave. The first time I met Dave, he was wearing a yellow Kill Bill jumpsuit. And I was like, whoa. And then that was actually a cardboard cutout of him, and he was standing next to the yellow Kill Bill jumpsuit. I'm still not sure which look I prefer on him.
