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

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

Basecamp
3

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

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

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 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

Funding the Expedition
14

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

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

19 Prove you can ship
product

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

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 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 How to find angels?
Take 50 Coffee Meetings

How Venture Capital Actually Works
24

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 >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 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 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 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 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%

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 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 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

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

Picking Your Crew
35

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

37 Short people shouldn’t hire
short people

38 Hire people that punch
above their weight class

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

40 You need missionaries over
mercenaries

41 Stay lean for as
long as you can

San Diego Venture Group -
Keynote Thank You