Changes  in  Venture  Capital  &  Building  500  Startups  

@DaveMcClure  Sao  Paulo,  Brazil  -­‐  September  2013  

Building  500  Startups  

•  Industry  Changes  &  Challenges  •  500  Strategy:  “Lots  of  Li/le  Bets”  •  Scale  &  Scalability,  Big  Data  for  VC  •  Feedback  Loop  &  Metrics  •  Pla4orms  &  Community  •  “The  Series  A  Crunch”  •  Local  vs.  Global  Opportuni=es  

Dave McClure Founding Partner & Chief Troublemaker, 500 Startups

00’s & 10’s: •  VC: Founders Fund, Facebook fbFund, 500 Startups •  Angel: Mashery, Mint.com, SlideShare, Twilio •  Marketing: PayPal, Simply Hired, Mint.com, O’Reilly

80’s & 90’s: •  Entrepreneur: Aslan Computing (acq’d by Servinet/Panurgy) •  Developer: Windows / SQL DB consultant (Intel, MSFT) •  Engineer: Johns Hopkins‘88, BS Eng / Applied Math

Long  Journey…  

•  East  Coast  -­‐>  West  Coast  (1989)  •  Geek:  Engineer  &  Programmer  •  Entrepreneur:  Small  Startup,  Small  Exit  •  Marke=ng:  PayPal,  Simply  Hired,  Mint.com  •  Community:  Blogs,  Frisbee,  Facebook,  Twi]er  •  Inves=ng:  Angel,  Founders  Fund,  ^Fund  •  500  Startups  (2010)  

500 Startups Global Seed Fund & Startup Accelerator

•  What is 500? –  ~$80M under management –  ~30 people / 10 investing partners –  Locations: SV, NYC, MEX, BRZ, IND, CHN, SE Asia –  1000+ Founders / 200+ Mentors –  25+ positive exits in <3 years

•  500+ Portfolio Co’s / 40+ Countries –  Wildfire (acq GOOG, $350M) –  MakerBot (acq SSYS, $400M) –  Viki (acq Rakuten, $200M) –  Twilio –  SendGrid –  TaskRabbit –  VivaReal –  AppStack –  9GAG –  PicCollage

Strategy,  Brand  &  Marke_ng  •  FUN!  IRREVERENCE!  Havaianas!  (don’t  be  boring)  •  Lots  of  Li]le  Bets,  Online  Pladorms  •  Design,  Data,  Distribu_on  •  Blogging,  Facebook,  Twi]er  •  #500STRONG:  for  Geeks,  by  Geeks  •  Seed  Fund  vs  Accelerator  •  Community:  from  Silicon  Valley  to  the  World  •  Conferences  &  Events  •  GeeksOnaPlane.com  

Startup Investor Ecosystem

   

Angels & Incubators ($0-10M)

“Micro-VC” Funds

($10-100M)

“Big” VC Funds ($100-500M)

“Mega” VC Funds (>$500M)

True First Round

Andreessen Atomico

Y-Combinator

TechStars

SoftTech (Clavier)

Felicis (Senkut)

SV Angel (Conway)

Sequoia Greylock

Union Square

Floodgate (Maples)

Foundry Group

Incuba=on  

Seed  

Series  A  

Series  B  

Series  C+  

Bootstrap, KickStarter, Crowdfunding

500 Startups: Global Seed Fund Over 150+ startups outside US, in 40+ countries

Silicon Valley 2.0: Lots of Little Bets

aka “MoneyBall for Startups”

•  VC Evolution: Physician, Scale Thyself (Aug 2012) •  MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)

Industry  Changes,  Challenges  

•  SW  Startup  Efficiency,  Reduced  CapX  Costs  •  Growing  Market,  Growing  Pladorms  •  VC  Industry  Upheavals  (2000,  2008)  •  Super  Angel  -­‐>  Micro  VC:  Seed  Funds  (ex:  FRC)  •  Incubators  &  Accelerators  (ex:  Y  Combinator)  •  Big  VC  (ex:  A16Z)  &  Pladorms  (ex:  Angel  List)  •  h]p://PreMoney.co      

Angel* List: It Rocks.

•  Startups & Investors •  Activity & Metrics •  Platform & APIs

•  *ps – not just for Angels, or USA

Changes in Tech Startups •  LESS Capital required to build product, get to market

–  Dramatically reduced $$$ on servers, software, bandwidth –  Crowdfunding, KickStarter, Angel List, Funders Club, etc –  Cheap access to online platforms for 100M+ consumers, smallbiz, etc

•  MORE Customers via ONLINE platforms (100M+ users) –  Search (Google) –  Social (Facebook, Twitter) –  Mobile (Apple, Android) –  Local (Yelp, Groupon, Living Social) –  Media (YouTube, Pinterest, Instagram, Tumblr) –  Comm (Email, IM/Chat, Voice, SMS, etc)

•  LOTS of little bets: Accelerators, Angels, Angel List, Small Exits –  Y Combinator, TechStars, 500 Startups –  Funding + Co-working + Mentoring -> Design, Data, Distribution –  “Fast, Cheap Fail”, network effects, quantitative + iterative investments

Daft Punk Lean Startup: Simpler, Faster, Cheaper, Smarter

 

1.  Startup Costs = Lower. 2.  # Users, Bandwidth = Bigger. 3.  Transaction $$$ = Better.

 

 

Ø  Building Product => Cheaper, Faster, Better Ø  Getting Customers => Easier, More Measurable

Iterative Product & Marketing Decisions based on Measured User Behavior

14  

Quan=ta=ve  Inves=ng  before  Trac=on  

250+  companies  @  $25-­‐100K    (1st  check)    

-­‐  Assume  high  failure  rate  (up  to  80%)      

Double-­‐Down  a'er  Trac=on  50+  ‘winners’  @  $100K-­‐$1M    

(2nd  +  3rd  check)                                                -­‐  -­‐  Target  10+  exits  @  $100M+  

 

   

500  Strategy:  “Lots  of  Li1le  Bets”*  

1)  Make  lots  of  li]le  bets  pre-­‐trac_on,  early-­‐stage  startups  

2)  amer  6-­‐12  months,  iden_fy  top  20%  performers  and  double-­‐down  higher  $$$  

3)  conserva_ve  model  assumes  -­‐  5-­‐10%  large  exits  @20X  ($50-­‐100M+)  -­‐  10-­‐20%  small  exits  @5X    ($5-­‐50M)  

*See Peter Sims book: “Little Bets”

Scale  &  Scaling  VC  

•  Lots  of  Li]le  Bets?  Or  a  Few  Big  Bets?  •  Power  Laws,  Singles  vs  Home  Runs  •  Focus  on  Network  Effects  •  Distribu_on  &  Mone_za_on  •  Communica_on  Pladorms  •  Ideal  Pordolio  Size  vs  Investment  Stage  

Deal  Flow,  Strategy  &  Selec_on  

•  Lots  of  Li/le  Bets  •  Take  Lots  of  Small  Risk,  Early  &  Omen  •  Differen_a_on  &  Branding  •  Revenue  Emphasis,  Small  but  Real  Problems  •  Focus  on  Online  Pladorms  •  Hacker,  Hipster,  Hustler  •  Global  vs  Local  

Minimum Viable Team: Hacker, Hipster, Hustler

•  Hacker:  engineers  &  developers  •  Hipster:  design  &  user  experience  (UX)  •  Hustler:  marke_ng  &  business,  “growth  hacker”  

1.  Build  func_onal  prototypes  2.  Improve  UX  so  people  convert  3.  Scale  customer  acquisi_on  &  distribu_on  

Feedback  Loop  &  Metrics  •  Bad  decisions  =  obvious  quickly  •  Good  decisions  =  not  obvious  for  years  •  Short-­‐term  metrics:  revenue,  users,  next  round  •  Sharing  best  prac_ces  for  decisions  •  Lots  of  Li]le  Bets  helps  speed  up  learning  •  “Winners”  vs  Numeric  Returns  •  Economics  of  1st  check  vs  follow-­‐on  •  Easy  to  get  big  mul_ples  on  small  checks,  BUT  •  Larger  checks  with  smaller  mul_ples  s_ll  good  

The Lean VC: Lots of Little Bets, Incremental Investment

Method: Invest in lots of startups using incremental investment, iterative development. Start with many small experiments, filter out failures, and expand investment in successes… (Rinse & Repeat).

•  Incubator: $0-100K (“Build & Validate Product”) •  Seed: $100K-$1M (“Test & Grow Marketing Channels””) •  Venture: $1M-$10M (“Maximize Growth & Revenue”)

Investment Stage #1: Product Validation + Customer Usage

•  Structure –  1-3 founders –  $25-$100K investment –  Incubator environment: multiple peers, mentors/advisors

•  Test Functional Prototype / “Minimum Viable Product” (MVP): –  Prototype->Alpha, ~3-6 months –  Develop Minimal Critical Feature Set => Get to “It Works! Someone Uses It.” –  Improve Design & Usability, Setup Conversion Metrics –  Test Small-Scale Customer Adoption (10-1000 users)

•  Demonstrate Concept, Reduce Product Risk, Test Functional Use •  Develop Metrics & Filter for Possible Future Investment

Investment Stage #2: Market Validation + Revenue Testing

•  Structure –  2-10 person team –  $100K-$1M investment –  Syndicate of Angel Investors / Small VC Funds

•  Improve Product, Expand Customers, Test Revenue: –  Alpha->Beta, ~6-12 months –  Scale Customer Adoption => “Many People Use It, & They Pay.” –  Test Marketing Campaigns, Customer Acquisition Channels + Cost –  Test Revenue Generation, Find Profitable Customer Segments

•  Prove Solution/Benefit, Assess Market Size •  Test Channel Cost, Revenue Opportunity •  Determine Org Structure, Key Hires

Investment Stage #3: Revenue Validation + Growth

•  Structure –  5-25 person team –  $1M-$10M investment –  Seed & Venture Investors

•  Make Money (or Go Big), Get to Sustainability: –  Beta->Production, 12-24 months –  Revenue / Growth => “We Can Make (a lot of) Money!” –  Mktg Plan => Predictable Channels / Campaigns + Budget –  Scalability & Infrastructure, Customer Service & Operations –  Connect with Distribution Partners, Expand Growth

•  Prove/Expand Market, Operationalize Business •  Future Milestones: Profitable/Sustainable, Exit Options

Follow-­‐On  Strategy  

•  Should  we  follow-­‐on?  Why  or  Why  Not?  •  Signaling  Risk  vs  Pordolio  Returns  •  Investor  opinion  shouldn’t  ma]er  more  than  business  fundamentals  (if  so,  it’s  a  problem)  

•  Downstream  Investor  Syndicate  is  cri_cal  •  Using  Angel  List  to  drive  visibility  •  Global  Strategies  (more  capital,  connec_ons)  

Pordolio  Development  

•  How  do  we  help?  How  can  we  help?  •  Importance  of  (trying  to  be)  Helpful  •  Board  seats  or  not?  Useful  to  VC,  not  founders  •  Product,  Market,  Revenue  •  Mentorship  &  Connec_ons  •  Pladorms  &  Distribu_on  •  Downstream  Investors  &  Syndicates  •  Exits  &  Liquidity  

Pladorm(s)  &  Community  

•  Mentors:  Engineering,  Design,  Marke_ng  •  Distribu=on:  Search,  Social,  Mobile,  Video,  Local  •  Global:  LatAm,  Asia,  India,  EU,  ME,  Africa  •  Social:  LinkedIn,  Quora,  Angel  List  •  Angel  List,  Second  Market,  Trusted  Insight  •  Dashboard.io,  Ma]erMark,  Funders  Club  

Platforms 2.0 Search, Social, Mobile,

Video, Messaging

Distribution Platforms Customer Reach: 100M-1B+

•  Search: Google, Baidu, Yahoo/Bing, Yandex

•  Social: Facebook, Twitter, LinkedIn, TenCent/QQ, WeChat

•  Mobile: Apple (iOS), Android •  Media: Video (YouTube), Photos (Instagram, Pinterest), Blogs

•  Comm: SMS, IM (WeChat, WhatsApp), Skype, Phone/Voice, etc

Got Crunched Yet?

Source: Bullpen Capital

Before & After 2 Dot-Com Crashes Daft Punk Startup: Simpler, Faster, Cheaper, Smarter

Before  2000  •  Sun  Servers  •  Oracle  DB  •  Exodus  Hos_ng  •  12-­‐24mo  dev  cycle  •  6-­‐18mo  sales  cycle  •  <100M  people  online  •  $1-­‐2M  seed  round  •  $3-­‐5M  Series  A  •  Sand  Hill  Road  crawl  •  Big,  Fat,  Dinosaur  Startup  

Amer  2008  •  AWS,  Google,  PayPal,  FB,  TW  •  Cloud  +  Open  Source  SW  •  Lean  Startup  /  Startup  Wknd  •  3-­‐90d  dev  cycle  •  SaaS  /  online  sales  •  >3B  people  online  •  <$100K  incub  +  <$1M  seed  •  $1-­‐3M  Series  A  •  Angel  List  global  visibility  •  Lean,  Li]le,  Cockroach  Startup  

Crunch Good? Crunch Bad? •  Series A bar higher: $1M revenue, 1M active users,

10M downloads, 100% YoY growth •  Lots of Incubation / Seed startups will “fail” •  BUT: Fail Budget = $50-$500K, not $5M+ •  Many “failed” startups = ramen-profitable, small

acquisition, or MBA alternative (<$100K) •  Series A/B VCs have lots to choose from •  Overall, founders / market getting smarter •  More focus on customers, problems, revenue •  Many die, some survive (1-5x), a few thrive (20x+).

Going Local, Going Global

web gets bigger -> world gets smaller

Local  vs  Global?  

•  The  Valley  is  Unique…  (sort  of)  •  Emerging  /  Developing  Markets  •  Too  Soon?  Too  Late?  Valua_on?    •  English,  Chinese,  Spanish,  Arabic  •  Investor  Ecosystems  •  Mentorship  &  Community  •  Limited  History  of  Exits  &  IPOs  •  Does  the  Future  look  different?  (yes,  we  hope)  

Global Trends •  Growth of Global Languages (see MyGengo.com)

–  1B+ speakers: Mandarin, English –  300-500M+ spkrs: Spanish, Arabic

•  Smart Device Proliferation –  mobile, tablet, TV, console, auto, etc

•  More Young, More Old ($$$) Users Online •  More Bandwidth, More Video, More Social, More Mobile •  Wealthy Chinese + Indian, Web + IRL Globetrotters ($$$B) •  Acceleration of Global Payment, E-Commerce, Logistics, Delivery •  Dramatically Reduced Cost: Product Dev, Customer Acqstn •  Global Distribution Platforms

–  US: AAPL, FB, AMZN, GOOG (Search, YouTube, Gmail, Android), LNKD, Twitter –  Asia: Baidu, Tencent/WeChat, Alibaba, Sina/Weibo, NHN, Softbank, Rakuten

Ques_ons?  Comments?  Heckles?  

•  Thanks  for  Listening  •  Feedback  Appreciated  •  We’re  S_ll  Learning  

•  More Info? –  http://500.co (our company) –  http://500hats.com (my blog) –  https://angel.co/500startups (our fund) –  Dave McClure, @DaveMcClure