Starting Up Startups.Methods, Magic, Meta of

Building Startup Ecosystems

Dave McClure500 Startups Rio, Mar 2013

slideshare.net/dmc500hats

500 StartupsGlobal Seed Fund & Startup Accelerator

• What is 500?– $60M+ under management– 20 people / 10 investing partners– Locations: SV, NYC, MEX, BRZ, IND, CHN, SEasia– 1000+ Founders / 200+ Mentors– 20+ confs/events per year

• 475+ Portfolio Co’s / 30+ Countries– Wildfire (acq GOOG, $350M)– Twilio– SendGrid– TaskRabbit– MakerBot– 9GAG– Viki– Gengo– VivaReal

500 Startups: Global Seed Fund100+ startup investments in 30+ countries

• Q4/12 added: Germany, Korea, Peru; + Russia, Israel, Turkey in Q1/13• Priorities in 2012: Brazil, Mexico, India• Priorities In 2013: China, SE Asia, MENA, Eastern Europe

This Talk...

• Startup Weekend: WTF? “Simulation Exercises 4 Startups” 4 Geeks, Designers, Founders, Startup Teams 4 Organizers, Partners, Investors, etc

What does it do well? What doesn’t it do so well? What can be improved? How? Who? When?

• 3Ms: Metrics, Money, Mentorship

Startup Weekend: #WINNING

• Test Drive an Idea -> Prototype

• Test Drive a Co-Founder / Team -> Startup

• Test Drive Customers, Workflow, Design, etc

• Recruiting (for Startups, for Corps, for VCs)

• Getaway from Ur Normal Boring Fucking Life

Startup Weekend: #FAIL

• Not Enough Time.…– 2 Build a “Real” Product/Biz– 2 Get 2 Know Co-Founder/Team– 2 Find/Scale Customers– 2 Get Funded

• Not Enough Structure.…– 2 Come Up With “Good” Idea– 2 Find Skilled Devs, Design– 2 Find/Scale Customers– 2 Get Funded

Startup Weekend: #MO.BETTAH?

• Mo’ Structure / Organizers• Mo’ MO-nay $$$ (Sponsors, Investors)• Mo’ Experienced Entrepreneurs (WIN, FAIL)• Mo’ Skilled Devs, Design/UX, Marketing• Mo’ Customers / Specific Segments?• Mo’ Platforms for Distribution / Monetization• Mo’ Specific Outcomes, Metrics, Results:

– Problems not Products (see: Customer Needs)– Teams not Individuals (see: FounderDating, other?)– Funding not “Winners” (see: Investors / Corp Sponsors)

The Rest of This Talk…• Too Many Boring Fucking Slides

• Leave Now, Hit The Beach, Start Drinking

• (we’re in Fucking Rio, for Christ’s Sake)

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”)

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

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

FAILURE IS NECESSARY. IT’S A PROCESS, NOT A PROBLEM

Failure = CRITICAL to Innovation• Failure not only tolerated, but ENCOURAGED

• Success = Continued Iteration of Failure

• US/SV: Failure = Growth, Education, Shared

• Elsewhere: Failure = Shame, Silence, Death

• Celebrity Role Models for Failure

• “Fall Down 7 Times, Get Up 8” = Fail Warrior!

Platform InnovationSearch, Social, Mobile

Platform Viability

Users .Users . . Money

. Money

FeaturesFeatures

Growth Profit

ProfitableGrowth

Nirvana

Successful Platforms have 3 Things:1) Features2) Users3) Money

Distribution PlatformsCustomer Reach: 100M+

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

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

• Mobile: Apple (iOS), Android

• Local: Yelp, Groupon, LivingSocial, FourSquare

• Media: Video (YouTube), Blogs (Tumblr), Photos (Pinterest)

• Comm: SMS, IM, Skype, Phone/Voice, etc

Startup Investor Ecosystem

Angels & Incubators($0-10M)

“Micro-VC” Funds ($10-100M)

Smaller VC Funds ($100-300M)

Larger VC Funds (>$300M)

TrueFirst Round

AndreessenAtomico

Y-Combinator

TechStars

SoftTech (Clavier)

Felicis (Senkut)

SV Angel (Conway)

SequoiaGreylock

Union Square

Floodgate (Maples)

Foundry Group

Bootstrap, KickStarter, Crowdfunding, Startup Wknd

Angel* List: It Rocks.

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

• *ps – not just for Angels, or USA

Big Data. Little Bets.

MoneyBall 4 Startups

http://slideshare.net/paulsingh/moneyball-a-quantitative-approach-to-angel-investing-austin-tx-aug-2012

1. Make Lots Of Little Bets2. Count Cards (Metrics)3. Double Down on Winners

70% Capital

22

“Lots of Little Bets”*

1) Make lots of little bets pre-traction, early-stage startups

30% Capital

2) after 6-12 months, identify top 20% performers and double-down higher $$$

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

*See Peter Sims book: “Little Bets”

Bet on Singles, Not HomeRuns.(Look for Ichiros, Not Barry Bonds)

Startup Incubators Lots of Little Bets. Most FAIL.

(but a few succeed :)

Incubator 2.0: Fast, Cheap, FAIL• Incubators = supportive startup ecosystem (+ angels, VCs)

• Efficient use of investment capital ($0-100K)

• High fail rate (60-80%) => large initial sample size

Incubator 2.0: Education, Collaboration, Iteration

• Success based on:– MANY, small experiments– common platforms, customers, problems & solutions– physical proximity, open/collaborative environment– Domain-specific mentors & expertise– fast fail, iteration, metrics & feedback loop

• Incremental investment; high-risk, but high-reward

27

Resources Accelerators Can Provide

global networks, mentors and staff

training and space

portfolio companies

conferences & events

Incubator Innovation

• Vertically-Focused Incubators: – Facebook: fbFund– Nike: Sensors / Wearables– Rock Health: Digital Healthcare– Digital Media: Turner Media, NY Times

• Investing & Partnering with Incubators– Startup Communities, Conferences, Events– Entrepreneurs, Hackers, Mentors– Hackathons, Contests, Demo Days

fbFund REV

fbFund REV: Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform & Facebook Connect.

• 22 startups @ ~$35K each (< $1M total)• 3 month program: Technology, Design, Marketing, Business topics • Success: 8 startups raised $500K –> 5 Series A -> 3 Series B (+ 3 small exits)• Wildfire Interactive acquired by GOOG for $350M (>50X)

Questions?

• Someone Get Me a Beer.