Building #500STRONGDave McClure, 500 Startups

@davemcclure / 500.co Charlottesville, VA - April 2017

Tom Tom Festival #TomTomFest

Dave McClureFounding Partner & Chief Troublemaker, 500 Startups

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

What a Long, Strange Trip It’s Been…EAST COAST (1966-1989) • Hillbilly: born in WV — “LET’S GO MOUNTAINEERS!” • WV->MD: grew up in Morgantown, WV -> Columbia, MD • College: Johns Hopkins (Baltimore), class of ’86.. ’87, wait.. ’88 (finally) • Go West Young Man: headed to California in ’89 (..earthquake!)

WEST COAST (1989-present) • Geek: Software Developer / SQL DB Programmer (1989-94) • Entrepreneur: Small Startup, Small Exit <$1M (1994-98) • Marketing: PayPal, Simply Hired, Mint.com (2001-05) • Community: Blogs, Facebook, Twitter, etc (2002-present) • Investor: Angel, Founders Fund, Facebook fbFund (2004-08, 2008-10) • Founder/VC: 500 Startups, #500STRONG (2010-17+)

• What is 500? – $330M AUM / 4+ main funds / 10+ microfunds – 150 people / 25 languages / 20 countries – 1800+ Companies / 3000+ Founders / 200+ Mentors – Investment, Accelerator, BizDev, Marketing, Events, Education – Community + Content + Conferences

• 1800+ Co’s / 60+ Countries – Twilio (NYSE: TWLO) – Credit Karma – Grab – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Behance (acq Adobe, $150M) – Simple (acq BBVA, $117M) – Sunrise (acq MSFT, $100M) – SendGrid – TalkDesk – Intercom – Udemy – Ipsy

500 Startups Global Seed Fund & Startup Platform

Startup Investor Ecosystem

Angels & Incubators ($0-10M)

“Micro-VC” Funds ($10-100M)

“Big” VC Funds ($100-500M)

“Mega” VC Funds (>$500M)

TrueFirst Round

AndreessenAtomico

Y-Combinator

TechStars

SoftTech (Clavier)

Felicis (Senkut)

SV Angel (Conway)

SequoiaGreylock

Union Square

Floodgate (Maples)

Foundry Group

Incubation

Seed

Series A

Series B

Series C+

Bootstrap, KickStarter, Crowdfunding

Football

“West Coast Offense”

Baseball

“MoneyBall”

Basketball

“3-pt revolution” Venture Capital

500 Startups

“Lots of little bets”

500 Strategy: MoneyBall for Startups Re-inventing a 50-year old sport

Dinosaurs vs. CockroachesLEAN Startup: Simpler, Faster, Cheaper, Smarter

1990-2000 ”Big, Fat, Dinosaur Startup” • Sun Servers • Oracle DB • Exodus Hosting • 12-24mo dev cycle • 6-18mo sales cycle • <100M people online • $5-10M Series A/B • Sand Hill Road crawl

2017 ”Lean, Little, Cockroach Startup” • AWS, Google, PayPal, FB, TW • Cloud + Open Source SW • Lean Startup; 3-90d dev cycle • SaaS / online sales • >3B people online • <$100K incub + <$1M seed • $1-3M Seed / Series A • Angel List global visibility

Startup Platforms:Search, Social, Mobile,

Pics, Video, Voice, Msgs

!19

500 Strategy: “Lots of Little Bets”*

*See Peter Sims book: “Little Bets”

Q: How Many Series A Startups Turn Into Unicorns? (~1%)

Data from ~600 companies from 500 Startups Funds I + II (2010 - 2013 cohorts)

$1-10M

Q: How Many Startups to Get 1 Unicorn? Unicorns 50:1 | Centaurs 20:1

Startup Risk Reduction

ConceptEarly

Customer Usage

Scalable Customer

Acquisition

[about to be] Profitable

Unit Economics

Scalable Profitable Business

Functional Prototype

PRODUCT

MARKET

REVENUE

Exit?

When 500 Likes to Invest

Strategy, Brand, Marketing• Lots of Little Bets, Online Platforms • Design, Data, Distribution • Blogging, Facebook, Twitter • #500STRONG: for Geeks, by Geeks • Seed Fund vs Accelerator !

• FUN: don’t be boring (t-shirts + flip-flops) • Community: from Silicon Valley to the World • Conferences & Events + GeeksOnaPlane.com

Fundraising & Team-Building• Ignorance & Inexperience • New Fund, Small Fund • Crazy Strategy, Crazy People • No Money, No History • Manufacturing a Budget • Writing, Telling, Believing, Living Your Story • Hustle & Humility

Deal Flow, Strategy & Selection

• Lots of Little Bets

• Take Lots of Small Risk, Early & Often • Differentiation & Branding • Revenue Emphasis, Small but Real Problems • Focus on Online Platforms • Hacker, Hipster, Hustler • Global vs Local

Minimum Viable Team:Hacker, Hipster, Hustler

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

1. Build functional prototypes (MVP) 2. Improve UX, conversion 3. Scale customer acquisition & distribution

The Lean InvestorMake lots of little bets: • Start with many small “experiments” • Filter out failures + small wins • Double-down on stuff that looks like it’s working

• Incubation: $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 – $0-$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

Building Startup Ecosystems

Q: How many VC funds needed to build a startup ecosystem?

• USA: ~800 VC funds; 2.5 per 1M ppl • China: ~700 VC funds; 0.5 per 1M ppl • UK/EU: ~100 VC funds; 0.25 per 1M ppl

• Other: <10-50 funds; <0.1 per 1M ppl

A Brief History of US Venture Capital

• first VC funds: ARDC, JH Whitney (1946) • SBICs / Small Business Investment Act (US, 1958) • Shockley -> “Traitorous Eight” -> Fairchild (1958) -> Intel (1968) • Sutter Hill (1964), Venrock (1969), Kleiner, Sequoia (1972)

• ERISA laws + “prudent man rule” (1974, 1978) • Pension Funds in VCs: $39M (1977) -> $570M (1978) -> $4B (1989) • Tech Explosion: 80’s, 90’s, 00’s • Microsoft (1975), Apple (1976), Oracle (1977), Sun (1982), Cisco

(1984), Amazon (1994), eBay (1995), Yahoo (1995), Google (1998), PayPal (1998), LinkedIn (2002), Facebook (2004), Twitter (2006)

Critical Ecosystem Factors

• Optimism & Belief (“Silicon Valley”) • Mentorship + Education (Knowledge) • Universities + Companies (People) • Capital, Legal, Finance (Infrastructure) • Engineering + Design / UX (Product) • Platforms + Distribution (Customers) • Online Payments (Monetization) • IPO / M&A Market (Exits)