Changes in Venture Capital+ Building 500 Startups

@DaveMcClureIstanbul, TurkeySeptember 2013

This Talk is About…

• Industry Changes: “Daft Punk Startup”• 500 Strategy: “Lots of Little Bets”• Venture Metrics: “The Lean VC”• Scalable Distribution: “Platforms & Community”• Myth Busting + Deconstructing: “The Series A Crunch”• Startup Demography: Local vs. Global vs. Valley

Dave McClureFounding 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

500 StartupsGlobal 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

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

Strategy, Brand & Marketing

• FUN! IRREVERENCE! Flip-Flops! (don’t be boring)

• Lots of Little Bets, Online Platforms• Design, Data, Distribution• Blogging, Facebook, Twitter• #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)

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

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)

Angel* List: It Rocks.

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

• *ps – not just for Angels, or USA

Industry Changes, Challenges

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

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.

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

Iterative Product & Marketing Decisions

based on Measured User Behavior

13

Quantitative Investing before Traction

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

- Assume high failure rate (up to 80%)

Double-Down after Traction50+ ‘winners’ @ $100K-$1M (2nd + 3rd check)

- - Target 10+ exits @ $100M+

500 Strategy: “Lots of Little Bets”*

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

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”

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

Feedback Loop & Metrics

• Bad decisions = obvious quickly• Good decisions = not obvious for years• Short-term metrics: revenue, users, next round• Sharing best practices for decisions• Lots of Little Bets helps speed up learning• “Winners” vs Numeric Returns• Economics of 1st check vs follow-on• Easy to get big multiples on small checks, BUT• Larger checks with smaller multiples still 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

Scale & Scaling VC

• Lots of Little Bets? Or a Few Big Bets?• Power Laws, Singles vs Home Runs• Focus on Network Effects• Distribution & Monetization• Communication Platforms• Ideal Portfolio Size vs Investment Stage

Platform(s) & Community

• Mentors: Engineering, Design, Marketing• Distribution: 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, MatterMark, Funders Club

Platforms 2.0Search, Social, Mobile,

Video, Messaging

Distribution PlatformsCustomer 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 CrashesDaft Punk Startup: Simpler, Faster, Cheaper, Smarter

Before 2000• Sun Servers• Oracle DB• Exodus Hosting• 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

After 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, Little, 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? Valuation? • 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

Questions? Comments? Heckles?

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

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