Incubator 2.0Let’s Hope This Time We Don’t Suck. Dave McClure http://500.co (@DaveMcClure) Mountain View, January 2013 http://slideshare.net/dmc500hats
Dave McClure Founding Partner & Troublemaker, 500 Startups00‟s & 10‟s:• Investor: Founders Fund, Facebook fbFund, 500 Startups• Companies: Mint.com, SlideShare, Twilio, WildFire, SendGrid• Marketing: PayPal, Simply Hired, Mint.com, O‟Reilly80‟s & 90‟s:• Entrepreneur: Founder/CEO Aslan Computing (acq‟d)• Developer: Windows / SQL DB consultant (Intel, MSFT)• Engineer: Johns Hopkins„88, BS Eng / Applied Math
500 Startups Global Seed Fund & Startup Accelerator• What is 500? – $50M+ under management – 20 people / 10 investing partners – Silicon Valley HQ + Incubator – SF, NY, MEX, BRZ, IND, CHN, SE Asia – 800+ Founders / 200+ Mentors – 20+ confs/events per year – Focus: Design, Data, Distribution• 400+ Portfolio Co’s / 30+ Countries – Wildfire (acq GOOG, $350M) – Twilio – SendGrid – TaskRabbit – MakerBot – 9GAG – Viki
500 Strategy: “Lots of Little Bets”*1) Make lots of little bets pre- Quantitative Investing before Traction 30% traction, early- 250+ companies @ $50K avg. (1st check) Capital stage startups - Assume high failure rate (up to 80%) Double-Down after2) after 6-12 months, identify Traction 70% top 20% performers and Capital 50+ ‘winners’ @ $100K-$1M double-down higher $$$ (2nd + 3rd check) - - Target 10+ exits @ $100M+3) conservative model assumes- 5-10% large exits @20X ($50-100M+)- 10-20% small exits @5X ($5-50M) 4 *See Peter Sims book: “Little Bets”
500 Startups: Global Seed Fund startup investments in 30+ countries• Q4/12 added: Germany, Korea, Peru; + Russia & Turkey in Q1/13• Priorities In 2013: SE Asia, Middle East, Eastern Europe
Angel* List: It Rocks. • Startups & Investors • Activity & Metrics • Platform & APIs • *ps – not just for Angels, or USA
Early-Stage Risk Reduction• 1st Mtg: Crazy, Idiots, Liars or Crooks?• Product: does it work? (crappy, not perfect)• Market: are people using it? (not their mom)• Revenue: will people pay for it? (just a few)• Growth: how will it/they scale? (online? offline?)• Finance: what will it cost? – Q1: cost to get a customer? – Q2: how & when do you make money?
Early-Stage Startups: Your “Due Diligence” Is An Illusion(Better approach = write a quick, small check then wait ~6 mo’s)• Problems in Early-Stage Due Diligence: – You Might Be Able to Detect Idiots & Liars, but… – Not much history, product, customers, or revenue (yet), so… – You probably can‟t figure out Winners (yet).• The New Due Diligence = Incremental Achievements – “Due Diligence” Trusted Referrals + History – “Great Team” Functional Prototype + Usage – “Size of Market” Evidence = Customers, Revenue• The Odds Are: They Suck, You’re Wrong – You‟ll Be Wrong 4x out of 5x. (If U Don‟t Suck). – In 6 Months, You‟ll Know If They Don‟t Suck. – In 1-2 Years, You‟ll Know If They‟re Awesome.
Startup Incubators & Metrics 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
Hacker, Hustler, Hipster• Hacker: engineers & developers• Hipster: design & UX• Hustler: marketing & business1. Build functional prototypes2. Improve UX so people convert3. Scale customer acq & distribution
Product, Market, Revenue• Product: assess functional use, improve design/UX• Market: test usage, distribution channels• Revenue: test cust acq cost, revenue, *timing*• Work on Pitch, Help Find Co-Investors, etc
Outlier Competition + Modeling Success Behaviors• You want min 3-5 “rockstars” to compete• Rockstars to model success for others• You can‟t assume >20% rockstars• Therefore, pick 5x5 = 25 teams• 3-5 rockstar teams emerge, compete, win• 5-10 *other* non-rockstars learn• Identify losers quickly (but don‟t be an ass)
Winners, Losers, Tweeners• Winners #WIN (with or without you)• Losers #LOSE (with or without you)• Tweeners #TWEEN – They might win with your help – They might lose with your help – Be helpful, but don‟t dally – Note: you might be wrong about the losers & tweeners, so don‟t be an arrogant a-hole.
fbFund REVfbFund 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)
The Lean VC: Lots of Little Bets, Incremental InvestmentMethod: 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
Thanks • Want more info? Go visit: – http://500startups.com (our company) – http://500hats.com (my blog) – https://angel.co/500-startups-fund-ii (our fund)