Silicon Valley 2.0  Lots of Little Bets + Moneyball for Startups     Dave McClure         http://500.co            (@DaveM...
Dave McClure                      Founding Partner & Troublemaker, 500 Startups00’s & 10’s:•  Investor: Founders Fund, Fac...
500 Startups             Global Seed Fund & Startup Accelerator•  What is 500?   –    $50M+ under management   –    20 peo...
500 Startups: Global Seed Fund               startup investments in 30+ countries•  Q4/12 added: Germany, Korea, Peru; + R...
Venture Capital 2.0:           Lots of Little Bets            aka “MoneyBall for Startups”•  VC Evolution: Physician, Scal...
Changes in Tech Startups•  LESS Capital required to build product, get to market   –    Dramatically reduced $$$ on server...
Web 2.0 + Lean Startup   1.  Startup Costs = Lower.   2.  # Users, Bandwidth = Bigger.   3.  Transaction $$$ = Better.Ø  ...
Think Different.
MoneyBall 4 Startups                    http://slideshare.net/paulsingh/moneyball-a-quantitative-approach-to-angel-investi...
500	  Strategy:	  “Lots	  of	  Li-le	  Bets”*	                                                    Quan.ta.ve	  Inves.ng	  ...
Startup Investor Ecosystem                          Bootstrap, KickStarter,                             Crowdfunding      ...
Angel* List: It Rocks.         •  Startups & Investors         •  Activity & Metrics         •  Platform & APIs         • ...
Early-Stage Risk Reduction•    1st Mtg: Crazy, Idiots, Liars or Crooks?•    Product: does it work? (crappy, not perfect)• ...
Early-Stage Startups:      Your “Due Diligence” Is An Illusion(Better approach = write a quick, small check then wait ~6 m...
Bet on Singles, Not HomeRuns. (Look for Ichiros, Not Barry Bonds)
Platforms 2.0Search, Social, Mobile
Platform ViabilitySuccessful	  PlaRorms	  	  have	  3	  Things:	                                                          ...
Distribution PlatformsCustomer Reach: 100M+  •  Search: Google, Baidu, Yahoo/Bing, Yandex  •  Social/Games: Facebook, Twit...
Web 2.0 Business Model:           KISS (“Keep It Simple, Stupid”)•  1) Re-invent Web 1.0 Businesses   –  Make a Website, a...
More Acquirers (tech + non-tech);            More & Smaller Acquisitions1.  Mature Internet Platform Co’s:     –  GOOG, MS...
Lean Startup, Lean VC Customers, Metrics, Iteration.  Invest BEFORE Traction;    Double Down AFTER.
The Lean Startup•    Progress ≠ Features; Measure Conversion•    Talk to Customers; Discover Problems•    Focus on “Produc...
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...
Incubator 2.0:  Education, Collaboration, Iteration•  Success based on:  –  MANY, small experiments  –  common platforms, ...
Education & Community•    Mentors, Investors•    Design, Data, Distribution•    Platform Partners•    Sponsors & Strategic...
Product, Market, Revenue•  Product: assess functional use, improve design/UX•  Market: test usage, distribution channels• ...
Hacker, Hustler, Hipster•  Hacker: engineers & developers•  Hipster: design & UX•  Hustler: marketing & business1.  Build ...
Outlier Competition +       Modeling Success Behaviors•    You want min 3-5 “rockstars” to compete•    Rockstars to model ...
Winners, Losers, Tweeners•  Winners #WIN (with or without you)•  Losers #LOSE (with or without you)•  Tweeners #TWEEN  –  ...
fbFund REVfbFund REV: Facebook “Social” Incubator: invest in startups, apps,  websites based on Facebook platform & Facebo...
The Lean VC:         Lots of Little Bets, Incremental InvestmentMethod: Invest in lots of startups using incremental inves...
Investment Stage #1:  Product Validation + Customer Usage•  Structure   –  1-3 founders   –  $25-$100K investment   –  Inc...
Investment Stage #2:    Market Validation + Revenue Testing•  Structure   –  2-10 person team   –  $100K-$1M investment   ...
Investment Stage #3:             Revenue Validation + Growth•  Structure   –  5-25 person team   –  $1M-$10M investment   ...
Going Local, Going Global  web gets bigger -> world gets smaller
Global Trends•  Growth of Global Languages (see MyGengo.com)     –  1B+ speakers: Mandarin, English     –  300-500M+ spkrs...
Thanks •  Want more info? Go visit:  –  http://500startups.com (our company)  –  http://500hats.com (my blog)  –  https:/...
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MoneyBall for Startups: Lots of Little Bets

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MoneyBall for Startups: Lots of Little Bets

  1. 1. Silicon Valley 2.0 Lots of Little Bets + Moneyball for Startups Dave McClure http://500.co (@DaveMcClure) Salt Lake City, January 2013 http://slideshare.net/dmc500hats
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. Venture Capital 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)
  6. 6. Changes in Tech Startups•  LESS Capital required to build product, get to market –  Dramatically reduced $$$ on servers, software, bandwidth –  Crowdfunding, KickStarter, Angel List, Funders Club, etc –  Cheap access to online platforms for 100M+ consumers, smallbiz, etc –  A few big IPOs @ $1B+, but LOTS of small acquisitions (<$100M)•  MORE Customers via ONLINE platforms (100M+ users) –  Search (Google) –  Social (Facebook, Twitter, LinkedIn) –  Mobile (Apple, Android) –  Local (Yelp, Groupon, Living Social) –  Media (YouTube, Pinterest, Instagram, Tumblr) –  Comm (Email, IM/Chat, Voice, SMS, etc)•  LOTS of little bets: Accelerators, Angels, Angel List, Small Exits –  Y Combinator, TechStars, 500 Startups –  Funding + Co-working + Mentoring -> Design, Data, Distribution –  “Fast, Cheap Fail”, network effects, quantitative + iterative investments
  7. 7. Web 2.0 + Lean Startup 1.  Startup Costs = Lower. 2.  # Users, Bandwidth = Bigger. 3.  Transaction $$$ = Better.Ø  Building Product => Cheaper, Faster, BetterØ  Getting Customers => Easier, More MeasurableIterative Product & Marketing Decisionsbased on Measured User Behavior
  8. 8. Think Different.
  9. 9. MoneyBall 4 Startups http://slideshare.net/paulsingh/moneyball-a-quantitative-approach-to-angel-investing-austin-tx-aug-2012 1.  Make Lots Of Little Bets 2.  Count Cards (Monitor Progress & Stats) 3.  Double Down on Winners
  10. 10. 500  Strategy:  “Lots  of  Li-le  Bets”*   Quan.ta.ve  Inves.ng  before  Trac.on  1)  Make  lots  of  li?le   30%     bets  pre-­‐tracBon,   250+  companies  @  $50K  avg.  (1st  check)     -­‐  Assume  high  failure  rate  (up  to  80%)     Capital   early-­‐stage  startups    2)  aGer  6-­‐12  months,  idenBfy   Double-­‐Down  aer  Trac.on   70%     top  20%  performers  and   50+  ‘winners’  @  $100K-­‐$1M     Capital   double-­‐down  higher  $$$   (2nd  +  3rd  check)                                                 -­‐  -­‐  Target  10+  exits  @  $100M+      3)  conservaBve  model  assumes    -­‐  5-­‐10%  large  exits  @20X  ($50-­‐100M+)  -­‐  10-­‐20%  small  exits  @5X    ($5-­‐50M)   10   *See Peter Sims book: “Little Bets”
  11. 11. Startup Investor Ecosystem Bootstrap, KickStarter, Crowdfunding Y-Combinator Incubation Angels & TechStars Incubators ($0-10M) SV Angel (Conway) Seed “Micro-VC” Funds SoftTech (Clavier) Floodgate (Maples) ($10-100M) Felicis (Senkut) First Round Series A True Smaller VC Funds Union Square ($100-500M) Foundry Group Series B Atomico Andreessen Larger VC Funds (>$500M)Greylock Sequoia Series C+
  12. 12. Angel* List: It Rocks. •  Startups & Investors •  Activity & Metrics •  Platform & APIs •  *ps – not just for Angels, or USA
  13. 13. 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?
  14. 14. 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” à Trusted Referrals + History –  “Great Team” à Functional Prototype + Usage –  “Size of Market” à 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.
  15. 15. Bet on Singles, Not HomeRuns. (Look for Ichiros, Not Barry Bonds)
  16. 16. Platforms 2.0Search, Social, Mobile
  17. 17. Platform ViabilitySuccessful  PlaRorms    have  3  Things:   Features    1)  Features    2)  Users      3)  Money     Growth     Profit     Nirvana   Profitable   .                                                             Users                                                .   Growth   Money  
  18. 18. 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 (WeChat, Line, WhatsApp, Kakao), Skype, Phone/Voice, etc
  19. 19. Web 2.0 Business Model: KISS (“Keep It Simple, Stupid”)•  1) Re-invent Web 1.0 Businesses –  Make a Website, a Widget, an App –  Sell Stuff (Transactions, Subscriptions, Affiliate)•  2) add Web 2.0 Technology –  Search, Social, Mobile, Local, Media, Comm –  Google, Facebook/Twitter, Apple/Android, YouTube –  Email, SMS, Ecommerce / Payments•  3) Get Customers, Make Money –  Distribution, Distribution, Distribution –  (Customer Acq’stn Cost) vs. ($Rev. Per Customer) –  Low CapX + Profitable Web Businesses
  20. 20. More Acquirers (tech + non-tech); More & Smaller Acquisitions1.  Mature Internet Platform Co’s: –  GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, FB, TW, LNKD, GRPN2.  Non-Tech “BigCo” / Consumer Verticals buying tech startups (for distribution)•  BigCo = Lots of Customers, $$$•  BigCo = Bureaucracy, Innovator Dilemma•  Outsource Innovation; Buy Talent / Products•  Acquiring LOTS (Small) Startups•  Great for Founders, Investors J * Mint acquired by Intuit in Sept 2009 for $170M
  21. 21. Lean Startup, Lean VC Customers, Metrics, Iteration. Invest BEFORE Traction; Double Down AFTER.
  22. 22. The Lean Startup•  Progress ≠ Features; Measure Conversion•  Talk to Customers; Discover Problems•  Focus on “Product/Market Fit” (good solution)•  Fast, Frequent Iteration (+ Feedback Loop)•  Keep it Simple & Actionable
  23. 23. Startup Incubators & Metrics Lots of Little Bets. Most FAIL. (but a few succeed :)
  24. 24. 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
  25. 25. 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
  26. 26. Education & Community•  Mentors, Investors•  Design, Data, Distribution•  Platform Partners•  Sponsors & Strategics•  Marketing & Visibility
  27. 27. 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
  28. 28. Hacker, Hustler, Hipster•  Hacker: engineers & developers•  Hipster: design & UX•  Hustler: marketing & business1.  Build functional prototypes2.  Improve UX so people convert3.  Scale customer acq & distribution
  29. 29. 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)
  30. 30. 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.
  31. 31. 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) 
  32. 32. 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”)
  33. 33. 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
  34. 34. 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
  35. 35. 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
  36. 36. Going Local, Going Global web gets bigger -> world gets smaller
  37. 37. 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, 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•  Dramatically Reduced Cost: Product Dev, Customer Acqstn•  Global Distribution Platforms –  US/EU: Apple, Facebook, AMZN, GOOG (Search, YouTube, Gmail, Android), Twitter –  Asia: Baidu, Tencent, Alibaba, Sina, NHN, Yahoo-J, Softbank, Rakuten, DeNA, Gree
  38. 38. 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)
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