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Silicon Valley 2.0: Lots of Little Bets + Beating the Series A Crunch


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slides from my talk on changes in tech startups & investing @ Echelon 2013 (Singapore, June 2013).

slides from my talk on changes in tech startups & investing @ Echelon 2013 (Singapore, June 2013).

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  • 1. Silicon Valley 2.0Lots of Little Bets +Beating the “Series A Crunch”Dave McClure 2013Singapore, June 2013
  • 2. Dave McClureFounding Partner & Chief Troublemaker, 500 Startups00’s & 10’s:• VC: Founders Fund, Facebook fbFund, 500 Startups• Angel: Mashery,, SlideShare, Twilio, WildFire, SendGrid• Marketing: PayPal, Simply Hired,, oDesk, O’Reilly80’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
  • 3. 500 StartupsGlobal Seed Fund & Startup Accelerator• What is 500?– ~$70M under management– 25 people / 12 investing partners– Locations: SV, NYC, MEX, BRZ, IND, CHN, SE asia– 1000+ Founders / 200+ Mentors• 500+ Portfolio Co’s / 30+ Countries– Wildfire (acq GOOG, $350M)– Twilio– SendGrid– TaskRabbit– MakerBot– Viki (SG)– Flyer.IO (SG/SV)– 9GAG (HK)– PicCollage (TWN)– Cubie (TWN)– WooMoo (TWN)– Payroll Hero (PI/Canada)– TwitMusic (PI)
  • 4. 500 Startups: Global Seed FundOver 100+ startups outside US, in 35+ countries• Q4/12 added: Germany, Korea, Peru; + Russia, Turkey, Ghana in Q2/13• Priorities in 2012: Brazil, Mexico, India• Priorities In 2013: China, SE Asia, MENA, Eastern Europe
  • 5. Silicon Valley 2.0:Lots of Little Betsaka “MoneyBall for Startups”• VC Evolution: Physician, Scale Thyself (Aug 2012)• MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)
  • 6. Changes in Tech Startups• LESS Capital required to build product, get to market– Dramatically reduced $$$ on servers, software, bandwidth– Crowdfunding, KickStarter, Angel List, Funders Club, etc– Cheap access to online platforms for 100M+ consumers, smallbiz, etc– A few big IPOs @ $1B+, but LOTS of small acquisitions (<$100M)• MORE Customers via ONLINE platforms (100M+ users)– Search (Google)– Social (Facebook, Twitter)– Mobile (Apple, Android)– Local (Yelp, Groupon, Living Social)– Media (YouTube, Pinterest, Instagram, Tumblr)– Comm (Email, IM/Chat, Voice, SMS, etc)• LOTS of little bets: Accelerators, Angels, Angel List, Small Exits– Y Combinator, TechStars, 500 Startups– Funding + Co-working + Mentoring -> Design, Data, Distribution– “Fast, Cheap Fail”, network effects, quantitative + iterative investments
  • 7. Think Different:Lean, Little, Startup, Metrics.
  • 8. Daft Punk Lean Startup:Simpler, Faster, Cheaper, Smarter1. Startup Costs = Lower.2. # Users, Bandwidth = Bigger.3. Transaction $$$ = Better. Building Product => Cheaper, Faster, Better Getting Customers => Easier, More MeasurableIterative Product & Marketing Decisionsbased on Measured User Behavior
  • 9. Lean Startup, Lean VCCustomers, Metrics, Iteration.Invest BEFORE Traction;Double Down AFTER.
  • 10. The Lean VC:Lots of Little Bets, Incremental InvestmentMethod: Invest in lots of startups using incrementalinvestment, iterative development. Start with manysmall experiments, filter out failures, and expandinvestment in successes… (Rinse & Repeat).• Incubator: $0-100K (“Build & Validate Product”)• Seed: $100K-$1M (“Test & Grow Marketing Channels””)• Venture: $1M-$10M (“Maximize Growth & Revenue”)
  • 11. 11500 Strategy: “Lots of Little Bets”*1) Make lots of littlebets pre-traction,early-stage startups2) after 6-12 months, identifytop 20% performers anddouble-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”
  • 12. 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
  • 13. 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
  • 14. 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
  • 15. Startup Investor EcosystemAngels &Incubators($0-10M)“Micro-VC” Funds($10-100M)Smaller VC Funds($100-500M)Larger VC Funds(>$500M)TrueFirst RoundAndreessenAtomicoY-CombinatorTechStarsSoftTech (Clavier)Felicis (Senkut)SV Angel (Conway)SequoiaGreylockUnion SquareFloodgate (Maples)Foundry GroupBootstrap, KickStarter,Crowdfunding
  • 16. Early-Stage Investment 101:Incremental Risk Reduction• 1stMtg: 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?
  • 17. Bet on Singles, Not HomeRuns.(Look for Ichiros, Not Barry Bonds)
  • 18. Beating The Series A “Crunch”CustomersDistributionRevenue
  • 19. Got Crunched Yet?Source: Bullpen Capital
  • 20. Before & After 2 Dot-Com CrashesDaft Punk Startup: Simpler, Faster, Cheaper, SmarterBefore 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 StartupAfter 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
  • 21. 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, smallacquisition, 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+).
  • 22. Formula 4 Getting “UN-Crunched”• Build Something People Want (Problem/Need)• …and will PAY FOR (Business Model)• Get Customers (Not Your Mom)then…• Just GROW, Baby. (Growth Hackers FTW)– Users– Usage– Revenue
  • 23. Angel* List: It Rocks.• Startups & Investors• Activity & Metrics• Platform & APIs• *ps – not just for Angels, or USA
  • 24. Platforms 2.0Search, Social, Mobile
  • 25. Platform ViabilityUsers .Users ..Money.MoneyFeaturesFeaturesGrowth ProfitProfitableGrowthNirvanaSuccessful Platformshave 3 Things:1) Features2) Users3) Money
  • 26. Distribution PlatformsCustomer Reach: 100M-1B+• Search: Google, Baidu, Yahoo/Bing, Yandex• Social/Games: Facebook, Twitter, LinkedIn, TenCent/QQ, WeChat• Mobile: Apple (iOS), Android• Local: Yelp, Groupon, LivingSocial, FourSquare• Media: Video (YouTube), Blogs (Tumblr), Photos (Instagram, Pinterest)• Comm: SMS, IM (WeChat, Line, WhatsApp), Skype, Phone/Voice, etc
  • 27. 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
  • 28. 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, GRPN1. Non-Tech “BigCo” / Consumer Verticalsbuying 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 * Mint acquired by Intuit inSept 2009 for $170M
  • 29. Startup Incubators & MetricsLots of Little Bets. Most FAIL.(but a few succeed :)
  • 30. 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
  • 31. 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
  • 32. Minimum Viable Team:Hacker, Hipster, Hustler• Hacker: engineers & developers• Hipster: design & user experience (UX)• Hustler: marketing & business, “growth hacker”1.Build functional prototypes2.Improve UX so people convert3.Scale customer acquisition & distribution
  • 33. Product, Market, Revenue• Product: assess functional use, improve design/UX• Market: test usage, distribution channels• Revenue: test cust acq cost, revenue, timing of both• Pitch: Work on Pitch, Help Find Co-Investors, etc
  • 34. Outlier Competition +Modeling Success Behaviors• Goal: 3-5 “rockstars” to compete (w/ each other)• A-students model success for B & C students– (and B & C students model FAIL for A-students)• Can’t assume >20% rockstars, so…– Aim for 15-25+ teams (x 20% = 3-5 outliers)• 3-5 great teams emerge, compete, win– 5-10 *other* lesser teams learn & win too
  • 35. 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) 
  • 37. Most BusinessesSuck @ Innovation.• They Don’t Know Technology.• They Don’t Know How to Code.• They Don’t Know SEO or SEM.• They Don’t Know Email Marketing.• They Don’t Know Social, Video, Local, Mobile.• They Don’t Know Good Design or UX.• They Don’t Know How to Cut & Paste.• They Don’t Know How to Use PayPal.
  • 38. Most Things Suck.• But, We Can Easily Make Most Things Better.• Tech + Web = Reduced Overhead Costs.• Search + Social Platforms = Better Marketing.• Copy Existing Business Model = Reduced Risk.• FOCUS = Make ONEthing / SOMEthing Better.
  • 39. #TonyStark#DOESNTSUCK
  • 40. You Don’t Have to be Tony Stark• Just Copy/Use the Stuff that Tony Stark Makes.– Tip: Most People Won’t Notice U Aren’t Tony Stark.• Copy/Use 99% All The Amazing Stuff Out There.• Innovate on the other 1%.• Innovate 1% More Every Month.• Then Kick Back and Have a Beer.
  • 41. #EVILPLAN#MWAHAHAEveryone Needs An Evil Plan (Hugh MacLeod)
  • 42. Formula 4 Awesome:Notice Things That Suck. Make Them Suck Less.• Most Offline Businesses Are Inefficient. (Web 1.0, Web 0.0)• Lots of Overhead, Crappy UX, Crappy Marketing.• Copy Their Business Model (It Already Makes $$$).• Reduce Overhead Cost (Be a Scrappy Startup).• Increase Marketing Efficiency (Do Online Marheting).• Copy/Integrate 99% Awesome Stuff (aka Tech)• Innovate on the Remaining 1%.• Keep Innovating 1%. Every Month
  • 43. Ok, Let’s Try It.• Find an existing, physical-world big dumbbusiness that makes money, but kinda sucks.• Verify they have high overhead costs, inefficient[offline] marketing, crappy service.• Copy the business model, reduce overhead costs,improve marketing.• Add some awesome technology, and theninnovate on ONE important thing.
  • 44. Problem: Ordering Food Sucks.(see blog post “Why Menus Suck”)• Issues:– Waiters– Menus– Pictures– Sharing– Discounts– Customer Lists– Food Quality– Food Service– Reviews– Delivery Time– Payment• Solutions:– ElaCarte– KitchIt– FoodA– Chewse– CraftCoffee– LoveWithFood– GoldBely– TeaLet–– MileHighOrganics– WholeShare
  • 45. #BRANDING101#THINKDIFFERENTHere’s To The Crazy Ones. (Jobs)
  • 46. 3 Basic Types of Brands:Virgin, Southwest, [Niche]• Virgin = “Mass Luxury” (+ sexy)– High-End Look & Feel, priced just barely within reach of mostmiddle-class customers, who love the “red-carpet” treatment• Southwest = “Convenience & Value” (+ funny)– Stuff that just works, not very expensive, great valuefor everybody. (Who doesn’t like Southwest?)• [Niche] = “Just for You & Me”– Designed for well-defined customer segments / attributes.– Less competition, higher margins, better retention– Ex: Gay, Old, Black, Short, Female, Moms, Left-Handed, Etc
  • 47. Going Local, Going Globalweb gets bigger -> world gets smaller
  • 48. Global Trends• Growth of Global Languages (see– 1B+ speakers: Mandarin, English– 300-500M+ spkrs: Spanish, Arabic• Smart Device Proliferation– mobile, tablet, TV, console, etc• More Young, More Old ($$$) 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
  • 49. Thanks • Questions / More Info?– (our company)– (my blog)– (our fund)– Rui Ma, 500 Startups China (@MissRuiMa)– Khailee Ng, 500 Startups SE Asia (@Khailee)– Dave McClure, 500 Startups USA (@DaveMcClure)