Silicon Valley 2.0Lots of Little Bets +Moneyball for StartupsDave McClurehttp://500.co(@DaveMcClure)Hong Kong, May 2013http://slideshare.net/dmc500hats
Dave McClureFounding Partner & Chief Troublemaker, 500 Startups00’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’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
500 StartupsGlobal Seed Fund & Startup Accelerator• What is 500?– ~$70M under management– 25 people / 12 investing partners– Locations: SV, NYC, MEX, BRZ, IND, CHN, SEasia– 1000+ Founders / 200+ Mentors• 500+ Portfolio Co’s / 30+ Countries– Wildfire (acq GOOG, $350M)– Twilio– SendGrid– TaskRabbit– MakerBot– Doodle Mobile (BJ)– ChinaNetCloud (SH)– 9GAG (HK)– Viki (SG)– PicCollage (TWN)– Cubie (TWN)
500 Startups: Global Seed FundOver 100+ startups outside US, in 35+ countries• Q4/12 added: Germany, Korea, Peru; + Russia, Israel, Turkey in Q1/13• Priorities in 2012: Brazil, Mexico, India• Priorities In 2013: China, SE Asia, MENA, Eastern Europe
Venture Capital 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)
Changes in Tech Startups• LESS Capital required to build product, get to market– Dramatically reduced $$$ on servers, software, bandwidth– Crowdfunding, KickStarter, Angel List, Funders Club, etc– Cheap access to online platforms for 100M+ consumers, smallbiz, etc– A few big IPOs @ $1B+, but LOTS of small acquisitions (<$100M)• MORE Customers via ONLINE platforms (100M+ users)– Search (Google)– Social (Facebook, Twitter, LinkedIn)– Mobile (Apple, Android)– Local (Yelp, Groupon, Living Social)– Media (YouTube, Pinterest, Instagram, Tumblr)– Comm (Email, IM/Chat, Voice, SMS, etc)• LOTS of little bets: Accelerators, Angels, Angel List, Small Exits– Y Combinator, TechStars, 500 Startups– Funding + Co-working + Mentoring -> Design, Data, Distribution– “Fast, Cheap Fail”, network effects, quantitative + iterative investments
Web 2.0 + Lean Startup1. Startup Costs = Lower.2. # Users, Bandwidth = Bigger.3. Transaction $$$ = Better. Building Product => Cheaper, Faster, Better Getting Customers => Easier, More MeasurableIterative Product & Marketing Decisionsbased on Measured User Behavior
MoneyBall 4 Startupshttp://slideshare.net/paulsingh/moneyball-a-quantitative-approach-to-angel-investing-austin-tx-aug-20121. Make Lots Of Little Bets2. Count Cards (Monitor Progress &Stats)3. Double Down on Winners
70%Capital10500 Strategy: “Lots of Little Bets”*1) Make lots of littlebets pre-traction,early-stage startups30%Capital2) 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”
Angel* List: It Rocks.• Startups & Investors• Activity & Metrics• Platform & APIs• *ps – not just for Angels, or USA
Early-Stage 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?
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.
Bet on Singles, Not HomeRuns.(Look for Ichiros, Not Barry Bonds)
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
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
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
Lean Startup, Lean VCCustomers, Metrics, Iteration.Invest BEFORE Traction;Double Down AFTER.
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
Startup Incubators & MetricsLots 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
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
Hacker, Hustler, Hipster• Hacker: engineers & developers• Hipster: design & UX• Hustler: marketing & business1.Build functional prototypes2.Improve UX so people convert3.Scale customer acq & distribution
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 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”)
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
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
Thanks • Questions / More Info?– http://500.co (our company)– http://500hats.com (my blog)– https://angel.co/500startups (our fund)– Rui Ma, 500 Startups China (@MissRuiMa)– Khailee Ng, 500 Startups SE Asia (@Khailee)– Dave McClure, 500 Startups USA (@DaveMcClure)