slides from my talk at Endeavor Investor Network (Jakarta, Feb 2014)

1. Changes in Venture Capital +
Building 500 Startups Ecosystem
@DaveMcClure - 500 Startups
Jakarta, Indonesia - Feb 2014

2. This Talk
• What is 500 Startups?
• Changes in Tech + Venture Capital
• “The Lean VC”: Quantitative Approach to VC
• Building 500 Startups: #500STRONG
• Global Entrepreneurship
• Q&A
!2

3. Dave McClure
Founding Partner & Chief Troublemaker, 500 Startups
00’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’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

4. This Talk
• What is 500 Startups?
!4

5. 500 Startups
Global Seed Fund & Startup Accelerator
• What is 500 Startups?
– ~$100M under mgmt, ~$8M annual budget
– seed fund + accelerator (SF, MV, MXC)
– 30 team members (12 investing partners)
– SV, SF, NYC, MEX, BRZ, IND, CHN, SE Asia
– 1000+ Founders / 200+ Mentors
– Conferences, Community, Geeks on a Plane!
!
• 675+ Portfolio Co’s / 40+ Countries
– Wildfire (acq GOOG, $350M)
– MakerBot (acq SSYS, $400M)
– Viki (acq Rakuten, $200M)
– Twilio
– SendGrid
– Credit Karma
– Udemy
– Zozi
– ElaCarte
– Virool

6. !6

7. 500 Startups: Global Seed Fund
Over 200+ startups outside US, in 40+ countries

8. This Talk
• What is 500 Startups?
• Changes in Tech + Venture Capital
!8

9. Daft Punk Lean Startup:
Simpler, Faster, Cheaper, Smarter
!
1.
2.
# Users, Bandwidth = Bigger.
3.
!
!
Startup Costs = Lower.
Transaction $$$ = Better.
!
➢
Building Product => Cheaper, Faster, Better
➢
Getting Customers => Easier, More Measurable
!
Iterative Product & Marketing Decisions
based on Measured User Behavior

10. Changes in Tech + VC
•
LESS Capital required to build product, get to market
– Dramatically reduced $$$ on servers, software, bandwidth
– Funding Platforms: KickStarter, Angel List, Funders Club, etc
– Cheap access to online platforms for 100M+ consumers, smallbiz, etc
!
•
MORE Customers via ONLINE platforms (100M-1B+ users)
– Search (Google)
– Social (Facebook, Twitter, LinkedIn)
– Mobile (Apple, Android)
– Local (Yelp, Groupon, Living Social -> FB, GOOG, TWTR)
– Media (YouTube, Pinterest, Instagram, Tumblr)
– Comm (Email, WeChat/WhatsApp/Line/IM/Chat, Voice, SMS, etc)
!
•
LOTS of little bets: Accelerators, Angels, Angel List, Small Exits
– Y Combinator, TechStars, 500 Startups
– Capital + Co-working + Mentoring -> Design, Data, Distribution
– “Fast, Cheap Fail”, network effects, quantitative + iterative investments

11. Platforms 2.0
Search, Social, Mobile,
Video, Messaging

12. Before & After 2 Dot-Com Crashes
Daft Punk Lean 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

13. Got Crunched Yet?
Source: Bullpen Capital

14. 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 (not bad)
!
• Overall, founders / market getting smarter
• More focus on customers, problems, revenue
• Many die, some survive (1-5x), some thrive (20x+).

15. Angel* List: It Rocks.
•
•
•
•
•
Startups & Investors
Syndicates & Backers
Activity & Metrics
Jobs & Talent
Platform & APIs
!

16. 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

17. This Talk
• What is 500 Startups?
• Changes in Tech + Venture Capital
• “The Lean VC”
!17

18. Lots of Little Bets
aka “MoneyBall for Startups”
•
•
VC Evolution: Physician, Scale Thyself (Aug 2012)
MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)

19. 500 Strategy: “Lots of Little Bets”*
!19
*See Peter Sims book: “Little Bets”

20. Minimum Viable Team:
Hacker, Hipster, Hustler
• Hacker: engineers & developers
• Hipster: design & user experience (UX)
• Hustler: marketing & business, “growth hacker”
!
1. Build functional prototypes
2. Improve UX so people convert
3. Scale customer acquisition & distribution

21. 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”)

22. 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

23. 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

24. 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

25. This Talk
• What is 500 Startups?
• Changes in Tech + Venture Capital
• “The Lean VC”
• Growing 500: #500STRONG
!25

26. Strategy, Brand, Marketing
Lots of Little Bets, Online Platforms
Design, Data, Distribution
Blogging, Facebook, Twitter
#500STRONG: for Geeks, by Geeks
Seed Fund vs Accelerator
!
• FUN: don’t be boring (t-shirts + flip-flops)
• Community: from Silicon Valley to the World
• Conferences & Events + GeeksOnaPlane.com
•
•
•
•
•

27. 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

28. Portfolio Development
• How do we help? How can we help?
• Importance of (trying to be) Helpful
• Board seats or not? Useful to VC, not founders
• Product, Market, Revenue
• Mentorship & Connections
• Platforms & Distribution
• Downstream Investors & Syndicates

29. Follow-On Strategy
• Should we follow-on? Why or Why Not?
• Signaling Risk vs Portfolio Returns
• Investor opinion shouldn’t matter more than business
fundamentals (if so, that’s a problem)
• Downstream Investor Syndicate is critical
• Using Angel List to drive visibility
• Global Strategies (more capital, connections)

30. 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

31. Scaling VC
• Lots of Little Bets? Or a Few Big Bets?
• Power Laws, Singles vs Home Runs
• Focus on Network Effects
• Communication Platforms
• Portfolio Size vs Investment Stage
• Recruiting Thousands of VCs

32. Example Startup Ecosystem
• 1,000 Bootstrap Startups ($0)
• 300 Accelerator Startups ($10-50K)
• 100 Seed-Funded Startups ($250K-$1M)
• 30 Series A Startups ($2-5M)
• 10 Series B Startups ($5-20M)
• 5 Series C Startups ($20-50M)
• 1-3 IPOs ($50-250M)
!32

33. This Talk
• What is 500 Startups?
• Changes in Tech + Venture Capital
• Growing 500 + “The Lean VC”
• GLOBAL Entrepreneurship
!33

34. Going Local, Going Global
web gets bigger -> world gets smaller

35. Local vs Global?
• “Silicon Valley is Unique” — NOT TRUE.
• *we had a 50-70 year head start… ROW will catch up.
• Emerging / Developing Markets: 3-5B+
• English, Chinese, Spanish, Arabic
!
• Challenges: Payments, Mobile/Web, Logistics
• Challenges: Capital, Mentorship, Exits
!
• Investor Ecosystems, Mentorship & Community
• Does the Future look different? (yes, we hope)

36. 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, Yandex, Mail.RU

37. Questions? Comments? Heckles?
• Thanks for Listening
• Feedback Appreciated
• We are Hiring + Internships
!
• More Info?
– http://500.co (our company)
– http://500hats.com (my blog)
– https://angel.co/500startups (our fund)
– Dave McClure, @DaveMcClure

38. How Big is MicroVC / Seed Stage Market?
5,000 microVCs invest 100,000 startups/yr @ $500K/startup = $50B/yr
How many people are entrepreneurs? How many startups get started every year?
• ~1% of Humanity is “Entrepreneurial” (def’n: “can create a $10M rev/yr business”)
• 1% x 7B ppl = 70M entrepreneurs, each of which starts 1-5 businesses lifetime
• 1-5 startups / 75 yrs avg life = (~1 startup/25 yrs) * 70M = ~3M startups per year
!
How much capital is needed globally to get seed stage startups rolling?
• Assume 1M-3M startups/yr x $50K-$500K funding/each
• Low: 1M x $50K = $50B/yr (*this is the LOW end estimate)
• High: 5M x $500K = $2.5T/yr (that’s “T” as in “Trillion”…)
!
How many metros? How many investors / metro? How many startups / metro?
• 1 microVC can do 10-20 startups/yr * $50K-$500K = $500K-$10M/yr budget
• 100-500 global metros @ >1-2M ppl can generate ~500-2,000 startups / metro / yr
• guesstimate = ~100K-200K startups/yr in top 200 global metros
• 10-50 micro VCs / metro * 200 metros = 2,000-10,000 microVCs globally
• EST: 5,000 microVCs can deploy $5M/yr each, or $50B/yr in ~100,000 startups !38