Dave McClure discusses changes in the venture capital industry and startup trends. He notes that startups now require less capital to build products and reach customers due to reduced costs and access to online platforms. This has led to a trend of "lots of little bets" through accelerator programs and smaller seed funds. McClure also discusses the growth of startup hubs globally and the importance of platforms, community, and quantitative metrics in venture capital investing.

1. Changes in Venture Capital
+ Building 500 Startups
@DaveMcClure
Istanbul, Turkey
September 2013

2. This Talk is About…
• Industry Changes: “Daft Punk Startup”
• 500 Strategy: “Lots of Little Bets”
• Venture Metrics: “The Lean VC”
• Scalable Distribution: “Platforms & Community”
• Myth Busting + Deconstructing: “The Series A Crunch”
• Startup Demography: Local vs. Global vs. Valley

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
• Marketing: PayPal, Simply Hired, Mint.com, 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. 500 Startups
Global Seed Fund & Startup Accelerator
• What is 500?
– ~$80M under management
– ~30 people / 10 investing partners
– Locations: SV, NYC, MEX, BRZ, IND, CHN, SE Asia
– 1000+ Founders / 200+ Mentors
– 25+ positive exits in ~3 years
• 500+ Portfolio Co’s / 40+ Countries
– Wildfire (acq GOOG, $350M)
– MakerBot (acq SSYS, $400M)
– Viki (acq Rakuten, $200M)
– Twilio
– SendGrid
– TaskRabbit
– VivaReal
– AppStack
– 9GAG
– PicCollage

5. 500 Startups: Global Seed Fund
Over 150+ startups outside US, in 40+ countries

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

7. Startup Investor Ecosystem
Angels &
Incubators
($0-10M)
“Micro-VC” Funds
($10-100M)
“Big” VC Funds
($100-500M)
“Mega” VC Funds
(>$500M)
TrueFirst Round
AndreessenAtomico
Y-Combinator
TechStars
SoftTech (Clavier)
Felicis (Senkut)
SV Angel (Conway)
SequoiaGreylock
Union Square
Floodgate (Maples)
Foundry Group
Incubation
Seed
Series A
Series B
Series C+
Bootstrap, KickStarter,
Crowdfunding

8. Silicon Valley 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)

9. Angel* List: It Rocks.
• Startups & Investors
• Activity & Metrics
• Platform & APIs
• *ps – not just for Angels, or
USA

10. 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

11. 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
• 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

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

13. 13
Quantitative Investing before Traction
250+ companies @ $25-100K
(1st check)
- Assume high failure rate (up to 80%)
Double-Down after
Traction
50+ ‘winners’ @ $100K-$1M
(2nd + 3rd check)
- - Target 10+ exits @ $100M+
500 Strategy: “Lots of Little Bets”*
1) Make lots of little
bets pre-traction,
early-stage startups
2) after 6-12 months, identify
top 20% performers and
double-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”

14. 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

15. 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

16. 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”)

17. 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

18. 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

19. 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

20. Scale & Scaling VC
• Lots of Little Bets? Or a Few Big Bets?
• Power Laws, Singles vs Home Runs
• Focus on Network Effects
• Distribution & Monetization
• Communication Platforms
• Ideal Portfolio Size vs Investment Stage

21. Platform(s) & Community
• Mentors: Engineering, Design, Marketing
• Distribution: Search, Social, Mobile, Video, Local
• Global: LatAm, Asia, India, EU, ME, Africa
• Social: LinkedIn, Quora, Angel List
• Angel List, Second Market, Trusted Insight
• Dashboard.io, MatterMark, Funders Club

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

23. Distribution Platforms
Customer Reach: 100M-1B+
• Search: Google, Baidu, Yahoo/Bing, Yandex
• Social: Facebook, Twitter, LinkedIn, TenCent/QQ, WeChat
• Mobile: Apple (iOS), Android
• Media: Video (YouTube), Photos (Instagram, Pinterest), Blogs
• Comm: SMS, IM (WeChat, WhatsApp), Skype, Phone/Voice, etc

24. Got Crunched Yet?
Source: Bullpen Capital

25. Before & After 2 Dot-Com Crashes
Daft Punk 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

26. 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
• Overall, founders / market getting smarter
• More focus on customers, problems, revenue
• Many die, some survive (1-5x), a few thrive (20x+).

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

28. Local vs Global?
• The Valley is Unique… (sort of)
• Emerging / Developing Markets
• Too Soon? Too Late? Valuation?
• English, Chinese, Spanish, Arabic
• Investor Ecosystems
• Mentorship & Community
• Limited History of Exits & IPOs
• Does the Future look different? (yes, we hope)

29. 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, auto, 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, Logistics, Delivery
• Dramatically Reduced Cost: Product Dev, Customer Acqstn
• Global Distribution Platforms
– US: AAPL, FB, AMZN, GOOG (Search, YouTube, Gmail, Android), LNKD, Twitter
– Asia: Baidu, Tencent/WeChat, Alibaba, Sina/Weibo, NHN, Softbank, Rakuten

30. Questions? Comments? Heckles?
• Thanks for Listening
• Feedback Appreciated
• We’re Still Learning
• More Info?
– http://500.co (our company)
– http://500hats.com (my blog)
– https://angel.co/500startups (our fund)
– Dave McClure, @DaveMcClure