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Changes	
  in	
  Venture	
  Capital	
  &	
  
Building	
  500	
  Startups	
  
@DaveMcClure	
  
Sao	
  Paulo,	
  Brazil	
  -­‐	
  September	
  2013	
  
Building	
  500	
  Startups	
  
•  Industry	
  Changes	
  &	
  Challenges	
  
•  500	
  Strategy:	
  “Lots	
  of	
  Li/le	
  Bets”	
  
•  Scale	
  &	
  Scalability,	
  Big	
  Data	
  for	
  VC	
  
•  Feedback	
  Loop	
  &	
  Metrics	
  
•  Pla4orms	
  &	
  Community	
  
•  “The	
  Series	
  A	
  Crunch”	
  
•  Local	
  vs.	
  Global	
  Opportuni=es	
  
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
Long	
  Journey…	
  
•  East	
  Coast	
  -­‐>	
  West	
  Coast	
  (1989)	
  
•  Geek:	
  Engineer	
  &	
  Programmer	
  
•  Entrepreneur:	
  Small	
  Startup,	
  Small	
  Exit	
  
•  Marke=ng:	
  PayPal,	
  Simply	
  Hired,	
  Mint.com	
  
•  Community:	
  Blogs,	
  Frisbee,	
  Facebook,	
  Twi]er	
  
•  Inves=ng:	
  Angel,	
  Founders	
  Fund,	
  ^Fund	
  
•  500	
  Startups	
  (2010)	
  
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
Strategy,	
  Brand	
  &	
  Marke_ng	
  
•  FUN!	
  IRREVERENCE!	
  Havaianas!	
  (don’t	
  be	
  boring)	
  
•  Lots	
  of	
  Li]le	
  Bets,	
  Online	
  Pladorms	
  
•  Design,	
  Data,	
  Distribu_on	
  
•  Blogging,	
  Facebook,	
  Twi]er	
  
•  #500STRONG:	
  for	
  Geeks,	
  by	
  Geeks	
  
•  Seed	
  Fund	
  vs	
  Accelerator	
  
•  Community:	
  from	
  Silicon	
  Valley	
  to	
  the	
  World	
  
•  Conferences	
  &	
  Events	
  
•  GeeksOnaPlane.com	
  
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
Incuba=on	
  
Seed	
  
Series	
  A	
  
Series	
  B	
  
Series	
  C+	
  
Bootstrap, KickStarter,
Crowdfunding
500 Startups: Global Seed Fund
Over 150+ startups outside US, in 40+ countries
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)
Industry	
  Changes,	
  Challenges	
  
•  SW	
  Startup	
  Efficiency,	
  Reduced	
  CapX	
  Costs	
  
•  Growing	
  Market,	
  Growing	
  Pladorms	
  
•  VC	
  Industry	
  Upheavals	
  (2000,	
  2008)	
  
•  Super	
  Angel	
  -­‐>	
  Micro	
  VC:	
  Seed	
  Funds	
  (ex:	
  FRC)	
  
•  Incubators	
  &	
  Accelerators	
  (ex:	
  Y	
  Combinator)	
  
•  Big	
  VC	
  (ex:	
  A16Z)	
  &	
  Pladorms	
  (ex:	
  Angel	
  List)	
  
•  h]p://PreMoney.co	
  	
  	
  
Angel* List: It Rocks.
•  Startups & Investors
•  Activity & Metrics
•  Platform & APIs
•  *ps – not just for Angels, or
USA
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
Daft Punk Lean Startup:
Simpler, Faster, Cheaper, Smarter
	
  
1.  Startup Costs = Lower.
2.  # Users, Bandwidth = Bigger.
3.  Transaction $$$ = Better.
	
  
	
  
Ø  Building Product => Cheaper, Faster, Better
Ø  Getting Customers => Easier, More Measurable
Iterative Product & Marketing Decisions
based on Measured User Behavior
14	
  
Quan=ta=ve	
  Inves=ng	
  before	
  Trac=on	
  
250+	
  companies	
  @	
  $25-­‐100K	
  	
  
(1st	
  check)	
  	
  
-­‐	
  Assume	
  high	
  failure	
  rate	
  (up	
  to	
  80%)	
  	
  
	
  
Double-­‐Down	
  a'er	
  Trac=on	
  
50+	
  ‘winners’	
  @	
  $100K-­‐$1M	
  	
  
(2nd	
  +	
  3rd	
  check)	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
-­‐	
  -­‐	
  Target	
  10+	
  exits	
  @	
  $100M+	
  
	
  
	
  
	
  
500	
  Strategy:	
  “Lots	
  of	
  Li1le	
  Bets”*	
  
1)	
  Make	
  lots	
  of	
  li]le	
  
bets	
  pre-­‐trac_on,	
  
early-­‐stage	
  startups	
  
2)	
  amer	
  6-­‐12	
  months,	
  iden_fy	
  
top	
  20%	
  performers	
  and	
  
double-­‐down	
  higher	
  $$$	
  
3)	
  conserva_ve	
  model	
  assumes	
  
-­‐  5-­‐10%	
  large	
  exits	
  @20X	
  ($50-­‐100M+)	
  
-­‐  10-­‐20%	
  small	
  exits	
  @5X	
  	
  ($5-­‐50M)	
  
*See Peter Sims book: “Little Bets”
Scale	
  &	
  Scaling	
  VC	
  
•  Lots	
  of	
  Li]le	
  Bets?	
  Or	
  a	
  Few	
  Big	
  Bets?	
  
•  Power	
  Laws,	
  Singles	
  vs	
  Home	
  Runs	
  
•  Focus	
  on	
  Network	
  Effects	
  
•  Distribu_on	
  &	
  Mone_za_on	
  
•  Communica_on	
  Pladorms	
  
•  Ideal	
  Pordolio	
  Size	
  vs	
  Investment	
  Stage	
  
Deal	
  Flow,	
  Strategy	
  &	
  Selec_on	
  
•  Lots	
  of	
  Li/le	
  Bets	
  
•  Take	
  Lots	
  of	
  Small	
  Risk,	
  Early	
  &	
  Omen	
  
•  Differen_a_on	
  &	
  Branding	
  
•  Revenue	
  Emphasis,	
  Small	
  but	
  Real	
  Problems	
  
•  Focus	
  on	
  Online	
  Pladorms	
  
•  Hacker,	
  Hipster,	
  Hustler	
  
•  Global	
  vs	
  Local	
  
Minimum Viable Team:
Hacker, Hipster, Hustler
•  Hacker:	
  engineers	
  &	
  developers	
  
•  Hipster:	
  design	
  &	
  user	
  experience	
  (UX)	
  
•  Hustler:	
  marke_ng	
  &	
  business,	
  “growth	
  hacker”	
  
1.  Build	
  func_onal	
  prototypes	
  
2.  Improve	
  UX	
  so	
  people	
  convert	
  
3.  Scale	
  customer	
  acquisi_on	
  &	
  distribu_on	
  
Feedback	
  Loop	
  &	
  Metrics	
  
•  Bad	
  decisions	
  =	
  obvious	
  quickly	
  
•  Good	
  decisions	
  =	
  not	
  obvious	
  for	
  years	
  
•  Short-­‐term	
  metrics:	
  revenue,	
  users,	
  next	
  round	
  
•  Sharing	
  best	
  prac_ces	
  for	
  decisions	
  
•  Lots	
  of	
  Li]le	
  Bets	
  helps	
  speed	
  up	
  learning	
  
•  “Winners”	
  vs	
  Numeric	
  Returns	
  
•  Economics	
  of	
  1st	
  check	
  vs	
  follow-­‐on	
  
•  Easy	
  to	
  get	
  big	
  mul_ples	
  on	
  small	
  checks,	
  BUT	
  
•  Larger	
  checks	
  with	
  smaller	
  mul_ples	
  s_ll	
  good	
  
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”)
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
Follow-­‐On	
  Strategy	
  
•  Should	
  we	
  follow-­‐on?	
  Why	
  or	
  Why	
  Not?	
  
•  Signaling	
  Risk	
  vs	
  Pordolio	
  Returns	
  
•  Investor	
  opinion	
  shouldn’t	
  ma]er	
  more	
  than	
  
business	
  fundamentals	
  (if	
  so,	
  it’s	
  a	
  problem)	
  
•  Downstream	
  Investor	
  Syndicate	
  is	
  cri_cal	
  
•  Using	
  Angel	
  List	
  to	
  drive	
  visibility	
  
•  Global	
  Strategies	
  (more	
  capital,	
  connec_ons)	
  
Pordolio	
  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	
  &	
  Connec_ons	
  
•  Pladorms	
  &	
  Distribu_on	
  
•  Downstream	
  Investors	
  &	
  Syndicates	
  
•  Exits	
  &	
  Liquidity	
  
Pladorm(s)	
  &	
  Community	
  
•  Mentors:	
  Engineering,	
  Design,	
  Marke_ng	
  
•  Distribu=on:	
  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,	
  Ma]erMark,	
  Funders	
  Club	
  
Platforms 2.0
Search, Social, Mobile,
Video, Messaging
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
Got Crunched Yet?
Source: Bullpen Capital
Before & After 2 Dot-Com Crashes
Daft Punk Startup: Simpler, Faster, Cheaper, Smarter
Before	
  2000	
  
•  Sun	
  Servers	
  
•  Oracle	
  DB	
  
•  Exodus	
  Hos_ng	
  
•  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	
  
Amer	
  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,	
  Li]le,	
  Cockroach	
  Startup	
  
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+).
Going Local, Going
Global
web gets bigger -> world gets smaller
Local	
  vs	
  Global?	
  
•  The	
  Valley	
  is	
  Unique…	
  (sort	
  of)	
  
•  Emerging	
  /	
  Developing	
  Markets	
  
•  Too	
  Soon?	
  Too	
  Late?	
  Valua_on?	
  	
  
•  English,	
  Chinese,	
  Spanish,	
  Arabic	
  
•  Investor	
  Ecosystems	
  
•  Mentorship	
  &	
  Community	
  
•  Limited	
  History	
  of	
  Exits	
  &	
  IPOs	
  
•  Does	
  the	
  Future	
  look	
  different?	
  (yes,	
  we	
  hope)	
  
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
Ques_ons?	
  Comments?	
  Heckles?	
  
•  Thanks	
  for	
  Listening	
  
•  Feedback	
  Appreciated	
  
•  We’re	
  S_ll	
  Learning	
  
•  More Info?
–  http://500.co (our company)
–  http://500hats.com (my blog)
–  https://angel.co/500startups (our fund)
–  Dave McClure, @DaveMcClure	
  

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Changes in Venture Capital & Building 500 Startups (Sao Paulo, Sept 2013)

  • 1. Changes  in  Venture  Capital  &   Building  500  Startups   @DaveMcClure   Sao  Paulo,  Brazil  -­‐  September  2013  
  • 2. Building  500  Startups   •  Industry  Changes  &  Challenges   •  500  Strategy:  “Lots  of  Li/le  Bets”   •  Scale  &  Scalability,  Big  Data  for  VC   •  Feedback  Loop  &  Metrics   •  Pla4orms  &  Community   •  “The  Series  A  Crunch”   •  Local  vs.  Global  Opportuni=es  
  • 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. Long  Journey…   •  East  Coast  -­‐>  West  Coast  (1989)   •  Geek:  Engineer  &  Programmer   •  Entrepreneur:  Small  Startup,  Small  Exit   •  Marke=ng:  PayPal,  Simply  Hired,  Mint.com   •  Community:  Blogs,  Frisbee,  Facebook,  Twi]er   •  Inves=ng:  Angel,  Founders  Fund,  ^Fund   •  500  Startups  (2010)  
  • 5. 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
  • 6. Strategy,  Brand  &  Marke_ng   •  FUN!  IRREVERENCE!  Havaianas!  (don’t  be  boring)   •  Lots  of  Li]le  Bets,  Online  Pladorms   •  Design,  Data,  Distribu_on   •  Blogging,  Facebook,  Twi]er   •  #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 Incuba=on   Seed   Series  A   Series  B   Series  C+   Bootstrap, KickStarter, Crowdfunding
  • 8. 500 Startups: Global Seed Fund Over 150+ startups outside US, in 40+ countries
  • 9. 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)
  • 10. Industry  Changes,  Challenges   •  SW  Startup  Efficiency,  Reduced  CapX  Costs   •  Growing  Market,  Growing  Pladorms   •  VC  Industry  Upheavals  (2000,  2008)   •  Super  Angel  -­‐>  Micro  VC:  Seed  Funds  (ex:  FRC)   •  Incubators  &  Accelerators  (ex:  Y  Combinator)   •  Big  VC  (ex:  A16Z)  &  Pladorms  (ex:  Angel  List)   •  h]p://PreMoney.co      
  • 11. Angel* List: It Rocks. •  Startups & Investors •  Activity & Metrics •  Platform & APIs •  *ps – not just for Angels, or USA
  • 12. Changes in Tech Startups •  LESS Capital required to build product, get to market –  Dramatically reduced $$$ on servers, software, bandwidth –  Crowdfunding, KickStarter, Angel List, Funders Club, etc –  Cheap access to online platforms for 100M+ consumers, smallbiz, etc •  MORE Customers via ONLINE platforms (100M+ users) –  Search (Google) –  Social (Facebook, Twitter) –  Mobile (Apple, Android) –  Local (Yelp, Groupon, Living Social) –  Media (YouTube, Pinterest, Instagram, Tumblr) –  Comm (Email, IM/Chat, Voice, SMS, etc) •  LOTS of little bets: Accelerators, Angels, Angel List, Small Exits –  Y Combinator, TechStars, 500 Startups –  Funding + Co-working + Mentoring -> Design, Data, Distribution –  “Fast, Cheap Fail”, network effects, quantitative + iterative investments
  • 13. Daft Punk Lean Startup: Simpler, Faster, Cheaper, Smarter   1.  Startup Costs = Lower. 2.  # Users, Bandwidth = Bigger. 3.  Transaction $$$ = Better.     Ø  Building Product => Cheaper, Faster, Better Ø  Getting Customers => Easier, More Measurable Iterative Product & Marketing Decisions based on Measured User Behavior
  • 14. 14   Quan=ta=ve  Inves=ng  before  Trac=on   250+  companies  @  $25-­‐100K     (1st  check)     -­‐  Assume  high  failure  rate  (up  to  80%)       Double-­‐Down  a'er  Trac=on   50+  ‘winners’  @  $100K-­‐$1M     (2nd  +  3rd  check)                                                 -­‐  -­‐  Target  10+  exits  @  $100M+         500  Strategy:  “Lots  of  Li1le  Bets”*   1)  Make  lots  of  li]le   bets  pre-­‐trac_on,   early-­‐stage  startups   2)  amer  6-­‐12  months,  iden_fy   top  20%  performers  and   double-­‐down  higher  $$$   3)  conserva_ve  model  assumes   -­‐  5-­‐10%  large  exits  @20X  ($50-­‐100M+)   -­‐  10-­‐20%  small  exits  @5X    ($5-­‐50M)   *See Peter Sims book: “Little Bets”
  • 15. Scale  &  Scaling  VC   •  Lots  of  Li]le  Bets?  Or  a  Few  Big  Bets?   •  Power  Laws,  Singles  vs  Home  Runs   •  Focus  on  Network  Effects   •  Distribu_on  &  Mone_za_on   •  Communica_on  Pladorms   •  Ideal  Pordolio  Size  vs  Investment  Stage  
  • 16. Deal  Flow,  Strategy  &  Selec_on   •  Lots  of  Li/le  Bets   •  Take  Lots  of  Small  Risk,  Early  &  Omen   •  Differen_a_on  &  Branding   •  Revenue  Emphasis,  Small  but  Real  Problems   •  Focus  on  Online  Pladorms   •  Hacker,  Hipster,  Hustler   •  Global  vs  Local  
  • 17. Minimum Viable Team: Hacker, Hipster, Hustler •  Hacker:  engineers  &  developers   •  Hipster:  design  &  user  experience  (UX)   •  Hustler:  marke_ng  &  business,  “growth  hacker”   1.  Build  func_onal  prototypes   2.  Improve  UX  so  people  convert   3.  Scale  customer  acquisi_on  &  distribu_on  
  • 18. Feedback  Loop  &  Metrics   •  Bad  decisions  =  obvious  quickly   •  Good  decisions  =  not  obvious  for  years   •  Short-­‐term  metrics:  revenue,  users,  next  round   •  Sharing  best  prac_ces  for  decisions   •  Lots  of  Li]le  Bets  helps  speed  up  learning   •  “Winners”  vs  Numeric  Returns   •  Economics  of  1st  check  vs  follow-­‐on   •  Easy  to  get  big  mul_ples  on  small  checks,  BUT   •  Larger  checks  with  smaller  mul_ples  s_ll  good  
  • 19. 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”)
  • 20. 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
  • 21. 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
  • 22. 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
  • 23. Follow-­‐On  Strategy   •  Should  we  follow-­‐on?  Why  or  Why  Not?   •  Signaling  Risk  vs  Pordolio  Returns   •  Investor  opinion  shouldn’t  ma]er  more  than   business  fundamentals  (if  so,  it’s  a  problem)   •  Downstream  Investor  Syndicate  is  cri_cal   •  Using  Angel  List  to  drive  visibility   •  Global  Strategies  (more  capital,  connec_ons)  
  • 24. Pordolio  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  &  Connec_ons   •  Pladorms  &  Distribu_on   •  Downstream  Investors  &  Syndicates   •  Exits  &  Liquidity  
  • 25. Pladorm(s)  &  Community   •  Mentors:  Engineering,  Design,  Marke_ng   •  Distribu=on:  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,  Ma]erMark,  Funders  Club  
  • 26. Platforms 2.0 Search, Social, Mobile, Video, Messaging
  • 27. 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
  • 28. Got Crunched Yet? Source: Bullpen Capital
  • 29. Before & After 2 Dot-Com Crashes Daft Punk Startup: Simpler, Faster, Cheaper, Smarter Before  2000   •  Sun  Servers   •  Oracle  DB   •  Exodus  Hos_ng   •  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   Amer  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,  Li]le,  Cockroach  Startup  
  • 30. 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+).
  • 31. Going Local, Going Global web gets bigger -> world gets smaller
  • 32. Local  vs  Global?   •  The  Valley  is  Unique…  (sort  of)   •  Emerging  /  Developing  Markets   •  Too  Soon?  Too  Late?  Valua_on?     •  English,  Chinese,  Spanish,  Arabic   •  Investor  Ecosystems   •  Mentorship  &  Community   •  Limited  History  of  Exits  &  IPOs   •  Does  the  Future  look  different?  (yes,  we  hope)  
  • 33. 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
  • 34. Ques_ons?  Comments?  Heckles?   •  Thanks  for  Listening   •  Feedback  Appreciated   •  We’re  S_ll  Learning   •  More Info? –  http://500.co (our company) –  http://500hats.com (my blog) –  https://angel.co/500startups (our fund) –  Dave McClure, @DaveMcClure