slides from my talk at Brazil Innovators startup conference in Sao Paulo (Sept 2013) on changes in the venture capital industry, and how we built 500 Startups.
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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
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
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
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+).
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