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

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

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

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

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

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

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

Similar to Changes in Venture Capital & Building 500 Startups (Sao Paulo, Sept 2013) (20)

More from Dave McClure

More from Dave McClure (20)

Recently uploaded

Recently uploaded (20)

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