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Farming Unicorns: Building Startup & Investor Ecosystems for Emerging Markets

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slides from my talk at #TechWadi Forum (San Francisco, January 2017)

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Farming Unicorns: Building Startup & Investor Ecosystems for Emerging Markets

  1. The New Colossus Not like the brazen giant of Greek fame, With conquering limbs astride from land to land; Here at our sea-washed, sunset gates shall stand A mighty woman with a torch, whose flame Is the imprisoned lightning, and her name Mother of Exiles. From her beacon-hand Glows world-wide welcome; her mild eyes command The air-bridged harbor that twin cities frame. "Keep ancient lands, your storied pomp!" cries she with silent lips. "Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, tempest-tost to me, I lift my lamp beside the golden door!” - Emma Lazarus Nov 2, 1883 Stand for Something… or You Stand for Nothing.
  2. @DaveMcClure @500Startups http://500.co TechWadi Forum - Jan 2017 Farming Unicorns Building Startup & Investor Ecosystems
  3. Dave McClure
 Founding Partner, 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, 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. • What is 500? – $300M global seed fund + startup accelerator – 150 people / 25 languages / 20 countries – 1600+ Companies / 3000+ Founders / 200+ Mentors – Investment, Accelerator, Distro, Marketing, Events, Education – Community + Content + Conferences • 1600+ Co’s / 60+ Countries – Twilio (NYSE: TWLO) – Credit Karma – Grab (aka GrabTaxi) – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Behance (acq Adobe, $150M) – Simple (acq BBVA, $117M) – Sunrise (acq MSFT, $100M) – Unifonic – uTurn – Kharabeesh – Fetchr – Wuzzuf 500 Startups
 Global Seed Fund & Startup Accelerator
  5. 500 Startups: MENA Portfolio
  6. Dinosaurs vs. Cockroaches
 LEAN Startup: Simpler, Faster, Cheaper, Smarter 1996 ”Big, Fat, Dinosaur Startup” • 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 2016 ”Lean, Little, Cockroach Startup” • 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
  7. Platforms:
 Search, Social, Mobile, Video, Messaging
  8. Data from ~600 companies from 500 Startups Funds I + II (2010 - 2013 cohorts) $1-10M Q: How Many Startups to Get 1 Unicorn? Unicorns 50:1 | Centaurs 20:1
  9. 99 VC Problems But a Batch Ain’t 1 9http://bit.ly/99VCProblems
  10. Chances of spotting unicorn = ~1%/
  11. If portfolio size = 15 companies/
  12. / If portfolio size = 30 companies
  13. / If portfolio size = 100 companies
  14. Football West Coast Offense Baseball MoneyBall Basketball 3 point revolution Venture Capital 500 Startups “Lots of little bets” 500 Strategy: MoneyBall for Startups Re-inventing a 50-year old sport
  15. 500 Strategy: Lots of Little Bets* 1) make lots of little bets on early-stage startups when they’re just getting started 3) wait 5-10 years for returns: -10-20% small exits @1-5X ($5-25M+) -5-10% larger exits @5-20X ($25-250M+) -1-2% unicorns @20-50X+ ($250M-1B+) *See Peter Sims book: “Little Bets” 2) over the next five years, double-down on top 20-30% ~500 co’s @ $100K 1st checks 100+ co’s @ $200-500K 2nd/3rd checks (hope for a few big exits @ $100M-$1B+) (assume high failure rate ~50-80%)
  16. Startup Risk Reduction Concept Early Customer Usage Scalable Customer Acquisition [about to be] Profitable Unit Economics Scalable Profitable Business Functional Prototype PRODUCT MARKET REVENUE Exit? When 500 Likes to Invest
  17. The Lean Investor Make lots of little bets: • Start with many small “experiments” • Filter out failures + small wins • Double-down on stuff that looks like it’s working • Incubation: $0-100K (“Build & Validate Product”) • Seed: $100K-$1M (“Test & Grow Marketing Channels””) • Venture: $1M-$10M (“Maximize Growth & Revenue”)
  18. Investment Stage #1: 
 Product Validation + Customer Usage • Structure – 1-3 founders – $0-$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
  19. 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
  20. 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
  21. Critical Ecosystem Factors • Optimism & Belief (“Silicon Valley”) • Mentorship + Education (Knowledge) • Universities + Companies (People) • Capital, Legal, Finance (Infrastructure) • Engineering + Design / UX (Product) • Platforms + Distribution (Customers) • Online Payments (Monetization) • IPO / M&A Market (Exits)
  22. Investor Ecosystem Angels & Accelerators ($0-10M) “Seed” Funds ($10-100M) “Traditional” VC Funds ($100-500M) “Unicorn” VC Funds (>$500M) Incubation 0-$100K Seed $100K-$1M Series A/B $1-10M Series B/C $10-100M Bootstrap, KickStarter, AngelList, Crowdfunding
  23. Building Startup Ecosystems
  24. Investor Ecosystem Funding, Liquidity, Exits • Bootstrap, FFF, Crowdfunding (0-$100K) • Angel Investors (0-$100K) • Accelerators (0-$100K) • Seed funds ($100K-$1M) • Series A/B ($2-10M) • Later Stage Funds ($20M+) • M&A / Secondary Markets • IPOs
  25. A) Invite VCs to Dinner? B) Give VCs some Arabic Coffee? C) Take VCs for a Ride on a Camel? Q: How to Bring 500 VC Funds to Emerging Markets? Umm, NO.
  26. Q: How many VC funds do we need to build an ecosystem? • USA: ~800 VC funds; 2.5 per 1M ppl • China: ~700 VC funds; 0.5 per 1M ppl • MENA: ~30 funds; 0.1 per 1M ppl NOT EVEN CLOSE!
  27. A Brief History of US Venture Capital • first VC funds: ARDC, JH Whitney (1946) • SBICs / Small Business Investment Act (US, 1958) • Shockley -> “Traitorous Eight” -> Fairchild (1958) -> Intel (1968) • Sutter Hill (1964), Venrock (1969), Kleiner, Sequoia (1972) • ERISA laws + “prudent man rule” (1974, 1978) • Pension Funds in VCs: $39M (1977) -> $570M (1978) -> $4B (1989) • Tech Explosion: 80’s, 90’s, 00’s • Microsoft (1975), Apple (1976), Oracle (1977), Sun (1982), Cisco (1984), Amazon (1994), eBay (1995), Yahoo (1995), Google (1998), PayPal (1998), LinkedIn (2002), Facebook (2004), Twitter (2006)
  28. What’s Most Critical? • You DON’T need to be in Silicon Valley, but… • Silicon Valley Needs to be in YOU.

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