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Farming Unicorns: Building Startup & Investor Ecosystems in Emerging Markets (Thailand, April 2016)

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slides from my talk on Startup Ecosystems at #StartupThailand conf (Bangkok, April 2016)

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Farming Unicorns: Building Startup & Investor Ecosystems in Emerging Markets (Thailand, April 2016)

  1. @DaveMcClure @500Startups http://500.co Bangkok - April 2016 Farming Unicorns Building Startup & Investor Ecosystems in Emerging Markets
  2. • What is 500? – $250M silicon valley VC fund + startup accelerator – 125 people / 30 partners / 25 languages / 20 countries – 1500+ Companies / 3000+ Founders / 200+ Mentors – Investment, Accelerator, Distro, Marketing, Events, Education – Community + Content + Conferences • 1500+ Co’s / 50+ Countries – Credit Karma ($3.5B) – Twilio ($1B+) – Grab ($1B+) – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Behance (acq Adobe, $150M) – Simple (acq BBVA, $117M) – Sunrise (acq MSFT, $100M) – Udemy – Ipsy – TalkDesk – Intercom 500 Startups
 Global Seed Fund & Startup Accelerator
  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. [ This Talk ] • What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Building Investor Ecosystems • Q&A
  5. 500 Startups Mission • Provide capital, community, education to smart people (founders, investors) • Build functional startup ecosystems (founders, team, angels, accelerators, VC funds, capital, exits, liquidity, etc) • #HFGSD: Have Fun, Get Stuff Done.
  6. 500 Startups • “Lots of little bets”: very large portfolio (>100 co’s per fund) • Founding Partners: PayPal/Google alumni, engineering + marketing • Global Approach: Silicon Valley HQ + Multi-Country Team/Reach • Focus on seed-stage investing in internet startups • Accelerator: 30-50 co’s, structured curriculum, office, support staff, founder/mentor community, investor intros, pitch prep, demo days • Dedicated consulting svcs for customer acq (“Growth Hacking”) • Events, Education, Community, FAMILY.
  7. 500 is Global Since July 20101,500+ investments3 0 Startups Is the Most Active Seed Investor in Silicon ey and Aims to be Largest in the World1 $240M in AUM2 The various geographies highlighted in the map result from investments we have made across all 500 Startups funds. 1. The Silicon Valley Tech Venture Capital Almanac, Fall 2013 and TechCrunch Article May 5, 2015, “500 Startups Aims To Be The Largest VCShop In The World” http://techcrunch.co tartups-aims-to-be-the-largest-vc-shop-in-the-world/ 2. Approximated as of 2/23/2016 and includes the following 500 Startups funds: (a) 500 Startups, L.P. and 500 Startups-A, L.P. (together, “Fund I”), (b) 500 Startups II, L.P. and 500
  8. Year People Locations AUM $ Companies 2010 5 MV 10 75 2011 10 BRZ 30 250 2012 15 MX, IND 50 450 2013 30 CHN, SEA 75 650 2014 50 SF, MENA 125 900 2015 100 Korea, UK, Thailand, Vietnam, Germany, EU, Israel, Japan, Turkey 200 1400 2016 150+ +10-20 More ??? 2000+ 500 Startups History
  9. Investor Ecosystem Angels & Incubators ($0-10M) “Micro-VC” Funds ($10-100M) “Regular” VC Funds ($100-500M) “Mega” VC Funds (>$500M) Incubation 0-$100K Seed $100K-$1M Series A/B $1-10M Series B/C $10-100M Bootstrap, KickStarter, AngelList, Crowdfunding
  10. Building Startup Ecosystems
  11. [ This Talk ] • What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Building Investor Ecosystems • Q&A
  12. Changes in Tech Startups • LESS Capital required to build product, get to market – Dramatically reduced cost for servers, software, bandwidth – Funding Platforms: KickStarter, Angel List, Funders Club, etc – Access to online platforms for 100M-1B+ consumers, smallbiz, etc • MORE Customers via ONLINE platforms (100M+ users) – Search (Google, Baidu) – Social (Facebook, Twitter, LinkedIn) – Mobile (Apple, Android) – E-Commerce (Amazon, PayPal, Alibaba) – Media (YouTube, Pinterest, Instagram) – Comm/Msgs (WeChat, WhatsApp, SnapChat, Email, Voice, SMS, etc) • LOTS of little bets: Accelerators, Angels, Angel List, Small Exits – Capital + Co-working + Mentoring -> Design, Data, Distribution – “Fast, Cheap Fail”, network effects, quantitative + iterative investments
  13. Before & After 2 Dot-Com Crashes
 LEAN Startup: Simpler, Faster, Cheaper, Smarter Before 2000 ”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 After 2008 ”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
  14. Platforms 2.0
 Search, Social, Mobile, Video, Messaging
  15. 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
  16. Startup Education • Business Plans / Revenue Projections • Software + Design/UX • Lean Startups + Continuous Deploy (Iterate) • Metrics Framework + Continuous Testing • Functional Prototypes / Customer Development • Scalable [Internet] Marketing & Sales • Cash-Flow Positive Unit Economics • Pitching + Fundraising • Monetization + Payments • Customer Service + Support
  17. [ This Talk ] • What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Building Investor Ecosystems • Q&A
  18. Industry Changes • Financial Market Crises (2000, 2008) • Startup Efficiency, Lean Startup Movement, Reduced Capital Costs • Growing Market, Global Distribution Platforms, “Growth Hacking” • Improved Monetization, Payments Infrastructure • Developing Startup Ecosystems, Global M&A • Micro VC: Seed Funds (ex: First Round Capital) • Incubators & Accelerators (ex: 500 Startups) • Funding Platforms (ex: Angel List, Kickstarter) • Global Market of Angel Investors, Accelerators, Seed Funds more info: http://PreMoney.co
  19. Investor Education • Startups are NOT Real Estate • Most Startups Fail / Power Law Returns • Portfolio Approach (20-100+ investments) • Legal Structure, Financial Structure • Syndication + Co-Investment • Access to Downstream Capital • Exits & Liquidity
  20. 500 Strategy: Lots of Little Bets* 1) make lots of little bets on pre-traction, early-stage startups 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 100-200 co’s @ $200-500K 2nd/3rd checks (target 25-50 exits @ $100M+) (assume high failure rate ~50-80%)
  21. 99 VC Problems But a Batch Ain’t 1 21 http://bit.ly/99VCProblems
  22. Portfolio Diversification “Spray, not Pray”
  23. Q: Chances of spotting unicorn?/ a) 1% b) 2% c) 5% d) 10% e) ZERO
  24. Chances of spotting unicorn = ~1%/
  25. If portfolio size = 15 companies/
  26. / If portfolio size = 30 companies
  27. / If portfolio size = 100 companies
  28. [ This Talk ] • What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Building Investor Ecosystems • Q&A
  29. Startup Investment Stages • Concept • Product • Functional Prototype • Early Users/Customers • Other Investors • Profitable Unit Economics? • Scalable Cust Acquisition? • Profitable Business • Scalable Organization • Exit / Liquidity? 29
  30. 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
  31. 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”)
  32. 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
  33. 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
  34. 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
  35. [ This Talk ] • What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Building Investor Ecosystems • Q&A
  36. 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)
  37. Who/What is an Entrepreneur? • someone who WANTS to start a business? • someone who can RUN a business? • someone who can run a SUSTAINABLE business • someone who can run a PROFITABLE business that employs a LARGE # people • someone who can run a $10M/yr business that employs 100+ people
  38. Challenges for Investors in Emerging Markets • Smaller Markets than US, EU, CH • Limited Internet / Mobile / Smartphone • Online Payments / Physical Logistics • Small # of Early-Stage Capital / Firms • Long Time to Exits / Liquidity (7-10 years) • Small # IPOs (0?) / Small # Local Acquirers
  39. Building Startup Ecosystems
  40. Solutions for Investors in Emerging Markets • Increase #, frequency of early-stage investors • Increase portfolio size, Decrease check size • Increase #, frequency of acquirers • Fund of Funds for Countries / Regions • Liquidity Funds for Repurchase of Series A/B • Use of Real Estate as Hedge / Synthetic Liquidity • Tax Incentives for Global, Local Acquirers • Tax Incentives for Investing in Startups, Innovation
  41. Questions? Comments? • More Info? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund) – Dave McClure, @DaveMcClure
  42. Appendix 42
  43. 500 Performance // 1. As of 12/31/2015 2. TVPI is calculated as follows: (a)(i) net asset value of the applicable fund portfolio (net of fees, expenses and carry), calculated using valuations that were marked up or down by the general partner the applicable fund based on exits, closures, subsequent financings and/or such general partner’s discretionary estimates of market value (the “NAV”) and dilution plus (ii) cash or cash equivale held by the applicable fund plus (IV) distributions tofund investors minus (iv) liabilities of the applicable fund, dividedby (b) contributed capital of the limited partners of the applicable fund, in each ca as of 12/31/2015. 3. IRR calculations represent the net internal rate of return on contributed capital of the applicable fund since its inception, measured as of 12/31/2015 using the NAV of the applicable fund. NAME SIZE1 VINTAGE NET IRR3TVPI2 FUND I JULY 2010 18.5% FUND II APRIL 2012 23.1%1.66x OCTOBER 2013 20.3%1.18xFUND III EXITS 500 Startups Global Funds Performance to Date
  44. DMC Performance / FEBRUARY23,2016PAGE18 / 500 Startups is not an investor in all companies disclosed on this slide. Fund IV is not an investor in any company disclosed on this slide. 1. Neither FF Angel nor Facebook Fund has confirmed the information set forth on this slide. This information is based on certain material assumptions and estimates, including without limitation, that each such fund continues tohold its investments originally made by Dave McClure and an estimate of the amount of dilution such investments have experienced. 2. Represents Dave McClure’s discretionary estimate as of 3/5/2015 and includes both realized and unrealized gains and losses. 3. Return multiple represents (a) gross amount realized by Dave McClure divided by (b) total amount invested. 4. Return multiple represents (a) Dave McClure’s estimate of such fund’s current percentage ownership of the company corresponding to investments by such fund that were led by Dave McClure multiplied by (b) the estimated enterprise value of the company as of 3/5/2015 (based on subsequent financings and/or Dave McClure’s discretionary estimates of market value). Such calculations and/or estimates may differ from those included in prior materials. 5. Return multiple represents (a) Dave McClure’s estimate of gross amount realized on investments by such fund that were led by Dave McClure divided by (b) the total amount invested by such fund as ANGEL INVESTOR FF ANGEL1 FACEBOOK FUND1 Personal Founders Fund (Founders Fund + Accel Partners) # OF INVESTMENTS LED BY DAVE 13 21 222009 INVESTMENT PERIOD 2004-2008 2008-2010 SELECT INVESTMENTS (acqd: LNKD, ~20X)3 (~100X)4 (acqd: INTU, ~10X)3 (~100X)4 (acqd: GOOG, ~40X)5 ESTIMATED CURRENT VALUE2 ~$1.2M (4X) ~$60M (30X) ~$35M (40X) TOTAL $ INVESTED BY DAVE ~$300K ~$2M ~$850K (~300X)4 (~40X)4 (~25X)4 (acqd: INTC:, ~14X)3 Appendix - Select Historical Performance: Dave McClure

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