1. HACK! Osaka
Innovation Strategies for
Regional Startup Ecosystems
Dave McClure
500 Startups
Osaka, Feb 2013
http://slideshare.net/dmc500hats

2. BE. THE. NAIL!
1. BE THE NAIL THAT STICKS OUT.
1. MOVE FAST, BREAK THINGS.
1. DON’T BE AFRAID TO FAIL!
(and, tell everyone you know about it,
Including your parents and your boss)

3. This Talk Will Confuse You.
• Innovation Recipes = Creativity + FAILURE + Iteration
• Innovation Examples: Tech, Product, Process, etc
• Silicon Valley Magic: Geeks + Entrepreneurs + VCs
• Kaizen for Entrepreneurs: Little Bets + “Lean Startup”
• Kaizen for VCs: Incubators + Accelerators
• Innovation for Regional Ecosystems
• Innovation for Government & Legal Systems

4. “We Are 500.”
#500STRONG

5. Dave McClure
Founding Partner & Chief Troublemaker, 500 Startups
00’s & 10’s:
• VC: Founders Fund, Facebook fbFund, 500 Startups
• Angel: 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

6. 500 Startups
Global Seed Fund & Startup Accelerator
• What is 500?
– $60M+ under management
– 20 people / 10 investing partners
– Locations: SV, NYC, MEX, BRZ, IND, CHN, SEasia
– 1000+ Founders / 200+ Mentors
– 20+ confs/events per year
• 450+ Portfolio Co’s / 30+ Countries
– Wildfire (acq GOOG, $350M)
– Twilio
– SendGrid
– TaskRabbit
– MakerBot
– 9GAG
– Viki
– Gengo (JPN)
– PeaTix (JPN)

7. 500 Startups: Global Seed Fund
startup investments in 30+ countries
• Q4/12 added: Germany, Korea, Peru; + Russia & Turkey in Q1/13
• Priorities In 2013: SE Asia, Middle East, Eastern Europe

8. 500 Corporate Sponsors, Tech Partners, & Investors
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9. Innovation
Think Different.

10. Creativity, Failure, Iteration
• Brainstorm new ideas & approaches (crazy!)
• Try many experiments (be *fearless*)
• MOST OF THEM WILL FAIL
• But, a few will succeed
• Iteration will improve success rates
• Critical Mass, Network effects help
• “Dance Like No One Is Watching”

11. FAILURE IS NECESSARY.
IT’S A PROCESS, NOT A PROBLEM

12. Failure = CRITICAL to Innovation
• Failure not only tolerated, but ENCOURAGED
• Success = Continued Iteration of Failure
• Japan: Failure = Shame, Silence, Death
• US/SV: Failure = Growth, Education, Shared
• Celebrity Role Models for Failure
• “Fall Down 7 Times, Get Up 8” = Fail Warrior!

13. Types of Innovation + Examples
• Tech Innovation: Electricity, Semiconductors, The Internet
• Product Innovation: Cars, Planes, The iPad
• Process Innovation: Assembly Line, Kaizen, Lean Startup
• Finance Innovation: Mortgages, Derivatives, Venture Capital
• Cultural Innovation: Civil Rights, Entrepreneurship, K-Pop
• Legal Innovation: Corporations, Class Action Lawsuits, Startup Visa
• Ecosystem Innovation: Rome, London, NYC, Silicon Valley

14. Silicon Valley Innovation
Technology & The Internet
Entrepreneurs & Failure
Venture Capital & Incubators

15. Silicon Valley (R)Evolution
• 40’s: Secret History of Silicon Valley (Steve Blank)
• 50’s: Shockley / Semiconductors
• 60’s: Fairchild / Traitorous Eight
• 70’s/80’s: Intel, Apple, Microsoft
• 90’s: Netscape, Yahoo, eBay, Amazon, Cisco
• 00’s+: Google, PayPal, LinkedIn, Facebook,
Twitter, YouTube, Pinterest… what’s next?

16. Changes in Startup & VC Ecosystem
• LESS Capital required to build product, get to market
– Low cost servers, software, bandwidth -- <$100K to build product
– 20 years Internet infrastructure (Email, Web Services, Payments, etc)
– Few big IPOs, LOTS of small acquisitions (<$100M)
• MORE Customers via ONLINE platforms (100M+ users)
– Search (Google)
– Social (Facebook, Twitter, LinkedIn)
– Mobile (Apple, Android)
• LOTS of little bets: Accelerators, Startups, Small Investment
– Y Combinator, TechStars, 500 Startups
– Funding + Co-working + Mentoring -> Design, Data, Distribution
– “Little Bets” = quantitative, scalable, iterative investment

17. Platform Innovation
Search, Social, Mobile

18. Platform Viability
Successful Platforms
have 3 Things: Features
Features
1) Features
2) Users
3) Money
Growth Profit
Nirvana
..
Profitable
Users
Users ..
Growth Money
Money

19. Distribution Platforms
Customer Reach: 100M+
• Search: Google, Baidu, Yahoo/Bing, Yandex
• Social/Games: Facebook, Twitter, LinkedIn, TenCent/QQ
• Mobile: Apple (iOS), Android
• Local: Yelp, Groupon, LivingSocial, FourSquare
• Media: Video (YouTube), Blogs (Tumblr), Photos (Pinterest)
• Comm: SMS, IM, Skype, Phone/Voice, etc

20. Startup Investor Ecosystem
Bootstrap, KickStarter,
Crowdfunding
Y-Combinator
Angels &
TechStars Incubators
($0-10M)
SV Angel (Conway)
SoftTech (Clavier)
“Micro-VC” Funds
Floodgate (Maples) ($10-100M)
Felicis (Senkut)
First Round True
Smaller VC Funds
Union Square ($100-300M)
Foundry Group
Atomico Andreessen
Larger VC Funds
(>$300M)
Greylock Sequoia

21. Angel* List: It Rocks.
• Startups & Investors
• Activity & Metrics
• Platform & APIs
• Customers & Corporates
• *ps – not just for Angels, or USA

22. Little Bets + Lean Startup
Kaizen for Tech Entrepreneurship

23. Big Data. Little Bets.

24. Entrepreneurship Innovation
• The Lean Startup (Kaizen!)
• Customer Development
• “MVP” = Minimum Viable Product
• Little Bets + Continuous Iteration
• Internet Marketing & Distribution Platforms
• Revenue-focused Businesses
• Incubators & Accelerators
• Angel List = http://Angel.co

25. The Lean Startup
Customers, Metrics, Iteration.

26. The Lean Startup
• Progress ≠ Features; Measure Conversion
• Talk to Customers; Discover Problems
• Focus on “Product/Market Fit” (good solution)
• Fast, Frequent Iteration (+ Feedback Loop)
• Keep it Simple & Actionable

27. MoneyBall 4 Startups
http://slideshare.net/paulsingh/
moneyball-a-quantitative-approach-to-angel-investing-austin-tx-aug-2012
1. Make Lots Of Little Bets
2. Count Cards (Metrics)
3. Double Down on Winners

28. “Lots of Little Bets”*
1) Make lots of little 30%
bets pre-traction, Capital
early-stage startups
2) after 6-12 months, identify 70%
top 20% performers and Capital
double-down higher $$$
3) conservative model assumes
-5-10% large exits @20X ($50-100M+)
-10-20% small exits @5X ($5-50M)
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*See Peter Sims book: “Little Bets”

29. Bet on Singles, Not HomeRuns.
(Look for Ichiros, Not Barry Bonds)

30. 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”)
• VC Evolution: Physician, Scale Thyself (Aug 2012)
• MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)

31. 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

32. 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

33. 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

34. Startup Incubators
Lots of Little Bets. Most FAIL.
(but a few succeed :)

35. Incubator 2.0: Fast, Cheap, FAIL
• Incubators = supportive startup ecosystem (+ angels, VCs)
• Efficient use of investment capital ($0-100K)
• High fail rate (60-80%) => large initial sample size

36. Incubator 2.0:
Education, Collaboration, Iteration
• Success based on:
– MANY, small experiments
– common platforms, customers, problems & solutions
– physical proximity, open/collaborative environment
– Domain-specific mentors & expertise
– fast fail, iteration, metrics & feedback loop
• Incremental investment; high-risk, but high-reward

37. Resources Accelerators Can Provide
global networks,
mentors and staff
training and space
portfolio companies
conferences & events
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38. Incubator Innovation
• Vertically-Focused Incubators:
– Facebook: fbFund
– Nike: Sensors / Wearables
– Rock Health: Digital Healthcare
– Digital Media: Turner Media, NY Times
• Investing & Partnering with Incubators
– Startup Communities, Conferences, Events
– Entrepreneurs, Hackers, Mentors
– Hackathons, Contests, Demo Days

39. fbFund REV
fbFund REV: Facebook “Social” Incubator: invest in startups, apps,
websites based on Facebook platform & Facebook Connect.
• 22 startups @ ~$35K each (< $1M total)
• 3 month program: Technology, Design, Marketing, Business topics
• Success: 8 startups raised $500K –> 5 Series A -> 3 Series B (+ 3 small exits)
• Wildfire Interactive acquired by GOOG for $350M (>50X) 

40. Regional Innovation
Rome
London
Silicon Valley

41. Regional Innovation
• Silicon Valley in 50s: The Secret History
• NYC (after 2008 Financial Crisis)
• Boulder, CO
• Startup Chile
• Singapore
• …
• Osaka?

42. Government & Legal
Innovation
Break DOWN Legal Barriers!
Break THRU Bureacracy!
Open UP Immigration!
Breakthrough Innovation!

43. Govt / Legal Innovation
• Government Incentives for Innovation
• Immigration Incentives
• Personal Bankruptcy / Public Guarantors?
• Startup Visa for Japan?
• Tax & Research Credits
• Ecosystems & Infrastructure

44. Thanks 
• For more info visit:
– http://500.co (our company)
– http://500hats.com (my blog)
– https://angel.co/500-startups-fund-ii (our fund)