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Incubator 2.0

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slides from my talk on incubators/accelerators @ Startup Grind conf (Jan 2013, Mt View).

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Incubator 2.0

  1. Incubator 2.0 Let’s Hope This Time We Don’t Suck. Dave McClure http://500.co (@DaveMcClure) Mountain View, January 2013 http://slideshare.net/dmc500hats
  2. Dave McClure Founding Partner & Troublemaker, 500 Startups 00’s & 10’s: • Investor: Founders Fund, Facebook fbFund, 500 Startups • Companies: Mint.com, SlideShare, Twilio, WildFire, SendGrid • Marketing: PayPal, Simply Hired, Mint.com, O’Reilly 80’s & 90’s: • Entrepreneur: Founder/CEO Aslan Computing (acq’d) • Developer: Windows / SQL DB consultant (Intel, MSFT) • Engineer: Johns Hopkins‘88, BS Eng / Applied Math
  3. 500 Startups Global Seed Fund & Startup Accelerator • What is 500? – $50M+ under management – 20 people / 10 investing partners – Silicon Valley HQ + Incubator – SF, NY, MEX, BRZ, IND, CHN, SE Asia – 800+ Founders / 200+ Mentors – 20+ confs/events per year – Focus: Design, Data, Distribution • 400+ Portfolio Co’s / 30+ Countries – Wildfire (acq GOOG, $350M) – Twilio – SendGrid – TaskRabbit – MakerBot – 9GAG – Viki
  4. 70% Capital 4 Quantitative Investing before Traction 250+ companies @ $50K avg. (1st check) - Assume high failure rate (up to 80%) Double-Down after Traction 50+ ‘winners’ @ $100K-$1M (2nd + 3rd check) - - Target 10+ exits @ $100M+ 500 Strategy: “Lots of Little Bets”* 1) Make lots of little bets pre-traction, early-stage startups 30% Capital 2) after 6-12 months, identify top 20% performers and double-down higher $$$ 3) conservative model assumes - 5-10% large exits @20X ($50-100M+) - 10-20% small exits @5X ($5-50M) *See Peter Sims book: “Little Bets”
  5. 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
  6. Angel* List: It Rocks. • Startups & Investors • Activity & Metrics • Platform & APIs • *ps – not just for Angels, or USA
  7. Early-Stage Risk Reduction • 1st Mtg: Crazy, Idiots, Liars or Crooks? • Product: does it work? (crappy, not perfect) • Market: are people using it? (not their mom) • Revenue: will people pay for it? (just a few) • Growth: how will it/they scale? (online? offline?) • Finance: what will it cost? – Q1: cost to get a customer? – Q2: how & when do you make money?
  8. Early-Stage Startups: Your “Due Diligence” Is An Illusion (Better approach = write a quick, small check then wait ~6 mo’s) • Problems in Early-Stage Due Diligence: – You Might Be Able to Detect Idiots & Liars, but… – Not much history, product, customers, or revenue (yet), so… – You probably can’t figure out Winners (yet). • The New Due Diligence = Incremental Achievements – “Due Diligence”  Trusted Referrals + History – “Great Team”  Functional Prototype + Usage – “Size of Market”  Evidence = Customers, Revenue • The Odds Are: They Suck, You’re Wrong – You’ll Be Wrong 4x out of 5x. (If U Don’t Suck). – In 6 Months, You’ll Know If They Don’t Suck. – In 1-2 Years, You’ll Know If They’re Awesome.
  9. Startup Incubators & Metrics Lots of Little Bets. Most FAIL. (but a few succeed :)
  10. 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
  11. 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
  12. Education & Community • Mentors, Investors • Design, Data, Distribution • Platform Partners • Sponsors & Strategics • Marketing & Visibility
  13. Hacker, Hustler, Hipster • Hacker: engineers & developers • Hipster: design & UX • Hustler: marketing & business 1. Build functional prototypes 2. Improve UX so people convert 3. Scale customer acq & distribution
  14. Product, Market, Revenue • Product: assess functional use, improve design/UX • Market: test usage, distribution channels • Revenue: test cust acq cost, revenue, *timing* • Work on Pitch, Help Find Co-Investors, etc
  15. Outlier Competition + Modeling Success Behaviors • You want min 3-5 “rockstars” to compete • Rockstars to model success for others • You can’t assume >20% rockstars • Therefore, pick 5x5 = 25 teams • 3-5 rockstar teams emerge, compete, win • 5-10 *other* non-rockstars learn • Identify losers quickly (but don’t be an ass)
  16. Winners, Losers, Tweeners • Winners #WIN (with or without you) • Losers #LOSE (with or without you) • Tweeners #TWEEN – They might win with your help – They might lose with your help – Be helpful, but don’t dally – Note: you might be wrong about the losers & tweeners, so don’t be an arrogant a-hole.
  17. 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) 
  18. 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”)
  19. 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
  20. 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
  21. 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
  22. Thanks  • Want more info? Go visit: – http://500startups.com (our company) – http://500hats.com (my blog) – https://angel.co/500-startups-fund-ii (our fund)
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slides from my talk on incubators/accelerators @ Startup Grind conf (Jan 2013, Mt View).

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