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Silicon Valley 2.0: Lots of Little Bets (Hong Kong, May 2013)
1. Silicon Valley 2.0
Lots of Little Bets +
Moneyball for Startups
Dave McClure
http://500.co
(@DaveMcClure)
Hong Kong, May 2013
http://slideshare.net/dmc500hats
2. Dave McClure
Founding Partner & Chief Troublemaker, 500 Startups
00âs & 10âs:
⢠VC: Founders Fund, Facebook fbFund, 500 Startups
⢠Angel: Mashery, Mint.com, SlideShare, Twilio, WildFire, SendGrid
⢠Marketing: PayPal, Simply Hired, Mint.com, oDesk, OâReilly
80âs & 90âs:
⢠Entrepreneur: Aslan Computing (acqâd by Servinet/Panurgy)
⢠Developer: Windows / SQL DB consultant (Intel, MSFT)
⢠Engineer: Johns Hopkinsâ88, BS Eng / Applied Math
3. 500 Startups
Global Seed Fund & Startup Accelerator
⢠What is 500?
â ~$70M under management
â 25 people / 12 investing partners
â Locations: SV, NYC, MEX, BRZ, IND, CHN, SEasia
â 1000+ Founders / 200+ Mentors
⢠500+ Portfolio Coâs / 30+ Countries
â Wildfire (acq GOOG, $350M)
â Twilio
â SendGrid
â TaskRabbit
â MakerBot
â Doodle Mobile (BJ)
â ChinaNetCloud (SH)
â 9GAG (HK)
â Viki (SG)
â PicCollage (TWN)
â Cubie (TWN)
4. 500 Startups: Global Seed Fund
Over 100+ startups outside US, in 35+ countries
⢠Q4/12 added: Germany, Korea, Peru; + Russia, Israel, Turkey in Q1/13
⢠Priorities in 2012: Brazil, Mexico, India
⢠Priorities In 2013: China, SE Asia, MENA, Eastern Europe
5. Venture Capital 2.0:
Lots of Little Bets
aka âMoneyBall for Startupsâ
⢠VC Evolution: Physician, Scale Thyself (Aug 2012)
⢠MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)
6. Changes in Tech Startups
⢠LESS Capital required to build product, get to market
â Dramatically reduced $$$ on servers, software, bandwidth
â Crowdfunding, KickStarter, Angel List, Funders Club, etc
â Cheap access to online platforms for 100M+ consumers, smallbiz, etc
â A few big IPOs @ $1B+, but LOTS of small acquisitions (<$100M)
⢠MORE Customers via ONLINE platforms (100M+ users)
â Search (Google)
â Social (Facebook, Twitter, LinkedIn)
â Mobile (Apple, Android)
â Local (Yelp, Groupon, Living Social)
â Media (YouTube, Pinterest, Instagram, Tumblr)
â Comm (Email, IM/Chat, Voice, SMS, etc)
⢠LOTS of little bets: Accelerators, Angels, Angel List, Small Exits
â Y Combinator, TechStars, 500 Startups
â Funding + Co-working + Mentoring -> Design, Data, Distribution
â âFast, Cheap Failâ, network effects, quantitative + iterative investments
7. Web 2.0 + Lean Startup
1. Startup Costs = Lower.
2. # Users, Bandwidth = Bigger.
3. Transaction $$$ = Better.
ď Building Product => Cheaper, Faster, Better
ď Getting Customers => Easier, More Measurable
Iterative Product & Marketing Decisions
based on Measured User Behavior
10. 70%
Capital
10
500 Strategy: âLots of Little Betsâ*
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: âLittle Betsâ
12. Angel* List: It Rocks.
⢠Startups & Investors
⢠Activity & Metrics
⢠Platform & APIs
⢠*ps â not just for Angels, or USA
13. 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?
â Q1: cost to get a customer?
â Q2: how & when do you make money?
14. Early-Stage Startups:
Your âDue Diligenceâ Is An Illusion
(Better approach = write a quick, small check then wait ~6 moâs)
⢠Problems in Early-Stage Due Diligence:
â You Might Be Able to Detect Idiots & Liars, butâŚ
â Not much history, product, customers, or revenue (yet), soâŚ
â You probably canât figure out Winners (yet).
⢠The New Due Diligence = Incremental Achievements
â âDue Diligenceâ ď Trusted Referrals + History
â âGreat Teamâ ď Functional Prototype + Usage
â âSize of Marketâ ď Evidence = Customers, Revenue
⢠The Odds Are: They Suck, Youâre Wrong
â Youâll Be Wrong 4x out of 5x. (If U Donât Suck).
â In 6 Months, Youâll Know If They Donât Suck.
â In 1-2 Years, Youâll Know If Theyâre Awesome.
15. Bet on Singles, Not HomeRuns.
(Look for Ichiros, Not Barry Bonds)
19. Web 2.0 Business Model:
KISS (âKeep It Simple, Stupidâ)
⢠1) Re-invent Web 1.0 Businesses
â Make a Website, a Widget, an App
â Sell Stuff (Transactions, Subscriptions, Affiliate)
⢠2) add Web 2.0 Technology
â Search, Social, Mobile, Local, Media, Comm
â Google, Facebook/Twitter, Apple/Android, YouTube
â Email, SMS, Ecommerce / Payments
⢠3) Get Customers, Make Money
â Distribution, Distribution, Distribution
â (Customer Acqâstn Cost) vs. ($Rev. Per Customer)
â Low CapX + Profitable Web Businesses
20. More Acquirers (tech + non-tech);
More & Smaller Acquisitions
1. Mature Internet Platform Coâs:
â GOOG, MSFT, YHOO, EBAY, AOL, AMZN,
AAPL, INTU, ADBE, FB, TW, LNKD, GRPN
1. Non-Tech âBigCoâ / Consumer Verticals
buying tech startups (for distribution)
⢠BigCo = Lots of Customers, $$$
⢠BigCo = Bureaucracy, Innovator Dilemma
⢠Outsource Innovation; Buy Talent / Products
⢠Acquiring LOTS (Small) Startups
⢠Great for Founders, Investors ď
* Mint acquired by Intuit in
Sept 2009 for $170M
21. Lean Startup, Lean VC
Customers, Metrics, Iteration.
Invest BEFORE Traction;
Double Down AFTER.
22. The Lean Startup
⢠Progress â Features; Measure Conversion
⢠Talk to Customers; Discover Problems
⢠Focus on âProduct/Market Fitâ (good solution)
⢠Fast, Frequent Iteration (+ Feedback Loop)
⢠Keep it Simple & Actionable
23. Startup Incubators & Metrics
Lots of Little Bets. Most FAIL.
(but a few succeed :)
24. 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
25. Incubator 2.0:
Education, Collaboration, Iteration
⢠Success based on:
â MANY, small experiments
â common platforms, customers, problems & solutions
â physical proximity, open/collaborative environment
â Domain-specific mentors & expertise
â fast fail, iteration, metrics & feedback loop
⢠Incremental investment; high-risk, but high-reward
27. 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
28. 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
29. Outlier Competition +
Modeling Success Behaviors
⢠You want min 3-5 ârockstarsâ to compete
⢠Rockstars to model success for others
⢠You canât 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 donât be an ass)
30. Winners, Losers, Tweeners
⢠Winners #WIN (with or without you)
⢠Losers #LOSE (with or without you)
⢠Tweeners #TWEEN
â They might win with your help
â They might lose with your help
â Be helpful, but donât dally
â Note: you might be wrong about the losers &
tweeners, so donât be an arrogant a-hole.
31. fbFund REV
fbFund REV: Facebook âSocialâ 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 â> 5 Series A -> 3 Series B (+ 3 small exits)
⢠Wildfire Interactive acquired by GOOG for $350M (>50X) ď
32. 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 (âBuild & Validate Productâ)
⢠Seed: $100K-$1M (âTest & Grow Marketing Channelsââ)
⢠Venture: $1M-$10M (âMaximize Growth & Revenueâ)
33. Investment Stage #1:
Product Validation + Customer Usage
⢠Structure
â 1-3 founders
â $25-$100K investment
â Incubator environment: multiple peers, mentors/advisors
⢠Test Functional Prototype / âMinimum Viable Productâ (MVP):
â Prototype->Alpha, ~3-6 months
â Develop Minimal Critical Feature Set => Get to âIt Works! Someone Uses It.â
â Improve Design & Usability, Setup Conversion Metrics
â Test Small-Scale Customer Adoption (10-1000 users)
⢠Demonstrate Concept, Reduce Product Risk, Test Functional Use
⢠Develop Metrics & Filter for Possible Future Investment
34. Investment Stage #2:
Market Validation + Revenue Testing
⢠Structure
â 2-10 person team
â $100K-$1M investment
â Syndicate of Angel Investors / Small VC Funds
⢠Improve Product, Expand Customers, Test Revenue:
â Alpha->Beta, ~6-12 months
â Scale Customer Adoption => âMany People Use It, & They Pay.â
â Test Marketing Campaigns, Customer Acquisition Channels + Cost
â Test Revenue Generation, Find Profitable Customer Segments
⢠Prove Solution/Benefit, Assess Market Size
⢠Test Channel Cost, Revenue Opportunity
⢠Determine Org Structure, Key Hires
35. Investment Stage #3:
Revenue Validation + Growth
⢠Structure
â 5-25 person team
â $1M-$10M investment
â Seed & Venture Investors
⢠Make Money (or Go Big), Get to Sustainability:
â Beta->Production, 12-24 months
â Revenue / Growth => âWe Can Make (a lot of) Money!â
â Mktg Plan => Predictable Channels / Campaigns + Budget
â Scalability & Infrastructure, Customer Service & Operations
â Connect with Distribution Partners, Expand Growth
⢠Prove/Expand Market, Operationalize Business
⢠Future Milestones: Profitable/Sustainable, Exit Options
37. Global Trends
⢠Growth of Global Languages (see MyGengo.com)
â 1B+ speakers: Mandarin, English
â 300-500M+ spkrs: Spanish, Arabic
⢠Smart Device Proliferation
â mobile, tablet, TV, console, 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
⢠Dramatically Reduced Cost: Product Dev, Customer Acqstn
⢠Global Distribution Platforms
â US/EU: Apple, Facebook, AMZN, GOOG (Search, YouTube, Gmail, Android), Twitter
â Asia: Baidu, Tencent, Alibaba, Sina, NHN, Yahoo-J, Softbank, Rakuten, DeNA, Gree
38. Thanks ď
⢠Questions / More Info?
â http://500.co (our company)
â http://500hats.com (my blog)
â https://angel.co/500startups (our fund)
â Rui Ma, 500 Startups China (@MissRuiMa)
â Khailee Ng, 500 Startups SE Asia (@Khailee)
â Dave McClure, 500 Startups USA (@DaveMcClure)