This document provides an overview of a talk given by Dave McClure, the Founding Partner and Chief Troublemaker of 500 Startups. The talk discusses what 500 Startups is, changes in technology and venture capital, the concept of "The Lean VC" which involves making lots of small bets on startups, and building the 500 Startups ecosystem globally. It also outlines 500 Startups' investment stages and approach to deal flow, portfolio development, follow-on strategy, and using feedback loops and metrics.

1. Changes in Venture Capital +
Building 500 Startups Ecosystem
@DaveMcClure - 500 Startups
Jakarta, Indonesia - Feb 2014

2. This Talk
• What is 500 Startups?
• Changes in Tech + Venture Capital
• “The Lean VC”: Quantitative Approach to VC
• Building 500 Startups: #500STRONG
• Global Entrepreneurship
• Q&A
!2

3. Dave McClure
Founding Partner & Chief Troublemaker, 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, oDesk, 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?
!4

5. 500 Startups
Global Seed Fund & Startup Accelerator
• What is 500 Startups?
– ~$100M under mgmt, ~$8M annual budget
– seed fund + accelerator (SF, MV, MXC)
– 30 team members (12 investing partners)
– SV, SF, NYC, MEX, BRZ, IND, CHN, SE Asia
– 1000+ Founders / 200+ Mentors
– Conferences, Community, Geeks on a Plane!
!
• 675+ Portfolio Co’s / 40+ Countries
– Wildfire (acq GOOG, $350M)
– MakerBot (acq SSYS, $400M)
– Viki (acq Rakuten, $200M)
– Twilio
– SendGrid
– Credit Karma
– Udemy
– Zozi
– ElaCarte
– Virool

6. !6

7. 500 Startups: Global Seed Fund
Over 200+ startups outside US, in 40+ countries

8. This Talk
• What is 500 Startups?
• Changes in Tech + Venture Capital
!8

9. Daft Punk Lean Startup:
Simpler, Faster, Cheaper, Smarter
!
1.
2.
# Users, Bandwidth = Bigger.
3.
!
!
Startup Costs = Lower.
Transaction $$$ = Better.
!
➢
Building Product => Cheaper, Faster, Better
➢
Getting Customers => Easier, More Measurable
!
Iterative Product & Marketing Decisions
based on Measured User Behavior

10. Changes in Tech + VC
•
LESS Capital required to build product, get to market
– Dramatically reduced $$$ on servers, software, bandwidth
– Funding Platforms: KickStarter, Angel List, Funders Club, etc
– Cheap access to online platforms for 100M+ consumers, smallbiz, etc
!
•
MORE Customers via ONLINE platforms (100M-1B+ users)
– Search (Google)
– Social (Facebook, Twitter, LinkedIn)
– Mobile (Apple, Android)
– Local (Yelp, Groupon, Living Social -> FB, GOOG, TWTR)
– Media (YouTube, Pinterest, Instagram, Tumblr)
– Comm (Email, WeChat/WhatsApp/Line/IM/Chat, Voice, SMS, etc)
!
•
LOTS of little bets: Accelerators, Angels, Angel List, Small Exits
– Y Combinator, TechStars, 500 Startups
– Capital + Co-working + Mentoring -> Design, Data, Distribution
– “Fast, Cheap Fail”, network effects, quantitative + iterative investments

11. Platforms 2.0
Search, Social, Mobile,
Video, Messaging

12. Before & After 2 Dot-Com Crashes
Daft Punk Lean Startup: Simpler, Faster, Cheaper, Smarter
Before 2000
• 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
• Big, Fat, Dinosaur Startup
After 2008
• 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
• Lean, Little, Cockroach Startup

13. Got Crunched Yet?
Source: Bullpen Capital

14. Crunch Good? Crunch Bad?
• Series A bar higher:
• $1M revenue, 1M active users, 10M downloads, 100% YoY growth
• Lots of Incubation / Seed startups will “FAIL”
!
• BUT: Fail Budget = $50-$500K, not $5M+
• Many “failed” startups = ramen-profitable, small acquisition
• … *or* MBA alternative (<$100K)
• Series A/B VCs have LOTS to choose from (not bad)
!
• Overall, founders / market getting smarter
• More focus on customers, problems, revenue
• Many die, some survive (1-5x), some thrive (20x+).

15. Angel* List: It Rocks.
•
•
•
•
•
Startups & Investors
Syndicates & Backers
Activity & Metrics
Jobs & Talent
Platform & APIs
!

16. Industry Changes, Challenges
• SW Startup Efficiency, Reduced CapX Costs
• Growing Market, Growing Platforms
• VC Industry Upheavals (2000, 2008)
• Super Angel -> Micro VC: Seed Funds (ex: FRC)
• Incubators & Accelerators (ex: Y Combinator)
• Big VC (ex: A16Z) & Platforms (ex: Angel List)
• http://PreMoney.co

17. This Talk
• What is 500 Startups?
• Changes in Tech + Venture Capital
• “The Lean VC”
!17

18. Lots of Little Bets
aka “MoneyBall for Startups”
•
•
VC Evolution: Physician, Scale Thyself (Aug 2012)
MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)

19. 500 Strategy: “Lots of Little Bets”*
!19
*See Peter Sims book: “Little Bets”

20. Minimum Viable Team:
Hacker, Hipster, Hustler
• Hacker: engineers & developers
• Hipster: design & user experience (UX)
• Hustler: marketing & business, “growth hacker”
!
1. Build functional prototypes
2. Improve UX so people convert
3. Scale customer acquisition & distribution

21. 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”)

22. 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

23. 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

24. 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

25. This Talk
• What is 500 Startups?
• Changes in Tech + Venture Capital
• “The Lean VC”
• Growing 500: #500STRONG
!25

26. Strategy, Brand, Marketing
Lots of Little Bets, Online Platforms
Design, Data, Distribution
Blogging, Facebook, Twitter
#500STRONG: for Geeks, by Geeks
Seed Fund vs Accelerator
!
• FUN: don’t be boring (t-shirts + flip-flops)
• Community: from Silicon Valley to the World
• Conferences & Events + GeeksOnaPlane.com
•
•
•
•
•

27. Deal Flow, Strategy & Selection
• Lots of Little Bets
• Take Lots of Small Risk, Early & Often
• Differentiation & Branding
• Revenue Emphasis, Small but Real Problems
• Focus on Online Platforms
• Hacker, Hipster, Hustler
• Global vs Local

28. Portfolio Development
• How do we help? How can we help?
• Importance of (trying to be) Helpful
• Board seats or not? Useful to VC, not founders
• Product, Market, Revenue
• Mentorship & Connections
• Platforms & Distribution
• Downstream Investors & Syndicates

29. Follow-On Strategy
• Should we follow-on? Why or Why Not?
• Signaling Risk vs Portfolio Returns
• Investor opinion shouldn’t matter more than business
fundamentals (if so, that’s a problem)
• Downstream Investor Syndicate is critical
• Using Angel List to drive visibility
• Global Strategies (more capital, connections)

30. Feedback Loop & Metrics
• Bad decisions = obvious quickly
• Good decisions = not obvious for years
• Short-term metrics: revenue, users, next round
!
• Sharing best practices for decisions
• Lots of Little Bets helps speed up learning
• “Winners” vs Numeric Returns
• Economics of 1st check vs follow-on
• Easy to get big multiples on small checks, BUT
• Larger checks with smaller multiples still good

31. Scaling VC
• Lots of Little Bets? Or a Few Big Bets?
• Power Laws, Singles vs Home Runs
• Focus on Network Effects
• Communication Platforms
• Portfolio Size vs Investment Stage
• Recruiting Thousands of VCs

32. Example Startup Ecosystem
• 1,000 Bootstrap Startups ($0)
• 300 Accelerator Startups ($10-50K)
• 100 Seed-Funded Startups ($250K-$1M)
• 30 Series A Startups ($2-5M)
• 10 Series B Startups ($5-20M)
• 5 Series C Startups ($20-50M)
• 1-3 IPOs ($50-250M)
!32

33. This Talk
• What is 500 Startups?
• Changes in Tech + Venture Capital
• Growing 500 + “The Lean VC”
• GLOBAL Entrepreneurship
!33

34. Going Local, Going Global
web gets bigger -> world gets smaller

35. Local vs Global?
• “Silicon Valley is Unique” — NOT TRUE.
• *we had a 50-70 year head start… ROW will catch up.
• Emerging / Developing Markets: 3-5B+
• English, Chinese, Spanish, Arabic
!
• Challenges: Payments, Mobile/Web, Logistics
• Challenges: Capital, Mentorship, Exits
!
• Investor Ecosystems, Mentorship & Community
• Does the Future look different? (yes, we hope)

36. Global Trends
• Growth of Global Languages (see MyGengo.com)
– 1B+ speakers: Mandarin, English
– 300-500M+ spkrs: Spanish, Arabic
• Smart Device Proliferation
– 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
– US/EU: Apple, Facebook, AMZN, GOOG (Search, YouTube, Gmail, Android), Twitter
– Asia: Baidu, Tencent, Alibaba, Sina, NHN, Yahoo-J, Softbank, Rakuten, Yandex, Mail.RU

37. Questions? Comments? Heckles?
• Thanks for Listening
• Feedback Appreciated
• We are Hiring + Internships
!
• More Info?
– http://500.co (our company)
– http://500hats.com (my blog)
– https://angel.co/500startups (our fund)
– Dave McClure, @DaveMcClure

38. How Big is MicroVC / Seed Stage Market?
5,000 microVCs invest 100,000 startups/yr @ $500K/startup = $50B/yr
How many people are entrepreneurs? How many startups get started every year?
• ~1% of Humanity is “Entrepreneurial” (def’n: “can create a $10M rev/yr business”)
• 1% x 7B ppl = 70M entrepreneurs, each of which starts 1-5 businesses lifetime
• 1-5 startups / 75 yrs avg life = (~1 startup/25 yrs) * 70M = ~3M startups per year
!
How much capital is needed globally to get seed stage startups rolling?
• Assume 1M-3M startups/yr x $50K-$500K funding/each
• Low: 1M x $50K = $50B/yr (*this is the LOW end estimate)
• High: 5M x $500K = $2.5T/yr (that’s “T” as in “Trillion”…)
!
How many metros? How many investors / metro? How many startups / metro?
• 1 microVC can do 10-20 startups/yr * $50K-$500K = $500K-$10M/yr budget
• 100-500 global metros @ >1-2M ppl can generate ~500-2,000 startups / metro / yr
• guesstimate = ~100K-200K startups/yr in top 200 global metros
• 10-50 micro VCs / metro * 200 metros = 2,000-10,000 microVCs globally
• EST: 5,000 microVCs can deploy $5M/yr each, or $50B/yr in ~100,000 startups !38