Published on February 19, 2014
Changes in Venture Capital + Building 500 Startups Ecosystem @DaveMcClure - 500 Startups Jakarta, Indonesia - Feb 2014
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
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
This Talk • What is 500 Startups? !4
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
500 Startups: Global Seed Fund Over 200+ startups outside US, in 40+ countries
This Talk • What is 500 Startups? • Changes in Tech + Venture Capital !8
Daft Punk Lean Startup: Simpler, Faster, Cheaper, Smarter ! 1. 2. # Users, Bandwidth = Bigger. 3. ! ! Startup Costs = Lower. Transaction $$$ = Better. ! ➢ Building Product => Cheaper, Faster, Better ➢ Getting Customers => Easier, More Measurable ! Iterative Product & Marketing Decisions based on Measured User Behavior
Changes in Tech + VC • LESS Capital required to build product, get to market – Dramatically reduced $$$ 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
Platforms 2.0 Search, Social, Mobile, Video, Messaging
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
Got Crunched Yet? Source: Bullpen Capital
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+).
Angel* List: It Rocks. • • • • • Startups & Investors Syndicates & Backers Activity & Metrics Jobs & Talent Platform & APIs !
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
This Talk • What is 500 Startups? • Changes in Tech + Venture Capital • “The Lean VC” !17
Lots of Little Bets aka “MoneyBall for Startups” • • VC Evolution: Physician, Scale Thyself (Aug 2012) MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)
500 Strategy: “Lots of Little Bets”* !19 *See Peter Sims book: “Little Bets”
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
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”)
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
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
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
This Talk • What is 500 Startups? • Changes in Tech + Venture Capital • “The Lean VC” • Growing 500: #500STRONG !25
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 • • • • •
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
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
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)
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
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
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
This Talk • What is 500 Startups? • Changes in Tech + Venture Capital • Growing 500 + “The Lean VC” • GLOBAL Entrepreneurship !33
Going Local, Going Global web gets bigger -> world gets smaller
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)
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
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
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
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