Published on September 25, 2013
Changes in Venture Capital + Building 500 Startups @DaveMcClure Istanbul, Turkey September 2013
This Talk is About… • Industry Changes: “Daft Punk Startup” • 500 Strategy: “Lots of Little Bets” • Venture Metrics: “The Lean VC” • Scalable Distribution: “Platforms & Community” • Myth Busting + Deconstructing: “The Series A Crunch” • Startup Demography: Local vs. Global vs. Valley
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 • 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
500 Startups Global Seed Fund & Startup Accelerator • What is 500? – ~$80M under management – ~30 people / 10 investing partners – Locations: SV, NYC, MEX, BRZ, IND, CHN, SE Asia – 1000+ Founders / 200+ Mentors – 25+ positive exits in ~3 years • 500+ Portfolio Co’s / 40+ Countries – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Twilio – SendGrid – TaskRabbit – VivaReal – AppStack – 9GAG – PicCollage
500 Startups: Global Seed Fund Over 150+ startups outside US, in 40+ countries
Strategy, Brand & Marketing • FUN! IRREVERENCE! Flip-Flops! (don’t be boring) • Lots of Little Bets, Online Platforms • Design, Data, Distribution • Blogging, Facebook, Twitter • #500STRONG: for Geeks, by Geeks • Seed Fund vs Accelerator • Community: from Silicon Valley to the World • Conferences & Events • GeeksOnaPlane.com
Startup Investor Ecosystem Angels & Incubators ($0-10M) “Micro-VC” Funds ($10-100M) “Big” VC Funds ($100-500M) “Mega” VC Funds (>$500M) TrueFirst Round AndreessenAtomico Y-Combinator TechStars SoftTech (Clavier) Felicis (Senkut) SV Angel (Conway) SequoiaGreylock Union Square Floodgate (Maples) Foundry Group Incubation Seed Series A Series B Series C+ Bootstrap, KickStarter, Crowdfunding
Silicon Valley 2.0: Lots of Little Bets aka “MoneyBall for Startups” • VC Evolution: Physician, Scale Thyself (Aug 2012) • MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)
Angel* List: It Rocks. • Startups & Investors • Activity & Metrics • Platform & APIs • *ps – not just for Angels, or USA
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
Changes in Tech Startups • LESS Capital required to build product, get to market – Dramatically reduced $$$ on servers, software, bandwidth – Crowdfunding, KickStarter, Angel List, Funders Club, etc – Cheap access to online platforms for 100M+ consumers, smallbiz, etc • MORE Customers via ONLINE platforms (100M+ users) – Search (Google) – Social (Facebook, Twitter) – Mobile (Apple, Android) – Local (Yelp, Groupon, Living Social) – Media (YouTube, Pinterest, Instagram, Tumblr) – Comm (Email, IM/Chat, Voice, SMS, etc) • LOTS of little bets: Accelerators, Angels, Angel List, Small Exits – Y Combinator, TechStars, 500 Startups – Funding + Co-working + Mentoring -> Design, Data, Distribution – “Fast, Cheap Fail”, network effects, quantitative + iterative investments
Daft Punk Lean Startup: Simpler, Faster, Cheaper, Smarter 1. Startup Costs = Lower. 2. # Users, Bandwidth = Bigger. 3. Transaction $$$ = Better. Building Product => Cheaper, Faster, Better Getting Customers => Easier, More Measurable Iterative Product & Marketing Decisions based on Measured User Behavior
13 Quantitative Investing before Traction 250+ companies @ $25-100K (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 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”
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
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
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
Scale & Scaling VC • Lots of Little Bets? Or a Few Big Bets? • Power Laws, Singles vs Home Runs • Focus on Network Effects • Distribution & Monetization • Communication Platforms • Ideal Portfolio Size vs Investment Stage
Platform(s) & Community • Mentors: Engineering, Design, Marketing • Distribution: Search, Social, Mobile, Video, Local • Global: LatAm, Asia, India, EU, ME, Africa • Social: LinkedIn, Quora, Angel List • Angel List, Second Market, Trusted Insight • Dashboard.io, MatterMark, Funders Club
Platforms 2.0 Search, Social, Mobile, Video, Messaging
Distribution Platforms Customer Reach: 100M-1B+ • Search: Google, Baidu, Yahoo/Bing, Yandex • Social: Facebook, Twitter, LinkedIn, TenCent/QQ, WeChat • Mobile: Apple (iOS), Android • Media: Video (YouTube), Photos (Instagram, Pinterest), Blogs • Comm: SMS, IM (WeChat, WhatsApp), Skype, Phone/Voice, etc
Got Crunched Yet? Source: Bullpen Capital
Before & After 2 Dot-Com Crashes Daft Punk 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
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 • Overall, founders / market getting smarter • More focus on customers, problems, revenue • Many die, some survive (1-5x), a few thrive (20x+).
Going Local, Going Global web gets bigger -> world gets smaller
Local vs Global? • The Valley is Unique… (sort of) • Emerging / Developing Markets • Too Soon? Too Late? Valuation? • English, Chinese, Spanish, Arabic • Investor Ecosystems • Mentorship & Community • Limited History of Exits & IPOs • 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, auto, 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, Logistics, Delivery • Dramatically Reduced Cost: Product Dev, Customer Acqstn • Global Distribution Platforms – US: AAPL, FB, AMZN, GOOG (Search, YouTube, Gmail, Android), LNKD, Twitter – Asia: Baidu, Tencent/WeChat, Alibaba, Sina/Weibo, NHN, Softbank, Rakuten
Questions? Comments? Heckles? • Thanks for Listening • Feedback Appreciated • We’re Still Learning • More Info? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund) – Dave McClure, @DaveMcClure
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