Changes in Venture Capital & Building 500 Startups (Sao Paulo, Sept 2013)

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Information about Changes in Venture Capital & Building 500 Startups (Sao Paulo, Sept 2013)
Technology

Published on September 20, 2013

Author: dmc500hats

Source: slideshare.net

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slides from my talk at Brazil Innovators startup conference in Sao Paulo (Sept 2013) on changes in the venture capital industry, and how we built 500 Startups.

Changes  in  Venture  Capital  &   Building  500  Startups   @DaveMcClure   Sao  Paulo,  Brazil  -­‐  September  2013  

Building  500  Startups   •  Industry  Changes  &  Challenges   •  500  Strategy:  “Lots  of  Li/le  Bets”   •  Scale  &  Scalability,  Big  Data  for  VC   •  Feedback  Loop  &  Metrics   •  Pla4orms  &  Community   •  “The  Series  A  Crunch”   •  Local  vs.  Global  Opportuni=es  

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

Long  Journey…   •  East  Coast  -­‐>  West  Coast  (1989)   •  Geek:  Engineer  &  Programmer   •  Entrepreneur:  Small  Startup,  Small  Exit   •  Marke=ng:  PayPal,  Simply  Hired,  Mint.com   •  Community:  Blogs,  Frisbee,  Facebook,  Twi]er   •  Inves=ng:  Angel,  Founders  Fund,  ^Fund   •  500  Startups  (2010)  

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

Strategy,  Brand  &  Marke_ng   •  FUN!  IRREVERENCE!  Havaianas!  (don’t  be  boring)   •  Lots  of  Li]le  Bets,  Online  Pladorms   •  Design,  Data,  Distribu_on   •  Blogging,  Facebook,  Twi]er   •  #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 Incuba=on   Seed   Series  A   Series  B   Series  C+   Bootstrap, KickStarter, Crowdfunding

500 Startups: Global Seed Fund Over 150+ startups outside US, in 40+ countries

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)

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

Angel* List: It Rocks. •  Startups & Investors •  Activity & Metrics •  Platform & APIs •  *ps – not just for Angels, or USA

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.     Ø  Building Product => Cheaper, Faster, Better Ø  Getting Customers => Easier, More Measurable Iterative Product & Marketing Decisions based on Measured User Behavior

14   Quan=ta=ve  Inves=ng  before  Trac=on   250+  companies  @  $25-­‐100K     (1st  check)     -­‐  Assume  high  failure  rate  (up  to  80%)       Double-­‐Down  a'er  Trac=on   50+  ‘winners’  @  $100K-­‐$1M     (2nd  +  3rd  check)                                                 -­‐  -­‐  Target  10+  exits  @  $100M+         500  Strategy:  “Lots  of  Li1le  Bets”*   1)  Make  lots  of  li]le   bets  pre-­‐trac_on,   early-­‐stage  startups   2)  amer  6-­‐12  months,  iden_fy   top  20%  performers  and   double-­‐down  higher  $$$   3)  conserva_ve  model  assumes   -­‐  5-­‐10%  large  exits  @20X  ($50-­‐100M+)   -­‐  10-­‐20%  small  exits  @5X    ($5-­‐50M)   *See Peter Sims book: “Little Bets”

Scale  &  Scaling  VC   •  Lots  of  Li]le  Bets?  Or  a  Few  Big  Bets?   •  Power  Laws,  Singles  vs  Home  Runs   •  Focus  on  Network  Effects   •  Distribu_on  &  Mone_za_on   •  Communica_on  Pladorms   •  Ideal  Pordolio  Size  vs  Investment  Stage  

Deal  Flow,  Strategy  &  Selec_on   •  Lots  of  Li/le  Bets   •  Take  Lots  of  Small  Risk,  Early  &  Omen   •  Differen_a_on  &  Branding   •  Revenue  Emphasis,  Small  but  Real  Problems   •  Focus  on  Online  Pladorms   •  Hacker,  Hipster,  Hustler   •  Global  vs  Local  

Minimum Viable Team: Hacker, Hipster, Hustler •  Hacker:  engineers  &  developers   •  Hipster:  design  &  user  experience  (UX)   •  Hustler:  marke_ng  &  business,  “growth  hacker”   1.  Build  func_onal  prototypes   2.  Improve  UX  so  people  convert   3.  Scale  customer  acquisi_on  &  distribu_on  

Feedback  Loop  &  Metrics   •  Bad  decisions  =  obvious  quickly   •  Good  decisions  =  not  obvious  for  years   •  Short-­‐term  metrics:  revenue,  users,  next  round   •  Sharing  best  prac_ces  for  decisions   •  Lots  of  Li]le  Bets  helps  speed  up  learning   •  “Winners”  vs  Numeric  Returns   •  Economics  of  1st  check  vs  follow-­‐on   •  Easy  to  get  big  mul_ples  on  small  checks,  BUT   •  Larger  checks  with  smaller  mul_ples  s_ll  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

Follow-­‐On  Strategy   •  Should  we  follow-­‐on?  Why  or  Why  Not?   •  Signaling  Risk  vs  Pordolio  Returns   •  Investor  opinion  shouldn’t  ma]er  more  than   business  fundamentals  (if  so,  it’s  a  problem)   •  Downstream  Investor  Syndicate  is  cri_cal   •  Using  Angel  List  to  drive  visibility   •  Global  Strategies  (more  capital,  connec_ons)  

Pordolio  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  &  Connec_ons   •  Pladorms  &  Distribu_on   •  Downstream  Investors  &  Syndicates   •  Exits  &  Liquidity  

Pladorm(s)  &  Community   •  Mentors:  Engineering,  Design,  Marke_ng   •  Distribu=on:  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,  Ma]erMark,  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  Hos_ng   •  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   Amer  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,  Li]le,  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?  Valua_on?     •  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

Ques_ons?  Comments?  Heckles?   •  Thanks  for  Listening   •  Feedback  Appreciated   •  We’re  S_ll  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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