Building #500STRONG

Building #500STRONG

Dave McClurePalo Alto, CA - July, 2013

Building 500

• Industry Changes & Challenges• Fundraising & Team-Building• Brand & Marketing• Deal Flow & Selection• Platforms, Community, Portfolio Development• Follow-On Strategy & Downstream Investors• Investor Relations & Reporting• Scale, Scalability, Big Data for VC• Local vs Global, Valley vs US Domestic vs Intl• Feedback Loop & Metrics

Dave McClureFounding 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

500 StartupsGlobal Seed Fund & Startup Accelerator

• What is 500?– ~$70M under management– ~30 people / 10 investing partners– Locations: SV, NYC, MEX, BRZ, IND, CHN, SE Asia– 1000+ Founders / 200+ Mentors– 22 positive exits in <3 years

• 500+ Portfolio Co’s / 30+ Countries– Wildfire (acq GOOG, $350M)– MakerBot (acq SSYS, $400M)– Twilio– SendGrid – TaskRabbit– Viki– Smule– AppStack– 9GAG– MediaLets– PicCollage

500 Startups: Global Seed FundOver 100+ startups outside US, in 35+ countries

• Q4/12 added: Germany, Korea, Peru; + Russia, Turkey, Ghana in Q2/13• Priorities in 2012: Brazil, Mexico, India• Priorities In 2013: China, SE Asia, MENA, Eastern Europe

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)

Fundraising & Team-Building

• Ignorance & Inexperience• New Fund, Small Fund• Crazy Strategy, Crazy People• No Money, No History• Manufacturing a Budget• Writing, Telling, Believing, Living Your Story• Hustle & Humility

Long Journey

• East Coast -> West Coast• Geek: Engineer & Programmer• Entrepreneur: Small Startup, Small Exit• Marketing: PayPal, Simply Hired, Mint.com• Community: Blogs, Frisbee, Facebook, Twitter• Investing: Angel, Founders Fund, fbFund• 500 Startups

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

Strategy, Brand & Marketing

• FUN! IRREVERENCE! FLIP-FLOPS! Etc– don’t be boring; don’t wear khakis + blue shirt + blazer

• 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

13

Quantitative Investing before Traction

250+ companies @ $25-100K (1st check)

- Assume high failure rate (up to 80%)

Double-Down after Traction50+ ‘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

Minimum Viable Team:Hacker, Hipster, Hustler

• Hacker: engineers & developers• Hipster: design & user experience (UX)• Hustler: marketing & business, “growth hacker”

1. Build functional prototypes2. Improve UX so people convert3. 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

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

Platform(s) & Community

• Mentors: Engineering, Design, Marketing• Distribution: Search, Social, Mobile• Global: LatAm, Asia, India, EU, etc• Social: LinkedIn, Quora, Angel List• Angel List, Second Market, Trusted Insight• Dashboard.io, MatterMark

Platforms 2.0Search, Social, Mobile,

Video, Messaging

Distribution PlatformsCustomer 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

Angel* List: It Rocks.

• Startups & Investors• Activity & Metrics• Platform & APIs

• *ps – not just for Angels, or USA

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, it’s a problem)• Downstream Investor Syndicate is critical• Using Angel List to drive visibility• Global Strategies (more capital, connections)

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

Got Crunched Yet?

Source: Bullpen Capital

Before & After 2 Dot-Com CrashesDaft 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+).

Investor Relations & Reporting

• What do Investors Care About?• Returns? Dealflow? Strategy?• How / When do you report this?• Data Collection & Accuracy• LPs and Co-Investors are Community too!

Scale & Scaling VC

• Lots of Little Bets? Or a Few Big Bets?• Power Laws, Singles vs Home Runs• Focus on Network Effects• Communication Platforms• Ideal Portfolio Size vs Investment Stage

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)• Selling Into Future Rounds

Going Local, Going Global

web gets bigger -> world gets smaller

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, DeNA, Gree

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

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