Super Angel Funds:Lots of Little Bets & Accelerators

aka “MoneyBall for Startups”

• VC Evolution: Physician, Scale Thyself (Aug 2012)• MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)

Slidedeck adapted from Dave McClure - StartUp Grind (Jan 2013)

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Early-Stage Startups: “Due Diligence” Is An Illusion(Better approach = write a quick, small check then wait ~6 mo’s)

• Problems in Early-Stage Due Diligence:• You Might Be Able to Detect Idiots & Liars, but…• Not much history, product, customers, or revenue (yet), so…• You probably can’t figure out Winners (yet).

• The New Due Diligence = Incremental Achievements• “Due Diligence” = Trusted Referrals + History (Ideation)• “Great Team” = Functional Prototype + Usage (Acceleration)• “Size of Market” Evidence = Customers, Revenue (Incubation)

• The Odds Are: We’re Wrong, They Sink, • We’ll Be Wrong 4x out of 5x. (If We Don’t Suck).• In 6 Months, You’ll Know If They Don’t Stink.• In 1-2 Years, You’ll Know If They’re Awesome.

Think Different.

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 • A few big IPOs @ $1B+, but LOTS of small acquisitions (<$100M)

• MORE Customers via ONLINE platforms (100M+ users)• Search (Google)• Social (Facebook, Twitter, LinkedIn)• 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, Super Angels, Small Exits• Y Combinator, TechStars, 500 Startups, GAN• Funding + Co-working + Mentoring -> Design, Data, Distribution• “Fast, Cheap Fail”, network effects, quantitative + iterative investments

Web 2.0 + Lean Startup

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

Early-Stage Risk Reduction

• 1st Mtg: Crazy, Idiots, Liars or Crooks? • Product: does it work? (crappy, not perfect)• Market: are people using it? (not their mom)• Revenue: will people pay for it? (just a few)• Growth: how will it/they scale? (online? offline?)• Finance: what will it cost?

• Q1: cost to get a customer? • Q2: how & when do you make money?

Accelerator Criteria:

70% Capital

Quantitative Investing before Traction

100+ companies @ $15K avg. (1st check) - Assume high failure rate (up to 80%)

Double-Down after Traction20+ ‘winners’ @ $100K-$1M (2nd + 3rd check)

- - Target 2+ exits @ $100M+

Strategy: “Lots of Little Bets”*

1) Make lots of little bets pre-traction, early-stage startups

30% Capital

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”

Startup Accelerators & Metrics Lots of Little Bets. Most FAIL.(but a few succeed :)

Startup Investor Ecosystem

Angels & Incubators($0-10M)

“Micro-VC” Funds ($10-100M)

Smaller VC Funds ($100-500M)

Larger VC Funds (>$500M)

TrueFirst Round

AndreessenAtomico

Y-Combinator

TechStars

SoftTech (Clavier)

Felicis (Senkut)

SV Angel (Conway)

SequoiaGreylock

Union Square

Floodgate (Maples)

Foundry Group

Accelerator

Seed

Series A

Series B

Series C+

Bootstrap, KickStarter, Crowdfunding

500 Startups

Local Accelerator Opportunity (GAN)

Accelerator: Fast, Cheap, FAIL

• Accelerator = supportive startup ecosystem (+ angels, VCs)• Efficient use of investment capital ($0-100K)• High fail rate (60-80%) => large initial sample size

Accelerator: Education, Collaboration, Iteration

• Success based on:• MANY, small experiments• common platforms, customers, problems & solutions• physical proximity, open/collaborative environment• Domain-specific mentors & expertise• fast fail, iteration, metrics & feedback loop

• Incremental investment; high-risk, but high-reward

Provide:Education & Community• Mentors, Investors• Design, Data, Distribution• Platform Partners• Sponsors & Strategics• Marketing & Visibility

Look For:Hacker, Hustler, Hipster• Hacker: engineers & developers• Hipster: design & UX• Hustler: marketing & business

1. Build functional prototypes = (Ideation)2. Improve UX so people convert = (Acceleration)3. Scale customer acq & distribution = (Incubation)

To do 3 Things:

Process:Product, Market, Revenue• Product: assess functional use, improve

design/UX = (Ideation)• Market: test usage, distribution channels =

(Acceleration)• Revenue: test cust acq cost, revenue, *timing* =

(Incubation)

• Work on Pitch, Help Find Co-Investors, etc

The Super Angel Fund: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).

• Accelerator: $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• $10-$25K investment• Accelerator 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

Thanks

• Want more info? • Kelly Schwedland• 219-405-5723• [email protected]

• slidedeck adapted from Dave Mcclure’s StartUp Grind Mountain View, January 2013• http://slideshare.net/dmc500hats 500.co (@DaveMcClure)