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Changes in Tech Startups& Venture Capital
@DaveMcClure#GOAP Istanbul
Nov 2013
This Talk…
• Industry Changes: Daft Punk Lean Startup• Myth Busting + Deconstructing: The Series A Crunch• 500 Strategy: Lots of Little Bets• Venture Metrics: The Lean VC• Scalable Distribution: Platforms & Community• Startup Geography: Local vs. Global
Dave McClureFounding 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 StartupsGlobal Seed Fund & Startup Accelerator
• What is 500?– $75M 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 – Credit Karma– VivaReal– Udemy– Zozi– The RealReal– Virool– Visually– Gengo– PicCollage– 9GAG– ParlakBirGelecek
500 Startups: Global Seed FundOver 150+ startups outside US, in 40+ countries
Startup Investor Ecosystem
Angels & Incubators($0-10M)
“Micro-VC” Funds ($10-100M)
“Big” VC Funds ($100-500M)
“Mega” VC Funds (>$500M)
TrueFirst Round
A16ZAtomico
Y-Combinator
TechStars
SoftTech (Clavier)
Felicis (Senkut)
SV Angel (Conway)
SequoiaGreylock
Union Square
Floodgate (Maples)
Foundry
Incubation
Seed
Series A
Series B
Series C+
Bootstrap, KickStarter, Crowdfunding
Changes in Tech Startups• LESS Capital required to build product, get to market
– Dramatically reduced $$$ on servers, software, bandwidth– Crowdfunding, KickStarter, Angel List, Funders Club, etc– Cheap access to online platforms for 100M+ consumers, smallbiz, etc
• MORE Customers via ONLINE platforms (100M+ users)– Search (Google)– Social (Facebook, Twitter)– Mobile (Apple, Android)– Local (Yelp, Groupon, FourSquare)– Media (YouTube, Pinterest, Instagram, Tumblr)– Comm (Email, IM/Chat, Voice, SMS, etc)
• LOTS of little bets: Accelerators, Angels, Angel List, Small Exits– Y Combinator, TechStars, 500 Startups– Funding + Co-working + Mentoring -> Design, Data, Distribution– “Fast, Cheap Fail”, network effects, quantitative + iterative investments
Industry Changes• Startup Efficiency, Reduced Capital Costs• Growing Market, Growing Platforms• VC Industry Upheavals (2000, 2008)• Super Angel -> Micro VC: Seed Funds (ex: First Round)• Incubators & Accelerators (ex: Y Combinator)• Big VC (ex: A16Z) & Platforms (ex: Angel List)
more info see: http://PreMoney.co
Daft Punk Lean Startup:Simpler, Faster, Cheaper, Smarter
1. Startup Costs = Lower.2. # Users, Bandwidth = Bigger.3. Transaction $$$ = Better.
Building Product => Cheaper, Faster, Better Getting Customers => Easier, More Measurable
Iterative Product & Marketing Decisions based on Measured User Behavior
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
Series A Crunch: Good or Bad?
Series A rqmts: $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+).
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)
13
Quantitative Investing before Traction250+ 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”
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
Platforms + Distribution
• 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 2.0Search, 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
Going Local, Going Global
web gets bigger -> world gets smaller
Local vs Global?
• Emerging / Developing Markets• Global Languages: English, Chinese, Spanish, Arabic• Critical Factors: Education, Mentorship, Capital• Capital Availability: Incubation, Seed, Series A• Positive Macro: Payments, Logistics, Mobile/Web
Penetration, Growing Middle Class, Distribution
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, home, 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• Dramatically Reduced Cost: Product Dev, Customer Acqstn• Global Distribution Platforms
– US/EU: AAPL, FB, AMZN, GOOG (Search, YouTube, Gmail, Android), TWTR– Asia: Baidu, Tencent, Alibaba, Sina, NHN, Yahoo-J, Softbank, Rakuten, DeNA, Gree
Questions? Comments?
• Thanks for Listening• Feedback Appreciated
• More Info? – http://500.co (our company)– http://500hats.com (my blog)– https://angel.co/500startups (our fund)– Dave McClure, @DaveMcClure