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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)
True First Round
Andreessen Atomico
Y-Combinator
TechStars
SoftTech (Clavier)
Felicis (Senkut)
SV Angel (Conway)
Sequoia Greylock
Union Square
Floodgate (Maples)
Foundry Group
Incuba=on
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)
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
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
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+).
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