Silicon Valley 2.0

“Geeks Gone Global”

Changes: Startups, Tech, VC• Venture Capital = Fewer, Smaller Funds

– Decline of Larger Funds (> $250m), except for a few HUGE ONES (>$1B)– Rise of “Super Angel” / “Micro-VC” seed funds (<$100M)– Fewer Large IPOs (>$1B), Lots of Small Acquisitions (<$250M)– Small funds typically run by Operators, not MBAs

• BIG Customer Platforms = Distribution + Monetization (not Tech)– Search (Google)– Social (Facebook, Twitter)– Mobile (Apple, Android)– Local (Groupon, Living Social)

• Incubators, Metrics = Many Small Experiments– Y Combinator, TechStars, 500 Startups– The “Lean Startup”, Design/UX, Distribution– Lots of Little Bets; Incremental Investment

70 % Fund

Capital

3

500 Strategy: Lots of Little Bets

1. Start with large, well-screened funnel of early-stage companies.

30% Fund

Capital

2. After first check / 3-6 months, identify top performers and double-down on best of them

3. Build conservative model assuming 5-10% larger exits @ > $100M, 10-20% smaller exits @ <$100M

500 Startups: “Super-Angel / Micro-VC” Fund

• Seed Fund & Startup Accelerator– $29M Fund I; $50M Fund II– 9-person team, 4 partners– 10,000 sq ft, HQ in Silicon Valley– 175+ Mentors in 10+ Countries

• Fund I Portfolio: 250 co’s– Twilio (Union Square, Bessemer)

– Wildfire (Summit)

– SendGrid (Foundry, Bessemer)

– TaskRabbit (First Round)

– MakerBot (Foundry)

– Viki (Greylock, Andreessen)

– Smule (Bessemer, Granite)

Dave McClure

00’s & 10’s:• Investor: Founders Fund, Facebook fbFund, 500 Startups• Companies: Mint.com, SlideShare, Twilio, WildFire, SendGrid• Marketing: PayPal, Simply Hired, Mint.com, O’Reilly Media• Speaker: Lean Startup, Web 2.0, Stanford/Facebook

80’s & 90’s:• Entrepreneur: Founder/CEO Aslan Computing (acq’d)• Developer: Windows / SQL DB consultant (Intel, MSFT)• Engineer: Johns Hopkins‘88, BS Eng / Applied Math

Why Micro VC? What has changed?

6

Angel Money

Venture Investor Ecosystem

Angels & Incubators($0-10M)

“Micro-VC” Funds ($10-100M)

Smaller VC Funds ($100-500M)

Larger VC Funds (>$500M)

True VenturesFirst Round

Andreessen-Horowitz

Accel Partners

Y-Combinator

TechStars

SoftTech (Clavier)

Felicis (Senkut)

SV Angel (Conway)

SequoiaGreylock

Union Square

Floodgate (Maples)

Foundry Group

Distribution PlatformsCustomer Reach: 100M+

• Search: Google (SEO/SEM)

• Social: Facebook, Twitter, Zynga, LinkedIn

• Mobile: Apple (iPhone, iPad), Android

• Local: Groupon, LivingSocial, Yelp, Google, Facebook

• Media: Video (YouTube), Blogs, Photos, Music.

• Comm: Email, IM, Chat, Phone/Voice.

Lots of Small Bets = Quantitative Approach

$ Invested Great Performers

$ Distributed

$1-5M avg exit

50

100

150

$ Millions

$25M average exit

$1-2M payback/co.

30+ companies (15%)

5-8% Ownership

High Performers5% of Portfolio

$100M of return

Ok Performers

• No heroic exit assumptions• Double-down on top 20%• Protected by Law of Large #s.

$50M into200+ companies

Solid Performers15% of Portfolio

$50M of returnGood Performers

$150M+ out50 companies

Ok Performers

$250M average exit

$5-10M payback/co.

10+ companies (5%)

1-5% Ownership

$ Invested

9

Details

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

Going Local, Going Globalweb 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: Tencent/QQ, Taobao/Alibaba/AliPay, Yahoo-J, Softbank, Rakuten, DeNA, Gree