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Building Startup Ecosystems (Berlin, June 2015)
1. Investing in Tech Startups &
Building Startup Ecosystems
Make Lots of Little Bets.
Expect Most to Fail.
@DaveMcClure
@500Startups http://500.co
#iBridge Berlin, June 2015
2. [ This Talk ]
⢠Changes in Building Technology Startups
⢠Changes in Venture Capital Investing
⢠Building Startup Ecosystems
3. Dave McClureâ¨
Founding Partner & Chief Troublemaker, 500 Startups
00âs & 10âs:
⢠VC: Founders Fund, Facebook fbFund, 500 Startups
⢠Angel: Mashery, Mint.com, SlideShare, Twilio, Wildfire, SendGrid
⢠Marketing: PayPal, Simply Hired, Mint.com, OâReilly
80âs & 90âs:
⢠Entrepreneur: Aslan Computing (acqâd by Servinet/Panurgy)
⢠Developer: Windows / SQL DB consultant (Intel, MSFT)
⢠Engineer: Johns Hopkinsâ88, BS Eng / Applied Math
4. ⢠What is 500?
â $175M silicon valley VC fund + startup accelerator
â 50 people / 20 investing partners / 12 countries / 20+ languages
â Locations: SV/SF, MEX, BRZ, IND, CHN/TWN, KOR, SE Asia, UK, MENA
â 2000+ Founders / 200+ Mentors
â Community + Content + Conferences
⢠~1000+ Portfolio Coâs / 50+ Countries
â Wildfire (acq GOOG, $350M)
â MakerBot (acq SSYS, $400M)
â Viki (acq Rakuten, $200M)
â Simple (acq BBVA, $117M)
â Sunrise (acq MSFT, $100M)
â Credit Karma
â Twilio
â SendGrid
â Udemy
â TheRealReal
â Barkbox
â Intercom
â TalkDesk
500 Startupsâ¨
Global Seed Fund & Startup Accelerator
5. [ This Talk ]
⢠Changes in Building Technology Startups
⢠Changes in Venture Capital Investing
⢠Building Startup Ecosystems
6. Before & After 2 Dot-Com Crashesâ¨
LEAN Startup: Simpler, Faster, Cheaper, Smarter
Before 2000
âBig, Fat, Dinosaur Startupâ
⢠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
After 2008
âLean, Little, Cockroach Startupâ
⢠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
7. Changes in Tech Startups
⢠LESS Capital required to build product, get to market
â Dramatically reduced cost for servers, software, bandwidth
â Funding Platforms: KickStarter, Angel List, Funders Club, etc
â Access to online platforms for 100M-1B+ consumers, smallbiz, etc
⢠MORE Customers via ONLINE platforms (100M+ users)
â Search (Google, Baidu)
â Social (Facebook, Twitter, LinkedIn)
â Mobile (Apple, Android)
â E-Commerce (Amazon, Ebay/PayPal, Alibaba)
â Media (YouTube, Pinterest, Instagram)
â Comm/Msgs (WeChat/WhatsApp, Email, Voice, SMS, etc)
⢠LOTS of little bets: Accelerators, Angels, Angel List, Small Exits
â Capital + Co-working + Mentoring -> Design, Data, Distribution
â âFast, Cheap Failâ, network effects, quantitative + iterative investments
13. Investor Education
⢠Startups are NOT Real Estate
⢠Most Startups Fail / Power Law Returns
⢠Portfolio Approach (20+ investments)
⢠Legal Structure, Financial Structure
⢠Syndication + Co-Investment
⢠Access to Downstream Capital
⢠Exits & Liquidity
13
14. 500 Strategy: Lots of Little Bets*
1) make lots of little
bets on pre-traction,
early-stage startups
3) wait 3-10 years for returns:
-10-20% small exits @1-5X ($5-25M+)
-5-10% larger exits @5-20X ($25-250M+)
-1-2% unicorns @20-50X+ ($250M-1B+)
*See Peter Sims book: âLittle Betsâ
2) over the next 2 years,
double-down on top 20%
15. The Lean Investor
Make lots of little bets:
⢠Start with many small âexperimentsâ
⢠Filter out failures + small wins
⢠Double-down on stuff that looks like itâs working
⢠Incubation: $0-100K (âBuild & Validate Productâ)
⢠Seed: $100K-$1M (âTest & Grow Marketing Channelsââ)
⢠Venture: $1M-$10M (âMaximize Growth & Revenueâ)
17. Investment Stage #1: â¨
Product Validation + Customer Usage
⢠Structure
â 1-3 founders
â $25-$100K investment
â Incubator environment: multiple peers, mentors/advisors
⢠Test Functional Prototype / âMinimum Viable Productâ (MVP):
â Prototype->Alpha, ~3-6 months
â Develop Minimal Critical Feature Set => Get to âIt Works! Someone Uses It.â
â Improve Design & Usability, Setup Conversion Metrics
â Test Small-Scale Customer Adoption (10-1000 users)
⢠Demonstrate Concept, Reduce Product Risk, Test Functional Use
⢠Develop Metrics & Filter for Possible Future Investment
18. Investment Stage #2: â¨
Market Validation + Revenue Testing
⢠Structure
â 2-10 person team
â $100K-$1M investment
â Syndicate of Angel Investors / Small VC Funds
⢠Improve Product, Expand Customers, Test Revenue:
â Alpha->Beta, ~6-12 months
â Scale Customer Adoption => âMany People Use It, & They Pay.â
â Test Marketing Campaigns, Customer Acquisition Channels + Cost
â Test Revenue / Unit Economics, Find Profitable Customer Segments
⢠Prove Solution/Benefit, Assess Market Size
⢠Test Channel Cost, Unit Economics, Revenue Opportunity
⢠Determine Org Structure, Key Hires
19. Investment Stage #3: â¨
Revenue Validation + Growth
⢠Structure
â 5-25 person team
â $1M-$10M investment
â Seed & Venture Investors
⢠Make Money (or Go Big), Get to Sustainability:
â Beta->Production, 12-24 months
â Revenue / Growth => âWe Can Make (a lot of) Money!â
â Mktg Plan => Predictable Channels / Campaigns + Budget
â Scalability & Infrastructure, Customer Service & Operations
â Connect with Distribution Partners, Expand Growth
⢠Prove/Expand Market, Operationalize Business
⢠Future Milestones: Profitable/Sustainable, Exit Options
20. The Flat, The Elbow, The Wall
⢠Invest @ âThe Flatâ
when prices are low
⢠Double-down if/when you
detect âThe Elbowâ (if
valuation isnât crazy)
⢠consider investing up
âThe Wallâ if you have
capital â but if valuation
is expensive, note you
may not be able to buy
meaningful ownership
relative to existing.
Time
Good Things
Happening Startup 3 (winner)
Startup 1 (loss)
Startup 2 (survive)
âThe Flatâ
âThe Elbowâ
âThe Wallâ
1
2
3
3
21. [ This Talk ]
⢠Changes in Building Technology Startups
⢠Changes in Venture Capital Investing
⢠Building Startup Ecosystems