slides from my talk on Changes in Venture Capital, #ABAF conf (Mumbai, Nov 2013)

1. Changes
in
Tech
Startups
&
Venture
Capital
@DaveMcClure
#ABAF
Mumbai
Nov
2013

2. This
Talk…
•
•
•
•
•
•
Industry
Changes:
Da$
Punk
Lean
Startup
Myth
BusJng:
The
Series
A
Crunch
500
Strategy:
Lots
of
Li8le
Bets
Venture
Metrics:
The
Lean
VC
Scalable
PlaMorms:
Marke=ng
&
Distribu=on
Demography=Geography:
Local
vs.
Global
Startups

3. 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

4. 500 Startups
Global Seed Fund & Startup Accelerator
•
What is 500?
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$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
–
–
–
–
–
–
–
–
–
–
–
–
–
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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
ZipDial
TradeBriefs
Tushky

5. 500 Startups: Global Seed Fund
Over 150+ startups outside US, in 40+ countries

6. Startup Investor Ecosystem
Bootstrap, KickStarter,
Crowdfunding
Y-Combinator
TechStars
Angels &
Incubators
($0-10M)
SV Angel (Conway)
Floodgate (Maples)
“Micro-VC” Funds
($10-100M)
First Round
Union Square
Incuba=on
SoftTech (Clavier)
Felicis (Senkut)
Series
A
True
“Big” VC Funds
($100-500M)
Seed
Foundry
Series
B
Atomico
Greylock
“Mega” VC Funds
(>$500M)
A16Z
Sequoia
Series
C+

7. 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)
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–
–
–
–
–
•
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

8. Industry
Changes
•
•
•
•
•
•
Startup
Efficiency,
Reduced
Capital
Costs
Growing
Market,
Growing
PlaIorms
VC
Industry
Upheavals
(2000,
2008)
Super
Angel
-­‐>
Micro
VC:
Seed
Funds
(ex:
First
Round)
Incubators
&
Accelerators
(ex:
Y
Combinator)
Big
VC
(ex:
A16Z)
&
PlaMorms
(ex:
Angel
List)
more
info
see:
h.p://PreMoney.co

9. 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

10. Before & After 2 Dot-Com Crashes
Daft Punk Startup: Simpler, Faster, Cheaper, Smarter
Before
2000
• Sun
Servers
• Oracle
DB
• Exodus
HosJng
• 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
Acer
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,
Li8le,
Cockroach
Startup

11. 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+).

12. 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. 500
Strategy:
“Lots
of
Li.le
Bets”*
Quan=ta=ve
Inves=ng
before
Trac=on
1)
Make
lots
of
limle
bets
pre-­‐tracJon,
early-­‐stage
startups
2)
acer
6-­‐12
months,
idenJfy
top
20%
performers
and
double-­‐down
higher
$$$
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+
3)
conservaJve
model
assumes
-­‐ 5-­‐10%
large
exits
@20X
($50-­‐100M+)
-­‐ 10-­‐20%
small
exits
@5X
($5-­‐50M)
13
*See Peter Sims book: “Little Bets”

14. 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”)

15. 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):
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–
–
–
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

16. 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

17. 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:
–
–
–
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–
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

18. EducaJon
+
Community
+
PlaMorms
•
•
•
•
•
•
Cri=cal
Skills:
Engineering,
Design,
MarkeJng
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,
MamerMark,
Funders
Club

19. Platforms 2.0
Search, Social, Mobile,
Video, Messaging

20. 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

21. Going Local, Going
Global
web gets bigger -> world gets smaller

22. Local
vs
Global?
•
•
•
•
•
Emerging
/
Developing
Markets
Global
Languages:
English,
Chinese,
Spanish,
Arabic
CriJcal
Factors:
Educa=on,
Mentorship,
Capital
Capital
Availability:
Incuba=on,
Seed,
Series
A
PosiJve
Macro:
Payments,
LogisJcs,
Mobile/Web
PenetraJon,
Growing
Middle
Class,
Distribu=on

23. Global Trends
• Growth of Global Languages (see Gengo.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/WeChat, Alibaba, Sina, NHN, Yahoo-J, Softbank, Rakuten

24. QuesJons?
Comments?
• Thanks
for
Listening
• Feedback
Appreciated
G
KLIN
HEC
• More Info?
–
–
–
–
http://500.co (our company)
http://500hats.com (my blog)
https://angel.co/500startups (our fund)
Dave McClure, @DaveMcClure