silicon valley 2.0: lots of little bets + beating the series a crunch
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Silicon Valley 2.0Lots of Little Bets +
Beating the “Series A Crunch”
Dave McClurehttp://500.co (@DaveMcClure)
Echelon 2013Singapore, June 2013
http://slideshare.net/dmc500hats
Dave McClureFounding Partner & Chief Troublemaker, 500 Startups
00’s & 10’s:• VC: Founders Fund, Facebook fbFund, 500 Startups• Angel: Mashery, Mint.com, SlideShare, Twilio, WildFire, SendGrid• Marketing: PayPal, Simply Hired, Mint.com, oDesk, 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?– ~$70M under management– 25 people / 12 investing partners
– Locations: SV, NYC, MEX, BRZ, IND, CHN, SE asia– 1000+ Founders / 200+ Mentors
• 500+ Portfolio Co’s / 30+ Countries– Wildfire (acq GOOG, $350M)
– Twilio– SendGrid – TaskRabbit– MakerBot– Viki (SG)
– Flyer.IO (SG/SV)– 9GAG (HK)– PicCollage (TWN)– Cubie (TWN)– WooMoo (TWN)
– Payroll Hero (PI/Canada)– TwitMusic (PI)
500 Startups: Global Seed FundOver 100+ startups outside US, in 35+ countries
• Q4/12 added: Germany, Korea, Peru; + Russia, Turkey, Ghana in Q2/13• Priorities in 2012: Brazil, Mexico, India• Priorities In 2013: China, SE Asia, MENA, Eastern Europe
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)
Changes in Tech Startups• LESS Capital required to build product, get to market
– Dramatically reduced $$$ on servers, software, bandwidth– Crowdfunding, KickStarter, Angel List, Funders Club, etc– Cheap access to online platforms for 100M+ consumers, smallbiz, etc – A few big IPOs @ $1B+, but LOTS of small acquisitions (<$100M)
• MORE Customers via ONLINE platforms (100M+ users)– Search (Google)– Social (Facebook, Twitter)– Mobile (Apple, Android)– Local (Yelp, Groupon, Living Social)– Media (YouTube, Pinterest, Instagram, Tumblr)– Comm (Email, IM/Chat, Voice, SMS, etc)
• LOTS of little bets: Accelerators, Angels, Angel List, Small Exits– Y Combinator, TechStars, 500 Startups– Funding + Co-working + Mentoring -> Design, Data, Distribution– “Fast, Cheap Fail”, network effects, quantitative + iterative investments
Daft Punk Lean Startup:Simpler, Faster, Cheaper, Smarter
1. Startup Costs = Lower.
2. # Users, Bandwidth = Bigger.
3. Transaction $$$ = Better.
Building Product => Cheaper, Faster, Better Getting Customers => Easier, More Measurable
Iterative Product & Marketing Decisions
based on Measured User Behavior
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”)
11
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”
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
Startup Investor Ecosystem
Angels & Incubators($0-10M)
“Micro-VC” Funds ($10-100M)
Smaller VC Funds ($100-500M)
Larger VC Funds (>$500M)
TrueFirst Round
AndreessenAtomico
Y-Combinator
TechStars
SoftTech (Clavier)
Felicis (Senkut)
SV Angel (Conway)
SequoiaGreylock
Union Square
Floodgate (Maples)
Foundry Group
Bootstrap, KickStarter, Crowdfunding
Early-Stage Investment 101:Incremental Risk Reduction
• 1st Mtg: Crazy, Idiots, Liars or Crooks? • Product: does it work? (crappy, not perfect)• Market: are people using it? (not their mom)• Revenue: will people pay for it? (just a few)• Growth: how will it/they scale? (online? offline?)• Finance: what will it cost?
– Q1: cost to get a customer? – Q2: how & when do you make money?
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
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+).
Formula 4 Getting “UN-Crunched”
• Build Something People Want (Problem/Need)
• …and will PAY FOR (Business Model)
• Get Customers (Not Your Mom)
then…
• Just GROW, Baby. (Growth Hackers FTW)– Users– Usage– Revenue
Angel* List: It Rocks.
• Startups & Investors• Activity & Metrics• Platform & APIs
• *ps – not just for Angels, or USA
Platform Viability
Users .Users ..
Money.
Money
FeaturesFeatures
Growth Profit
ProfitableGrowth
Nirvana
Successful Platforms have 3 Things:1) Features2) Users3) Money
Distribution PlatformsCustomer Reach: 100M-1B+
• Search: Google, Baidu, Yahoo/Bing, Yandex
• Social/Games: Facebook, Twitter, LinkedIn, TenCent/QQ, WeChat
• Mobile: Apple (iOS), Android
• Local: Yelp, Groupon, LivingSocial, FourSquare
• Media: Video (YouTube), Blogs (Tumblr), Photos (Instagram, Pinterest)
• Comm: SMS, IM (WeChat, Line, WhatsApp), Skype, Phone/Voice, etc
Web 2.0 Business Model: KISS (“Keep It Simple, Stupid”)
• 1) Re-invent Web 1.0 Businesses– Make a Website, a Widget, an App– Sell Stuff (Transactions, Subscriptions, Affiliate)
• 2) add Web 2.0 Technology– Search, Social, Mobile, Local, Media, Comm– Google, Facebook/Twitter, Apple/Android, YouTube– Email, SMS, Ecommerce / Payments
• 3) Get Customers, Make Money– Distribution, Distribution, Distribution– (Customer Acq’stn Cost) vs. ($Rev. Per Customer)
– Low CapX + Profitable Web Businesses
More Acquirers (tech + non-tech); More & Smaller Acquisitions
1. Mature Internet Platform Co’s:– GOOG, MSFT, YHOO, EBAY, AOL, AMZN,
AAPL, INTU, ADBE, FB, TW, LNKD, GRPN
1. Non-Tech “BigCo” / Consumer Verticals buying tech startups (for distribution)
• BigCo = Lots of Customers, $$$
• BigCo = Bureaucracy, Innovator Dilemma
• Outsource Innovation; Buy Talent / Products
• Acquiring LOTS (Small) Startups
• Great for Founders, Investors
* Mint acquired by Intuit in Sept 2009 for $170M
Incubator 2.0: Fast, Cheap, FAIL• Incubators = supportive startup ecosystem (+ angels, VCs)
• Efficient use of investment capital ($0-100K)
• High fail rate (60-80%) => large initial sample size
Incubator 2.0: Education, Collaboration, Iteration
• Success based on:– MANY, small experiments
– common platforms, customers, problems & solutions
– physical proximity, open/collaborative environment
– Domain-specific mentors & expertise
– fast fail, iteration, metrics & feedback loop
• Incremental investment; high-risk, but high-reward
Minimum Viable Team:Hacker, Hipster, Hustler
• Hacker: engineers & developers
• Hipster: design & user experience (UX)
• Hustler: marketing & business, “growth hacker”
1.Build functional prototypes
2.Improve UX so people convert
3.Scale customer acquisition & distribution
Product, Market, Revenue
• Product: assess functional use, improve design/UX• Market: test usage, distribution channels• Revenue: test cust acq cost, revenue, timing of both
• Pitch: Work on Pitch, Help Find Co-Investors, etc
Outlier Competition + Modeling Success Behaviors
• Goal: 3-5 “rockstars” to compete (w/ each other)
• A-students model success for B & C students– (and B & C students model FAIL for A-students)
• Can’t assume >20% rockstars, so…– Aim for 15-25+ teams (x 20% = 3-5 outliers)
• 3-5 great teams emerge, compete, win– 5-10 *other* lesser teams learn & win too
fbFund REV
fbFund REV: Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform & Facebook Connect.
• 22 startups @ ~$35K each (< $1M total)• 3 month program: Technology, Design, Marketing, Business topics • Success: 8 startups raised $500K –> 5 Series A -> 3 Series B (+ 3 small exits)• Wildfire Interactive acquired by GOOG for $350M (>50X)
Most Businesses Suck @ Innovation.
• They Don’t Know Technology.
• They Don’t Know How to Code.
• They Don’t Know SEO or SEM.
• They Don’t Know Email Marketing.
• They Don’t Know Social, Video, Local, Mobile.
• They Don’t Know Good Design or UX.
• They Don’t Know How to Cut & Paste.
• They Don’t Know How to Use PayPal.
Most Things Suck.
• But, We Can Easily Make Most Things Better.
• Tech + Web = Reduced Overhead Costs.• Search + Social Platforms = Better Marketing.• Copy Existing Business Model = Reduced Risk.
• FOCUS = Make ONEthing / SOMEthing Better.
You Don’t Have to be Tony Stark
• Just Copy/Use the Stuff that Tony Stark Makes.– Tip: Most People Won’t Notice U Aren’t Tony Stark.
• Copy/Use 99% All The Amazing Stuff Out There.
• Innovate on the other 1%.
• Innovate 1% More Every Month.
• Then Kick Back and Have a Beer.
Formula 4 Awesome:Notice Things That Suck. Make Them Suck Less.
• Most Offline Businesses Are Inefficient. (Web 1.0, Web 0.0)• Lots of Overhead, Crappy UX, Crappy Marketing.
• Copy Their Business Model (It Already Makes $$$).
• Reduce Overhead Cost (Be a Scrappy Startup).
• Increase Marketing Efficiency (Do Online Marheting).
• Copy/Integrate 99% Awesome Stuff (aka Tech)• Innovate on the Remaining 1%.
• Keep Innovating 1%. Every Month
Ok, Let’s Try It.
• Find an existing, physical-world big dumb business that makes money, but kinda sucks.
• Verify they have high overhead costs, inefficient [offline] marketing, crappy service.
• Copy the business model, reduce overhead costs, improve marketing.
• Add some awesome technology, and then innovate on ONE important thing.
Problem: Ordering Food Sucks.(see blog post “Why Menus Suck”)
• Issues:– Waiters– Menus– Pictures– Sharing– Discounts– Customer Lists– Food Quality– Food Service– Reviews– Delivery Time– Payment
• Solutions:– ElaCarte– KitchIt– FoodA– Chewse– CraftCoffee– LoveWithFood– GoldBely– TeaLet– Ordr.in– MileHighOrganics– WholeShare
3 Basic Types of Brands:Virgin, Southwest, [Niche]
• Virgin = “Mass Luxury” (+ sexy)– High-End Look & Feel, priced just barely within reach of most
middle-class customers, who love the “red-carpet” treatment
• Southwest = “Convenience & Value” (+ funny)– Stuff that just works, not very expensive, great value
for everybody. (Who doesn’t like Southwest?)
• [Niche] = “Just for You & Me”– Designed for well-defined customer segments / attributes.– Less competition, higher margins, better retention– Ex: Gay, Old, Black, Short, Female, Moms, Left-Handed, Etc
Global Trends• Growth of Global Languages (see MyGengo.com)
– 1B+ speakers: Mandarin, English– 300-500M+ spkrs: Spanish, Arabic
• Smart Device Proliferation– mobile, tablet, TV, console, etc
• More Young, More Old ($$$) 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: Baidu, Tencent, Alibaba, Sina, NHN, Yahoo-J, Softbank, Rakuten, DeNA, Gree
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