dinosaurs & unicorns: avoiding corporate extinction by investing in startup innovation

Dinosaurs + Unicorns: Avoiding Corporate Extinction By Investing in Startup Innovation

@DaveMcClure @500Startups http://500.co

#InnovatorsSummit - Sao Paulo, Nov 2015

http://500.co

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, 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

• What is 500? – $200M silicon valley VC fund + startup accelerator – 100 people / 30 investing partners / 18 countries / 20+ languages – 2500+ Founders / 250+ Mentors – Community + Content + Conferences

• ~1200+ Portfolio Co’s / 50+ Countries – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Simple (acq BBVA, $117M) – Sunrise (acq MSFT, $100M) – Credit Karma – Twilio – GrabTaxi – SendGrid – Udemy – Barkbox – Intercom – TalkDesk

500 Startups Global Seed Fund & Startup Accelerator

[ This Talk ]

• Startups Move FAST. • Startups Can KILL. • How 500 Works With Startups. • How 500 Works With Corporates. • Questions?

Unicorns + Software: Eating The World, Killing The Dinosaurs

5

Key Factors • Software = low overhead • Startups = move fast • Internet Marketing (Search, Social, Mobile)

= better customer acquisition, lower cost, faster growth, generally more awesomeness

6

Unicorns + Software: Eating The World, Killing The Dinosaurs

Before & After 2 Dot-Com CrashesLEAN Startup: Simpler, Faster, Cheaper, Smarter

Before 2000 Big, Fat, Dinosaur Startup • 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 Lean, Little, Cockroach Startup • 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

Industry Changes• Lean Startup Efficiency, Reduced Capital Costs • Global Market: 3B->6B Internet/Smartphone Access • Billion-People Distribution Platforms, “Growth Hacking” • Improved Monetization, Payments Infrastructure, Logistics

• Explosion of “Unicorns” Disrupting Public Companies • VC Displacing IPOs, Micro VC + Seed Funds • Global Market of Angels, Accelerators, Acquirers • Investment in Startup Ecosystems, New Funding Platforms

Changes in Tech Startups• LESS Capital required to build product, get to market

– Dramatically reduced cost for servers, software, bandwidth – Funding Platforms: KickStarter, Angel List, Funders Club, etc – Access to online platforms for 100M-1B+ consumers, smallbiz, etc

• MORE Customers via ONLINE platforms (100M+ users) – Search (Google, Baidu) – Social (Facebook, Twitter, LinkedIn) – Mobile (Apple, Android) – E-Commerce (Amazon, Ebay/PayPal, Alibaba) – Media (YouTube, Pinterest, Instagram) – Comm/Msgs (WeChat, WhatsApp, Line, SnapChat, Email, Voice, SMS, etc)

• LOTS of little bets: Accelerators, Angels, Angel List, Small Exits – Capital + Co-working + Mentoring -> Design, Data, Distribution – “Fast, Cheap Fail”, network effects, quantitative + iterative investments

Platforms 2.0 Search, Social, Mobile,

Video, Messaging

[ This Talk ]


History Lesson: Startups Can KILL.

In 2001, Borders thought e-books were not important.

They outsourced it to Amazon.In only 10 years, Borders

became bankrupt, laying off 10,700 people,

While Amazon is worth $150 Billion.





In 2000, Blockbuster was offered to buy Netflix for

$50 MillionIn only 10 years,

Blockbuster becomes bankrupt.

While Netflix worth $20 Billion.






In 2000, Blockbuster was offered to buy Netflix for

$50 MillionIn only 10 years,

Blockbuster becomes bankrupt.

While Netflix worth $20 Billion.

Kodak is famous for inventing the first film-less

digital camera in the world.It is also famous for becoming bankrupt

because they didn’t invest in it.


It’s happening to banks.


It’s happening to car makers.


It’s happening to logistics companies.


Future History: Next Unicorns?

[ This Talk ]


500 Startups: 100+ Investors, Entrepreneurs, Geeks from Silicon Valley + 17 other Countries

The title “Partner” is used in accordance with customary business practice in the venture capital industry and does not indicate a legal

Dave McClure Christine TsaiFOUNDING FOUNDING PARTNER

Khailee NgMANAGING

Bedy YangMANAGING

SOUTH EAST ASIA LATAM/BRAZIL

Hasan Haider

Santiago Zavala

Rui Ma

Marvin Liao

Elizabeth Yin

Edith Yeung

Sean Percival

Adam Benayoun

Juan L. Salaberry

Pankaj Jain

Mojan MovassateMax Fram-Schwartz Ryan Lawler

Andrea Barrica

Zafer Younis

Krating Poonpol Natavudh P. (Moo)Cjin Cheng Binh Tran

Emily Chiu

Diana Moldavsky

Robert Neivert

Eddie Thai

Erhan ErdoganPhilipp Moehring

James Riney Mat Johnson Matt Lerner Tammy Camp

Tim Chae

Early employee Paypal, early ‘Super Angel’, venture capitalist at Founder’s Fund, led

fbFund.

Early employee YouTube, led developer community building for Google after

YouTube’s acquisition

Built and exited 2 startups in 3 years. GroupsMore sold to

Groupon + SAYS.com merged to be listed on

the Malaysian stock exchange

Founded Brazil Innovators and built

startup ecosystems in Latin America, and most

active seed investor threre. Kauffman Fellow

500 Startups: 100+ Investors, Entrepreneurs, Geeks from Silicon Valley + 17 other Countries

The 500 Portfolio: Over 1,000 Companies in 50 Countries

3 Unicorns > $1B+ in valuation

30 Centaurs > $100M+ in valuation

300 Ponies > $10M+ in valuation

Udemy VivaReal Smule TalkDesk Intercom WePay Sendgrid

TheRealReal Womply Life360 StyleSeat Peertransfer Vungle

ElaCarte Ipsy Remind BarkBox Plangrid Tradesy Virool

Kinnek Sprig

Skimlinks ToutApp Recurly ContaAzul Zozi BoostCTR OwnLocal Brainient Bustle LeTote Breather Mayvenn SpotHero Canva TokyoOtakuMode ClubW Muse Geekatoo Transcriptic SnapSheet Algolia Juxta Labs

RealtyShares Unikrn Lenda AgFunder BTCjam Junglee Culture Alley Cleanify Italist AllDay Avanoo Neighborly Holidog ViralGains SilverPush StudyPool ++++

500 Partners: VCs + Tech Platforms

Our companies have raised capital from hundreds of VCs around the world:

Our companies have been acquired by over 20 major corporate acquirers:

24

Sectors Selected Companies

E-COMMERCE

CLOUD & SAAS

VIDEO

MOBILE & TABLET

EDUCATION

PAYMENTS & FINANCIAL SERVICES

DATA SCIENCE (AI/MACHINE LEARNING)

IoT & HARDWARE

REAL ESTATE TECH & LOGISTICS

500 Sectors: Investment Categories

Legal review Partner approval

Angel Pre-Seed Seed Post-Seed Series A/B Growth

Accelerator

How 500 Invests

Seed

“Distro"

Follow-On

Selection Criteria – Data-Driven Process Based on Pre-defined Metrics • Product or service solves a problem for a specific target customer • Capital-efficient business; operational at less than $1M in external financing • Scalable internet-based distribution (search, social, mobile) or proven ability to scale sales • Functional prototype required before investing (or previous product success) • Measurable traction: engaged users, some revenue, and attractive unit economics • Cross-functional team with design, engineering and marketing expertise

500 Strategy: Lots of Little Bets*

1) make lots (>100) of investments in early-stage startups

3) wait 3-10 years for returns: -10-20% small exits @1-5X (<25M+) -5-10% larger exits @5-20X ($25-250M+) -1-2% unicorns @20-50X+ (>$250M-1B+)

*See Peter Sims book: “Little Bets”

2) over next 2 years, double-down on top 20%

http://petersims.com/book/

Startup Risk Reduction

ConceptEarly

Customer Usage

Scalable Customer

Acquisition

[about to be] Profitable

Unit Economics

Scalable Profitable Business

Functional Prototype

PRODUCT

MARKET

REVENUE

Exit?

When 500 Likes to Invest

The Lean Investor

Make lots of little bets: • Start with many small “experiments” • Filter out failures + small wins • Double-down on stuff that looks like it’s working

• Incubation: $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 / Unit Economics, Find Profitable Customer Segments

• Prove Solution/Benefit, Assess Market Size • Test Channel Cost, Unit Economics, 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

[ This Talk ]


How Can Corporates Work With Startups?

How Can Corporates Work With Startups?

• Research: Learn about Innovation Topics + Disruptive Tech • Meet: Get to Know Top Companies + Future Unicorns • Invest: Own A Piece of The Future (Accelerator, Fund, Direct) • Partner: Test Drive New Products With Your Customers • Acquire: Acquire People + Technology + Business

500 Startups + Stanford University Investor Education Program

#Venture Capital Unlocked: Learn the secrets of Silicon Valley Investing#Corporate Accelerator: Build your own accelerator with 500 Startups #Corporate VC: How to develop an industry-specific investment thesis

#500VCs

How to build investment thesis

Meet REAL startup founders and conduct selection

Connection with Silicon Valley investors and mentors

Legal docs: cap table and standard terms

How to generate deal flow Trends and relevant area of investments


#500VCs

Feb 8th-19th 2016 @ Stanford+500

signup NOW: http://500.vc


#500VCs

http://500.vc

(Portfolio) SIZE MATTERS

Q: Chances of spotting unicorn? /

a) 1% b) 2% c) 5% d) 10% e) ZERO

Chances of spotting unicorn /

/

http://bit.ly/99VCProblems



If portfolio size = 15 companies /

/ If portfolio size = 30 companies

/ If portfolio size = 100 companies

Questions? Comments?

• More? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund & syndicates) – Dave McClure, @DaveMcClure

http://500.co

http://500hats.com

https://angel.co/500startups