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

#Gitex Dubai - Oct 2016

Farming Unicorns in Emerging Markets Building Startup & Investor Ecosystems in MENA

Dave McClureFounding Partner, 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? – $275M global seed fund + startup accelerator – 140 people / 25 languages / 20 countries – 1700+ Companies / 3500+ Founders / 200+ Mentors – Investment, Accelerator, Growth Marketing, Events, Education – Community + Content + Conferences

• 1700+ Co’s / 60+ Countries – Twilio (NYSE: TWLO) – Credit Karma – Grab (aka GrabTaxi) – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Behance (acq Adobe, $150M) – Simple (acq BBVA, $117M) – Sunrise (acq MSFT, $100M) – Udemy – Ipsy – TalkDesk – Intercom

500 Startups Global Seed Fund & Startup Accelerator

500 Falcons Team

Rakan Al Eidi (ررااكانن االعيیدديي)VENTURE PARTNER, 500 Falcons

Hasan Haider (حسنن حيیددرر)GENERAL PARTNER, 500 Falcons

Sharif El Badawi (شرريیفف االبددوويي)VENTURE PARTNER, 500 Falcons

500 Startups: MENA Portfolio

Dinosaurs vs. CockroachesLEAN Startup: Simpler, Faster, Cheaper, Smarter

1996 ”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

2016 ”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

Platforms:Search, Social, Mobile,

Video, Messaging

Data from ~600 companies from 500 Startups Funds I + II (2010 - 2013 cohorts)

$1-10M

Q: How Many Startups to Get 1 Unicorn? Unicorns 50:1 | Centaurs 20:1

99 VC Problems But a Batch Ain’t 1

9http://bit.ly/99VCProblems

Q: Chances of spotting unicorn? /

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

Chances of spotting unicorn = ~1%/

If portfolio size = 15/

/ If portfolio size = 30

/ If portfolio size = 100

Perils of Becoming a Unicorn (Before/After IPO)

2009 2016

Jeff Lawson, Founder/CEO Twilio (NYSE:TWLO)

How Many Startups to Get to 1 Unicorn?

Investor Ecosystem Funding, Liquidity, Exits

• Bootstrap, FFF, Crowdfunding (0-$100K) • Angel Investors (0-$100K) • Accelerators (0-$100K) • Seed funds ($100K-$1M) • Series A/B ($2-10M) • Later Stage Funds ($20M+) • M&A / Secondary Markets • IPOs

Q: How many VC funds do we need to build an ecosystem?

• USA: ~800 VC funds; 2.5 per 1M ppl • China: ~700 VC funds; 0.5 per 1M ppl

• MENA: ~30 funds; 0.1 per 1M ppl

NOT EVEN CLOSE!

A Brief History of US Venture Capital

• first VC funds: ARDC, JH Whitney (1946) • SBICs / Small Business Investment Act (US, 1958) • Shockley -> “Traitorous Eight” -> Fairchild (1958) -> Intel (1968) • Sutter Hill (1964), Venrock (1969), Kleiner, Sequoia (1972)

• ERISA laws + “prudent man rule” (1974, 1978) • Pension Funds in VCs: $39M (1977) -> $570M (1978) -> $4B (1989) • Tech Explosion: 80’s, 90’s, 00’s • Microsoft (1975), Apple (1976), Oracle (1977), Sun (1982), Cisco

(1984), Amazon (1994), eBay (1995), Yahoo (1995), Google (1998), PayPal (1998), LinkedIn (2002), Facebook (2004), Twitter (2006)

Q: How to Bring 500 VC Funds to Emerging Markets?

A) Invite VCs to Dinner?

Q: How to Bring 500 VC Funds to Emerging Markets?

A) Invite VCs to Dinner? B) Give VCs some Arabic Coffee?

Q: How to Bring 500 VC Funds to Emerging Markets?

A) Invite VCs to Dinner? B) Give VCs some Arabic Coffee? C) Take VCs for a Ride on a Camel?

Q: How to Bring 500 VC Funds to Emerging Markets?

Umm, NO.

A) Invite VCs to Dinner? B) Give VCs some Arabic Coffee? C) Take VCs for a Ride on a Camel?

… or… D) Invest in VCs!*

Q: How to Bring 500 VC Funds to Emerging Markets?

Umm, NO.

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 – $0-$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

The Unicorn “Hedge” https://500hats.com/welcome-to-the-unicorn-hedge-2fd3c6b50f89

Q: Which is more overvalued? — 100 Unicorn startups or Fortune 500? TREND: Non-tech public companies buying innovation (aka Unicorns) as a hedge against the value of their own stock.

Examples: Dollar Shave Club -> Unilever, Cruise -> GM, Jet.com -> Walmart.

Startups + Corporation = TEAM

31

Startups: • Speed • Talent (People) • Product / IP

Corporations: • Customers • Budget / Money

Corporate/Startup Innovation Framework

Partnerships

Investments

M&A

OutcomesStrategies

People Product Customers

Dealflow

Accelerators

PR & Sponsorships

Competitions & Events

Silicon Valley Outposts

Investing in VC funds

Corporate/Startup Innovation Framework

Outcomes

People Product Customers

Corporate/Startup Innovation Framework

Partnerships

Investments

M&A

OutcomesStrategies

People Product Customers

Corporate/Startup Innovation Framework

Partnerships

Investments

M&A

OutcomesStrategies

People Product Customers

Dealflow

Accelerators

PR & Sponsorships

Competitions & Events

Silicon Valley Outposts

Investing in VC funds

Different Strategies, Rqmts Different Outcomes, Impact

Partner Invest Acquire

Effort Low Medium High

Cost Low Medium High

Impact Low Medium High

Building Startup Ecosystems

Critical Ecosystem Factors

• Optimism & Belief (“Silicon Valley”) • Mentorship + Education (Knowledge) • Universities + Companies (People) • Capital, Legal, Finance (Infrastructure) • Engineering + Design / UX (Product) • Platforms + Distribution (Customers) • Online Payments (Monetization) • IPO / M&A Market (Exits)

What’s Most Critical?• You DON’T need to be in Silicon Valley, but… • Silicon Valley Needs to be in YOU.