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

Think Different: Lean, Little, Startup, Metrics.

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

Lean Startup, Lean VCCustomers, Metrics, Iteration.

Invest BEFORE Traction; Double Down AFTER.

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?

Bet on Singles, Not HomeRuns.(Look for Ichiros, Not Barry Bonds)

Beating The Series A “Crunch”

Customers

Distribution

Revenue

Got Crunched Yet?

Source: Bullpen Capital

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

Platforms 2.0Search, Social, Mobile

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

Startup Incubators & Metrics

Lots of Little Bets. Most FAIL.(but a few succeed :)

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)

#INCREMENTALINNOVATION#IteratIONFTW

How 2 Boil a Frog

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.

#TonyStark#DOESNTSUCK

http://marvel.com/ironman3

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.

#EVILPLAN#MWAHAHA

Everyone Needs An Evil Plan (Hugh MacLeod)

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

#BRANDING101#THINKDIFFERENT

Here’s To The Crazy Ones. (Jobs)

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

Going Local, Going Globalweb gets bigger -> world gets smaller

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

Thanks • Questions / More Info?

– http://500.co (our company)– http://500hats.com (my blog)

– https://angel.co/500startups (our fund)

– Rui Ma, 500 Startups China (@MissRuiMa)– Khailee Ng, 500 Startups SE Asia (@Khailee)– Dave McClure, 500 Startups USA (@DaveMcClure)