Changes in Venture Capital +

Building Startup Ecosystems

@DaveMcClure - 500 Startups

Seoul, Korea - March 2014
 This Talk
• What is 500 Startups?
• Changes in Tech + VC
• “Lean VC”: Quantitative Venture Capital
• Building Startup Ecosystems
• Global Entrepreneurship
• Q&A

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 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, 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 Startups

Global Seed Fund & Startup Accelerator
• What is 500 Startups?
– $100M silicon valley venture capital fund
– internet seed fund + startup accelerator program
– 30 team members (13 investing partners)
– SV, SF, NYC, MEX, BRZ, IND, CHN, SE Asia
– 1000+ Founders / 200+ Mentors
– Community + Content + Conferences
!
• 700+ Portfolio Co’s / 40+ Countries
– Wildfire (acq GOOG, $350M)
– MakerBot (acq SSYS, $400M)
– Viki (acq Rakuten, $200M)
– Simple (acq BBVA, $117M)
– Twilio
– SendGrid
– Credit Karma
– Udemy
– Zozi
– ElaCarte
– Virool
500 Startups: Global Seed Fund

Over 200+ startups outside US, in 40+ countries
 This Talk
• What is 500 Startups?
• Changes in Tech + Venture Capital

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 Lean Startup:

Simpler, Faster, Cheaper, Smarter
!
1. Startup Costs = Lower.
2. # Users, Bandwidth = Bigger.
!
! 3. Transaction $$$ = Better.
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➢ Building Product => Cheaper, Faster, Better
➢ Getting Customers => Easier, More Measurable
!
Iterative Product & Marketing Decisions
based on Measured User Behavior
 Changes in Tech + VC
• LESS Capital required to build product, get to market
– Dramatically reduced $$$ on servers, software, bandwidth
– Funding Platforms: KickStarter, Angel List, Funders Club, etc
– Cheap access to online platforms for 100M+ consumers, smallbiz, etc
!
• MORE Customers via ONLINE platforms (100M-1B+ users)
– Search (Google)
– Social (Facebook, Twitter)
– Mobile (Apple, Android)
– Media (YouTube, Pinterest, Instagram, Tumblr)
– Comm (Email, WeChat/WhatsApp/Line/Kakao, IM/Chat, Voice, SMS, etc)
!
• LOTS of little bets: Accelerators, Angels, Angel List, Small Exits
– Y Combinator, TechStars, 500 Startups
– Capital + Co-working + Mentoring -> Design, Data, Distribution
– “Fast, Cheap Fail”, network effects, quantitative + iterative investments
 Platforms 2.0

Search, Social, Mobile,
Video, Messaging
 Before & After 2 Dot-Com Crashes

Simpler, Faster, Cheaper, Smarter

Before 2000 After 2008

• 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
• 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
Series A Crunch?

Source: Bullpen Capital

 Startup Failure: Good or 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 (not bad)
!
• Overall, founders / market getting smarter
• More focus on customers, problems, revenue
• Many die, some survive (1-5x), some thrive (20x+).
 Industry Changes, Challenges
• SW Startup Efficiency, Reduced CapX Costs
• Growing Market, Growing Platforms
• VC Industry Upheavals (2000, 2008)
• Micro VC: Seed Funds (ex: First Round Capital)
• Incubators & Accelerators (ex: Y Combinator)
• Big VC (ex: A16Z) & Platforms (ex: Angel List)
Angel* List: It Rocks.

• Startups & Investors

• Syndicates & Backers
• Activity & Metrics
• Jobs & Talent
• Platform & APIs
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 This Talk
• What is 500 Startups?
• Changes in Tech + VC
• “Lean VC”: Quantitative Venture Capital

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500 Strategy: “Lots of Little Bets”*

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*See Peter Sims book: “Little Bets”
 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
 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”)
 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)
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• 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
 Lots of Little Bets
aka “MoneyBall for Startups”

• VC Evolution: Physician, Scale Thyself (Aug 2012)

• MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)
 This Talk
• What is 500 Startups?
• Changes in Tech + VC
• “Lean VC”: Quantitative Venture Capital
• Building Startup Ecosystems

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 Example Startup Ecosystem
• 1,000 Bootstrap Startups ($0)
• 300 Accelerator Startups ($10-50K)
• 100 Seed-Funded Startups ($250K-$1M)
• 30 Series A Startups ($2-5M)
• 10 Series B Startups ($5-20M)
• 5 Series C Startups ($20-50M)
• 1-3 IPOs ($50-250M)

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 Investment Strategy
• Lots of Little Bets / Early Bets
• Solve Customer Problems -> Tech + Mktg
• Online Distribution / “Growth Hacking”
• Focus on Revenue over Usage
• “Hacker, Hipster, Hustler”
• Global Network + Silicon Valley HQ
 Network Benefits
• Silicon Valley HQ + founder network
• Mentorship & Education
• Platforms & Distribution
• Downstream Investors
• M&A / Exit Environment
 Follow-On Strategy
• Should we follow-on? Why or Why Not?
• Signaling Risk vs Portfolio Returns
• Downstream Investor Syndicate is critical
• Using Angel List to drive visibility
• Global Strategies (more capital, connections)
 Feedback Loop & Metrics
• Bad decisions = obvious quickly
• Good decisions = not obvious for years
• Short-term metrics: revenue, users, next
round
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• Sharing best practices for decisions
• Lots of Little Bets helps speed up learning
• Billion Dollar “Unicorns” vs 10-20X ROI
 Scaling VC
• Lots of Little Bets? Or a Few Big Bets?
• Power Laws, Singles vs Home Runs
• Focus on Network Effects
• Communication Platforms
• Portfolio Size vs Investment Stage
• Recruiting Thousands of VCs
How Big is Seed Stage Startup Market?
5,000 microVCs can fund 100,000 startups/yr @ $500K/startup = $50B/yr

Q: How many people are entrepreneurs? How many startups get started every year?
• ~1% of Humanity is “Entrepreneurial” (def’n: “can create a $10M rev/yr business”)
• 1% x 7B ppl = 70M entrepreneurs, who create 1-5 businesses lifetime (75 yrs)
• entrepreneurs could create ~1-5M new startup businesses every year
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Q: How much capital is needed globally to fund seed stage startups?
• Assume 1M-5M startups/yr x $50K-$1M funding/each
• Low: 1M x $50K = $50B/yr <-> High: 5M x $1M = $5T/yr
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Q: How many metros? How many investors? How many investors / startups / metro?
• 1 “micro-VC” can fund 10-20 startups/yr * $50K-$1M = ~$1-10M annual budget
• 500+ global metros with population >1M+ people can generate ~100-1,000 startups / yr
• guesstimate = min 100K+ startups/yr total across top 100-200 global metros
• 5-50 VCs / metro * 200 metros = 1,000-10,000 VCs globally
• FUTURE: 5,000 VCs can deploy $10M/yr each, or $50B/yr in ~100,000 startups
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 This Talk
• What is 500 Startups?
• Changes in Tech + Venture Capital
• Growing 500 + “The Lean VC”
• GLOBAL Entrepreneurship

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Going Local, Going Global

web gets bigger -> world gets smaller
 Local vs Global?
• “Silicon Valley is Unique” — NOT TRUE.
• *we had a 50-70 year head start… ROW will catch up.
• Emerging / Developing Markets: 3-5B+
• English, Chinese, Spanish, Arabic
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• Challenges: Payments, Mobile/Web, Logistics
• Challenges: Capital, Mentorship, Exits
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• Investor Ecosystems, Mentorship & Community
• Does the Future look different? (yes, we hope)
 Global Trends
• Growth of Global Languages (see Gengo.com)
– 1B+ speakers: Mandarin, English
– 300-500M+ spkrs: Spanish, Arabic, Hindi, Malay

• Smart Device Proliferation

– mobile, tablet, TV, console, etc

• More Young, More Old Users Online

• More Bandwidth, More Video, More Social, More Mobile
• Wealthy International Travelers
• Acceleration of Global Payment, E-Commerce
• Dramatically Reduced Cost: Product Dev, Customer Acqstn
• Global Distribution Platforms (Search, Social, Mobile, Video, Comm)
Questions? Comments? Heckles?
• Thanks for Listening
• Feedback Appreciated
• We are Hiring + Internships
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• More Info?
– http://500.co (our company)
– http://500hats.com (my blog)
– https://angel.co/500startups (our fund)
– Dave McClure, @DaveMcClure