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 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 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 2.0Search, Social, Mobile,

Video, Messaging

Before & After 2 Dot-Com Crashes 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

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

!• *ps – not just for Angels, or USA

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”*

*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) !

• 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 Betsaka “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 !

• 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 !

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 !

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 Globalweb 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 !

• Challenges: Payments, Mobile/Web, Logistics • Challenges: Capital, Mentorship, Exits !

• 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 !

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