Silicon Valley 2.0 Lots of Little Bets +

Moneyball for Startups

Dave McClure http://500.co (@DaveMcClure)

Salt Lake City, January 2013 http://slideshare.net/dmc500hats

Dave McClure Founding Partner & Troublemaker, 500 Startups

00’s & 10’s: •  Investor: Founders Fund, Facebook fbFund, 500 Startups •  Companies: Mint.com, SlideShare, Twilio, WildFire, SendGrid •  Marketing: PayPal, Simply Hired, Mint.com, O’Reilly

80’s & 90’s: •  Entrepreneur: Founder/CEO Aslan Computing (acq’d) •  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? –  $50M+ under management –  20 people / 10 investing partners –  Silicon Valley HQ + Incubator –  SF, NY, MEX, BRZ, IND, CHN, SE Asia –  800+ Founders / 200+ Mentors –  20+ confs/events per year –  Focus: Design, Data, Distribution

•  400+ Portfolio Co’s / 30+ Countries –  Wildfire (acq GOOG, $350M) –  Twilio –  SendGrid –  TaskRabbit –  MakerBot –  9GAG –  Viki

500 Startups: Global Seed Fund startup investments in 30+ countries

•  Q4/12 added: Germany, Korea, Peru; + Russia & Turkey in Q1/13 •  Priorities In 2013: SE Asia, Middle East, Eastern Europe

Venture Capital 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, LinkedIn) –  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

Web 2.0 + Lean Startup

1.  Startup Costs = Lower. 2.  # Users, Bandwidth = Bigger. 3.  Transaction $$$ = Better.

Ø  Building Product => Cheaper, Faster, Better Ø  Getting Customers => Easier, More Measurable

Iterative Product & Marketing Decisions based on Measured User Behavior

Think Different.

MoneyBall 4 Startups

http://slideshare.net/paulsingh/ moneyball-a-quantitative-approach-to-angel-investing-austin-tx-aug-2012

1. Make Lots Of Little Bets 2. Count Cards (Monitor Progress & Stats) 3. Double Down on Winners

70%    Capital  

10  

Quan.ta.ve  Inves.ng  before  Trac.on  

250+  companies  @  $50K  avg.  (1st  check)    -­‐  Assume  high  failure  rate  (up  to  80%)    

 

Double-­‐Down  a'er  Trac.on  50+  ‘winners’  @  $100K-­‐$1M    

(2nd  +  3rd  check)                                                -­‐  -­‐  Target  10+  exits  @  $100M+  

 

   

500  Strategy:  “Lots  of  Li-le  Bets”*  

1)  Make  lots  of  li?le  bets  pre-­‐tracBon,  early-­‐stage  startups  

30%    Capital  

2)  aGer  6-­‐12  months,  idenBfy  top  20%  performers  and  double-­‐down  higher  $$$  

3)  conservaBve  model  assumes  -­‐  5-­‐10%  large  exits  @20X  ($50-­‐100M+)  -­‐  10-­‐20%  small  exits  @5X    ($5-­‐50M)  

*See Peter Sims book: “Little Bets”

Startup Investor Ecosystem

Angels & Incubators ($0-10M)

“Micro-VC” Funds

($10-100M)

Smaller VC Funds ($100-500M)

Larger VC Funds (>$500M)

True First Round

Andreessen Atomico

Y-Combinator

TechStars

SoftTech (Clavier)

Felicis (Senkut)

SV Angel (Conway)

Sequoia Greylock

Union Square

Floodgate (Maples)

Foundry Group

Incubation

Seed

Series A

Series B

Series C+

Bootstrap, KickStarter, Crowdfunding

Angel* List: It Rocks.

•  Startups & Investors •  Activity & Metrics •  Platform & APIs

•  *ps – not just for Angels, or USA

Early-Stage 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?

Early-Stage Startups: Your “Due Diligence” Is An Illusion

(Better approach = write a quick, small check then wait ~6 mo’s)

•  Problems in Early-Stage Due Diligence: –  You Might Be Able to Detect Idiots & Liars, but… –  Not much history, product, customers, or revenue (yet), so… –  You probably can’t figure out Winners (yet).

•  The New Due Diligence = Incremental Achievements –  “Due Diligence” à Trusted Referrals + History –  “Great Team” à Functional Prototype + Usage –  “Size of Market” à Evidence = Customers, Revenue

•  The Odds Are: They Suck, You’re Wrong –  You’ll Be Wrong 4x out of 5x. (If U Don’t Suck). –  In 6 Months, You’ll Know If They Don’t Suck. –  In 1-2 Years, You’ll Know If They’re Awesome.

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

Platforms 2.0 Search, Social, Mobile

Platform Viability

Users                                                .  .                                                            

Money  

Features                

Growth   Profit  

Profitable  Growth  

Nirvana  

Successful  PlaRorms    have  3  Things:  1)  Features  2)  Users  3)  Money  

Distribution Platforms Customer Reach: 100M+

•  Search: Google, Baidu, Yahoo/Bing, Yandex

•  Social/Games: Facebook, Twitter, LinkedIn, TenCent/QQ

•  Mobile: Apple (iOS), Android

•  Local: Yelp, Groupon, LivingSocial, FourSquare

•  Media: Video (YouTube), Blogs (Tumblr), Photos (Pinterest)

•  Comm: SMS, IM (WeChat, Line, WhatsApp, Kakao), 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

2.  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 J

* Mint acquired by Intuit in Sept 2009 for $170M

Lean Startup, Lean VC

Customers, Metrics, Iteration.

Invest BEFORE Traction; Double Down AFTER.

The Lean Startup

•  Progress ≠ Features; Measure Conversion •  Talk to Customers; Discover Problems •  Focus on “Product/Market Fit” (good solution) •  Fast, Frequent Iteration (+ Feedback Loop) •  Keep it Simple & Actionable

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

Education & Community

•  Mentors, Investors •  Design, Data, Distribution •  Platform Partners •  Sponsors & Strategics •  Marketing & Visibility

Product, Market, Revenue

•  Product: assess functional use, improve design/UX •  Market: test usage, distribution channels •  Revenue: test cust acq cost, revenue, *timing*

•  Work on Pitch, Help Find Co-Investors, etc

Hacker, Hustler, Hipster

•  Hacker: engineers & developers •  Hipster: design & UX •  Hustler: marketing & business

1.  Build functional prototypes 2.  Improve UX so people convert 3.  Scale customer acq & distribution

Outlier Competition + Modeling Success Behaviors

•  You want min 3-5 “rockstars” to compete •  Rockstars to model success for others •  You can’t assume >20% rockstars •  Therefore, pick 5x5 = 25 teams •  3-5 rockstar teams emerge, compete, win •  5-10 *other* non-rockstars learn •  Identify losers quickly (but don’t be an ass)

Winners, Losers, Tweeners

•  Winners #WIN (with or without you) •  Losers #LOSE (with or without you) •  Tweeners #TWEEN

– They might win with your help – They might lose with your help – Be helpful, but don’t dally

– Note: you might be wrong about the losers & tweeners, so don’t be an arrogant a-hole.

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)

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

Going Local, Going Global web 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

•  Want more info? Go visit: – http://500startups.com (our company) – http://500hats.com (my blog) – https://angel.co/500-startups-fund-ii (our fund)