Building Startup Ecosystems & The Rise of Micro-VCs
33 likes15,878 views
This document discusses the rise of micro-VC funds and changes in startups and venture capital. It notes that startups now require less capital to develop products and reach customers due to reduced costs and access to online platforms. Micro-VC funds of under $100 million make many small investments in early-stage startups. The document advocates a "lean VC" approach of incremental funding as startups achieve milestones like product validation, market validation, and revenue validation. It argues this global trend could support over 10,000 startups per year being funded.
![Startup Founder Essentials
• Business Plans
• Software + Design/UX
• Lean Startups + Continuous Deploy (Iterate)
• Metrics Framework + Continuous Testing
• Functional Prototypes
• Scalable [Online] Mktg & Sales
• Predictable Unit Economics
• Pitching + Fundraising (Angel List)
• Monetization + Payments
• Customer Service + Support
9](https://image.slidesharecdn.com/startupvc-141028211534-conversion-gate02/85/Building-Startup-Ecosystems-The-Rise-of-Micro-VCs-9-320.jpg)
![How Big is Seed Stage Startup Market?
500 VCs invest in 10,000 startups/yr @ $500K/startup = $5B/yr
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, each of which starts 1-5 businesses lifetime (70 yrs)
• hypothesis: talented entrepreneurs can create 1-5M new “startup” businesses every year
!
NOW: let’s say we *ONLY* do the top 1% => the best 10,000 startups in the top 200 metros
!
How many metros? How many investors / metro? How many startups / metro?
• 1 [micro] VC can fund 10-20 startups/yr * $50K-$500K = ~$1-10M/yr annual budget
• global metros of 1-10M+ ppl can generate 100-1,000 startups / year
• 1-5 VCs in top 200 metros = 500 VCs x 20 startups/yr = 10,000 startups/yr
• hypothesis: 500 VCs invest $500K each -> 20 startups/yr = $5B/yr -> 10,000 startups
!
… so forget about 500 Startups, and start thinking about 500 VCs.
15](https://image.slidesharecdn.com/startupvc-141028211534-conversion-gate02/85/Building-Startup-Ecosystems-The-Rise-of-Micro-VCs-26-320.jpg)
Building Startup Ecosystems & The Rise of Micro-VCs
- 1. @DaveMcClure @500Startups http://500.co NASSCOM Product Conclave Bangalore, Oct 2014 Building Startup Ecosystems & the Rise of the Micro-VC
- 2. This Talk… • Changes in Startups + Birth of “Micro-VC” • “Lean VC” = Quantitative Venture Capital • Building Startup Ecosystems • “Global” Entrepreneurship
- 3. 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, 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
- 4. 500 Startups Global Seed Fund & Startup Accelerator • What is 500? – $120M silicon valley VC fund + startup accelerator – 40 people / 13 investing partners – Locations: SV/SF, MEX, BRZ, IND, CHN/TWN, KOR, SE Asia, MENA – 2000+ Founders / 200+ Mentors – Community + Content + Conferences ! • 900+ Portfolio Co’s / 45+ Countries – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Simple (acq BBVA, $117M) – Twilio – SendGrid – Credit Karma – Udemy – TheRealReal – Barkbox – HomeJoy – ZipDial
- 5. This Talk… • Changes in Startups + Birth of “Micro-VC” • “Lean VC” = Quantitative Venture Capital • Building Startup Ecosystems • “Global” Entrepreneurship
- 6. Industry Changes • Financial Market Crises (2000, 2008) • Startup Efficiency, Lean Startup Movement, Reduced Capital Costs • Growing Market, Global Distribution Platforms, “Growth Hacking” • Improved Monetization, Payments Infrastructure • Developing Startup Ecosystems, Global M&A ! • Micro VC: Seed Funds (ex: First Round Capital) • Incubators & Accelerators (ex: Y Combinator, 500 Startups) • Funding Platforms (ex: Angel List, Kickstarter) • Global Market of Angel Investors, Accelerators, Seed Funds ! more info: http://PreMoney.co
- 7. Changes in Tech Startups • LESS Capital required to build product, get to market – Dramatically reduced cost for servers, software, bandwidth – Funding Platforms: KickStarter, Angel List, Funders Club, etc – Access to online platforms for 100M-1B+ consumers, smallbiz, etc ! • MORE Customers via ONLINE platforms (100M+ users) – Search (Google, Baidu) – Social (Facebook, Twitter, LinkedIn) – Mobile (Apple, Android) – E-Commerce (Amazon, Ebay/PayPal, Alibaba) – Media (YouTube, Pinterest, Instagram) – Comm/Msgs (WeChat/WhatsApp, Email, Voice, SMS, etc) ! • LOTS of little bets: Accelerators, Angels, Angel List, Small Exits – Capital + Co-working + Mentoring -> Design, Data, Distribution – “Fast, Cheap Fail”, network effects, quantitative + iterative investments
- 8. Before & After 2 Dot-Com Crashes Daft Punk Startup: Simpler, Faster, Cheaper, Smarter Before 2000 ”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 After 2008 ”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
- 9. Startup Founder Essentials • Business Plans • Software + Design/UX • Lean Startups + Continuous Deploy (Iterate) • Metrics Framework + Continuous Testing • Functional Prototypes • Scalable [Online] Mktg & Sales • Predictable Unit Economics • Pitching + Fundraising (Angel List) • Monetization + Payments • Customer Service + Support 9
- 10. Platforms 2.0 Search, Social, Mobile, Video, Messaging
- 11. Angel List: Platform for Investors + Startups • Startups + Metrics • Founders + Bios • Investors + Syndicates • Accelerators + Online Applications • Jobs + Talent 11
- 12. This Talk… • Changes in Startups + Birth of “Micro-VC” • “Lean VC” = Quantitative Venture Capital • Building Startup Ecosystems • “Global” Entrepreneurship
- 13. 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)
- 14. Investor Education • Startups are NOT Real Estate • Most Startups Fail / Power Law Returns • Portfolio Approach (20+ investments) • Legal Structure, Financial Structure • Syndication + Co-Investment • Access to Downstream Capital • Exits & Liquidity 14
- 15. 500 Strategy: Lots of Little Bets* 1) make lots of little bets on pre-traction, early-stage startups 2) in 6-24 months, double-down on top 20-30% performers 3) wait 3-7 years for returns: -5-10% large exits @20X+ ($50-100M+) -10-20% small exits @5X ($5-50M) *See Peter Sims book: “Little Bets”
- 16. The Lean VC: Lots of Little Bets, Incremental Investment Method: Make little bets in lots of startups using incremental investment, iterative development. Start with many small experiments, filter out failures, and expand investment in successes. ! • Incubator: $0-100K (“Build & Validate Product”) • Seed: $100K-$1M (“Test & Grow Marketing Channels””) • Venture: $1M-$10M (“Maximize Growth & Revenue”)
- 17. 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
- 18. 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
- 19. 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
- 20. This Talk… • Changes in Startups + Birth of “Micro-VC” • “Lean VC” = Quantitative Venture Capital • Building Startup Ecosystems • “Global” Entrepreneurship
- 21. Startup Investor Ecosystem !! Angels & Incubators ($0-10M) ! “Micro-VC” Funds ($10-100M) “Big” VC Funds ($100-500M) “Mega” VC Funds (>$500M) SV Angel First Round Union Square A16Z Y-Combinator SoftTech (Clavier) Felicis (Senkut) Sequoia Incubation Seed Series A Series B Series C+ Bootstrap, KickStarter, AngelList, Crowdfunding
- 22. 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) 22
- 23. Example Startup Ecosystem • 1,000 Bootstrap Startups ($0-10K) • = 1,000 Parents/Garages/Basements @ $0-500/mo food+rent • 300 Accelerator Startups ($10-100K) • = 10-20 Accelerators @ $1-5M/yr, 20-50 co’s/yr • 100 Seed-Stage Startups ($100K-$1M) • = 5-10 Micro-VC Funds @ $10-30M/yr, 10-20 co’s/yr • 30 Series A/B Startups ($1-10M) • = 3-5 Early-Stage Funds @ $25-100M/yr, 5-10 co’s/yr • 10 Later-Stage Companies ($10-100M) • = 2-3 Later-Stage Funds @ $50-250M/yr, 3-5 co’s/yr • 1-3 Mature Company IPOs ($100M+) 23
- 24. This Talk… • Changes in Startups + Birth of “Micro-VC” • “Lean VC” = Quantitative Venture Capital • Building Startup Ecosystems • “Global” Entrepreneurship
- 25. Local vs Global? • Emerging / Developing Markets • Global Languages: English, Chinese, Spanish, Arabic • Critical Factors: Education, Mentorship, Capital • Capital Availability: Incubation, Seed, Series A • Positive Macro: SmartPhones, Tablets, Payments, Logistics, Growing Middle Class, Distribution Platforms • Wealthy Global Users, Shoppers, Travelers
- 26. How Big is Seed Stage Startup Market? 500 VCs invest in 10,000 startups/yr @ $500K/startup = $5B/yr 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, each of which starts 1-5 businesses lifetime (70 yrs) • hypothesis: talented entrepreneurs can create 1-5M new “startup” businesses every year ! NOW: let’s say we *ONLY* do the top 1% => the best 10,000 startups in the top 200 metros ! How many metros? How many investors / metro? How many startups / metro? • 1 [micro] VC can fund 10-20 startups/yr * $50K-$500K = ~$1-10M/yr annual budget • global metros of 1-10M+ ppl can generate 100-1,000 startups / year • 1-5 VCs in top 200 metros = 500 VCs x 20 startups/yr = 10,000 startups/yr • hypothesis: 500 VCs invest $500K each -> 20 startups/yr = $5B/yr -> 10,000 startups ! … so forget about 500 Startups, and start thinking about 500 VCs. 15
- 27. Questions? Comments? • More Info? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund) – Dave McClure, @DaveMcClure