Changes in VC + Building Startup Ecosystems
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This document provides an overview of a talk given by Dave McClure on changes in venture capital and building startup ecosystems. The key points covered include: 1. An introduction to 500 Startups, a global seed fund and startup accelerator that has invested in over 700 companies across 40+ countries. 2. Changes that have occurred in technology and venture capital due to factors like reduced costs, increased online platforms, and the rise of accelerators and angel investing. 3. How 500 Startups employs a "Lean VC" approach of making many small bets through incremental investment stages focused on product validation, market validation, and revenue validation.
Changes in VC + Building Startup Ecosystems
- 1. Changes in Venture Capital + Building Startup Ecosystems @DaveMcClure - 500 Startups Seoul, Korea - March 2014
- 2. This Talk • What is 500 Startups? • Changes in Tech + VC • “Lean VC”: Quantitative Venture Capital • Building Startup Ecosystems • Global Entrepreneurship • Q&A !2
- 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, 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
- 4. 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
- 5. 500 Startups: Global Seed Fund Over 200+ startups outside US, in 40+ countries
- 6. This Talk • What is 500 Startups? • Changes in Tech + Venture Capital !6
- 7. Lean Startup: Simpler, Faster, Cheaper, Smarter ! 1. 2. # Users, Bandwidth = Bigger. 3. ! ! Startup Costs = Lower. Transaction $$$ = Better. ! ➢ Building Product => Cheaper, Faster, Better ➢ Getting Customers => Easier, More Measurable ! Iterative Product & Marketing Decisions based on Measured User Behavior
- 8. Changes in Tech + VC • LESS Capital required to build product, get to market – Dramatically reduced $$$ 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
- 9. Platforms 2.0 Search, Social, Mobile, Video, Messaging
- 10. 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
- 11. Series A Crunch? Source: Bullpen Capital
- 12. 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+).
- 13. 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)
- 14. Angel* List: It Rocks. • • • • • Startups & Investors Syndicates & Backers Activity & Metrics Jobs & Talent Platform & APIs !
- 15. This Talk • What is 500 Startups? • Changes in Tech + VC • “Lean VC”: Quantitative Venture Capital !15
- 16. 500 Strategy: “Lots of Little Bets”* !16 *See Peter Sims book: “Little Bets”
- 17. 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
- 18. 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”)
- 19. 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
- 20. 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
- 21. 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
- 22. Lots of Little Bets aka “MoneyBall for Startups” • • VC Evolution: Physician, Scale Thyself (Aug 2012) MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)
- 23. This Talk • What is 500 Startups? • Changes in Tech + VC • “Lean VC”: Quantitative Venture Capital • Building Startup Ecosystems !23
- 24. !24
- 25. 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) !25
- 26. 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
- 27. Network Benefits • Silicon Valley HQ + founder network • Mentorship & Education • Platforms & Distribution • Downstream Investors • M&A / Exit Environment
- 28. 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)
- 29. 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
- 30. 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
- 31. 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 !31
- 32. This Talk • What is 500 Startups? • Changes in Tech + Venture Capital • Growing 500 + “The Lean VC” • GLOBAL Entrepreneurship !32
- 33. Going Local, Going Global web gets bigger -> world gets smaller
- 34. 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)
- 35. 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)
- 36. 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