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Silicon Valley 2.0: Lots of Little Bets + Beating the Series A Crunch

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slides from my talk on changes in tech startups & investing @ Echelon 2013 (Singapore, June 2013).

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Silicon Valley 2.0: Lots of Little Bets + Beating the Series A Crunch

  1. Silicon Valley 2.0 Lots of Little Bets + Beating the “Series A Crunch” Dave McClure http://500.co (@DaveMcClure) Echelon 2013 Singapore, June 2013 http://slideshare.net/dmc500hats
  2. 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
  3. 500 Startups Global Seed Fund & Startup Accelerator • What is 500? – ~$70M under management – 25 people / 12 investing partners – Locations: SV, NYC, MEX, BRZ, IND, CHN, SE asia – 1000+ Founders / 200+ Mentors • 500+ Portfolio Co’s / 30+ Countries – Wildfire (acq GOOG, $350M) – Twilio – SendGrid – TaskRabbit – MakerBot – Viki (SG) – Flyer.IO (SG/SV) – 9GAG (HK) – PicCollage (TWN) – Cubie (TWN) – WooMoo (TWN) – Payroll Hero (PI/Canada) – TwitMusic (PI)
  4. 500 Startups: Global Seed Fund Over 100+ startups outside US, in 35+ countries • Q4/12 added: Germany, Korea, Peru; + Russia, Turkey, Ghana in Q2/13 • Priorities in 2012: Brazil, Mexico, India • Priorities In 2013: China, SE Asia, MENA, Eastern Europe
  5. 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)
  6. Changes in Tech Startups • LESS Capital required to build product, get to market – Dramatically reduced $$$ on servers, software, bandwidth – Crowdfunding, KickStarter, Angel List, Funders Club, etc – Cheap access to online platforms for 100M+ consumers, smallbiz, etc – A few big IPOs @ $1B+, but LOTS of small acquisitions (<$100M) • MORE Customers via ONLINE platforms (100M+ users) – Search (Google) – Social (Facebook, Twitter) – Mobile (Apple, Android) – Local (Yelp, Groupon, Living Social) – Media (YouTube, Pinterest, Instagram, Tumblr) – Comm (Email, IM/Chat, Voice, SMS, etc) • LOTS of little bets: Accelerators, Angels, Angel List, Small Exits – Y Combinator, TechStars, 500 Startups – Funding + Co-working + Mentoring -> Design, Data, Distribution – “Fast, Cheap Fail”, network effects, quantitative + iterative investments
  7. Think Different: Lean, Little, Startup, Metrics.
  8. Daft Punk Lean Startup: Simpler, Faster, Cheaper, Smarter 1. Startup Costs = Lower. 2. # Users, Bandwidth = Bigger. 3. Transaction $$$ = Better.  Building Product => Cheaper, Faster, Better  Getting Customers => Easier, More Measurable Iterative Product & Marketing Decisions based on Measured User Behavior
  9. Lean Startup, Lean VC Customers, Metrics, Iteration. Invest BEFORE Traction; Double Down AFTER.
  10. 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”)
  11. 11 500 Strategy: “Lots of Little Bets”* 1) Make lots of little bets pre-traction, early-stage startups 2) after 6-12 months, identify top 20% performers and double-down higher $$$ 3) conservative model assumes -5-10% large exits @20X ($50-100M+) -10-20% small exits @5X ($5-50M) *See Peter Sims book: “Little Bets”
  12. 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
  13. 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
  14. 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
  15. Startup Investor Ecosystem Angels & Incubators ($0-10M) “Micro-VC” Funds ($10-100M) Smaller VC Funds ($100-500M) Larger VC Funds (>$500M) TrueFirst Round AndreessenAtomico Y-Combinator TechStars SoftTech (Clavier) Felicis (Senkut) SV Angel (Conway) SequoiaGreylock Union Square Floodgate (Maples) Foundry Group Bootstrap, KickStarter, Crowdfunding
  16. Early-Stage Investment 101: Incremental 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?
  17. Bet on Singles, Not HomeRuns. (Look for Ichiros, Not Barry Bonds)
  18. Beating The Series A “Crunch” Customers Distribution Revenue
  19. Got Crunched Yet? Source: Bullpen Capital
  20. Before & After 2 Dot-Com Crashes Daft Punk Startup: 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
  21. Crunch Good? Crunch 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 • Overall, founders / market getting smarter • More focus on customers, problems, revenue • Many die, some survive (1-5x), a few thrive (20x+).
  22. Formula 4 Getting “UN-Crunched” • Build Something People Want (Problem/Need) • …and will PAY FOR (Business Model) • Get Customers (Not Your Mom) then… • Just GROW, Baby. (Growth Hackers FTW) – Users – Usage – Revenue
  23. Angel* List: It Rocks. • Startups & Investors • Activity & Metrics • Platform & APIs • *ps – not just for Angels, or USA
  24. Platforms 2.0 Search, Social, Mobile
  25. Platform Viability Users .Users . . Money . Money FeaturesFeatures Growth Profit Profitable Growth Nirvana Successful Platforms have 3 Things: 1) Features 2) Users 3) Money
  26. Distribution Platforms Customer Reach: 100M-1B+ • Search: Google, Baidu, Yahoo/Bing, Yandex • Social/Games: Facebook, Twitter, LinkedIn, TenCent/QQ, WeChat • Mobile: Apple (iOS), Android • Local: Yelp, Groupon, LivingSocial, FourSquare • Media: Video (YouTube), Blogs (Tumblr), Photos (Instagram, Pinterest) • Comm: SMS, IM (WeChat, Line, WhatsApp), Skype, Phone/Voice, etc
  27. 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
  28. 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 1. 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  * Mint acquired by Intuit in Sept 2009 for $170M
  29. Startup Incubators & Metrics Lots of Little Bets. Most FAIL. (but a few succeed :)
  30. 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
  31. 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
  32. 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
  33. Product, Market, Revenue • Product: assess functional use, improve design/UX • Market: test usage, distribution channels • Revenue: test cust acq cost, revenue, timing of both • Pitch: Work on Pitch, Help Find Co-Investors, etc
  34. Outlier Competition + Modeling Success Behaviors • Goal: 3-5 “rockstars” to compete (w/ each other) • A-students model success for B & C students – (and B & C students model FAIL for A-students) • Can’t assume >20% rockstars, so… – Aim for 15-25+ teams (x 20% = 3-5 outliers) • 3-5 great teams emerge, compete, win – 5-10 *other* lesser teams learn & win too
  35. 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) 
  36. #INCREMENTALINNOVATION #IteratIONFTW How 2 Boil a Frog
  37. Most Businesses Suck @ Innovation. • They Don’t Know Technology. • They Don’t Know How to Code. • They Don’t Know SEO or SEM. • They Don’t Know Email Marketing. • They Don’t Know Social, Video, Local, Mobile. • They Don’t Know Good Design or UX. • They Don’t Know How to Cut & Paste. • They Don’t Know How to Use PayPal.
  38. Most Things Suck. • But, We Can Easily Make Most Things Better. • Tech + Web = Reduced Overhead Costs. • Search + Social Platforms = Better Marketing. • Copy Existing Business Model = Reduced Risk. • FOCUS = Make ONEthing / SOMEthing Better.
  39. #TonyStark #DOESNTSUCK http://marvel.com/ironman3
  40. You Don’t Have to be Tony Stark • Just Copy/Use the Stuff that Tony Stark Makes. – Tip: Most People Won’t Notice U Aren’t Tony Stark. • Copy/Use 99% All The Amazing Stuff Out There. • Innovate on the other 1%. • Innovate 1% More Every Month. • Then Kick Back and Have a Beer.
  41. #EVILPLAN #MWAHAHA Everyone Needs An Evil Plan (Hugh MacLeod)
  42. Formula 4 Awesome: Notice Things That Suck. Make Them Suck Less. • Most Offline Businesses Are Inefficient. (Web 1.0, Web 0.0) • Lots of Overhead, Crappy UX, Crappy Marketing. • Copy Their Business Model (It Already Makes $$$). • Reduce Overhead Cost (Be a Scrappy Startup). • Increase Marketing Efficiency (Do Online Marheting). • Copy/Integrate 99% Awesome Stuff (aka Tech) • Innovate on the Remaining 1%. • Keep Innovating 1%. Every Month
  43. Ok, Let’s Try It. • Find an existing, physical-world big dumb business that makes money, but kinda sucks. • Verify they have high overhead costs, inefficient [offline] marketing, crappy service. • Copy the business model, reduce overhead costs, improve marketing. • Add some awesome technology, and then innovate on ONE important thing.
  44. Problem: Ordering Food Sucks. (see blog post “Why Menus Suck”) • Issues: – Waiters – Menus – Pictures – Sharing – Discounts – Customer Lists – Food Quality – Food Service – Reviews – Delivery Time – Payment • Solutions: – ElaCarte – KitchIt – FoodA – Chewse – CraftCoffee – LoveWithFood – GoldBely – TeaLet – Ordr.in – MileHighOrganics – WholeShare
  45. #BRANDING101 #THINKDIFFERENT Here’s To The Crazy Ones. (Jobs)
  46. 3 Basic Types of Brands: Virgin, Southwest, [Niche] • Virgin = “Mass Luxury” (+ sexy) – High-End Look & Feel, priced just barely within reach of most middle-class customers, who love the “red-carpet” treatment  • Southwest = “Convenience & Value” (+ funny) – Stuff that just works, not very expensive, great value for everybody. (Who doesn’t like Southwest?) • [Niche] = “Just for You & Me” – Designed for well-defined customer segments / attributes. – Less competition, higher margins, better retention – Ex: Gay, Old, Black, Short, Female, Moms, Left-Handed, Etc
  47. Going Local, Going Global web gets bigger -> world gets smaller
  48. Global Trends • Growth of Global Languages (see MyGengo.com) – 1B+ speakers: Mandarin, English – 300-500M+ spkrs: Spanish, Arabic • Smart Device Proliferation – mobile, tablet, TV, console, etc • More Young, More Old ($$$) 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
  49. Thanks  • Questions / More Info? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund) – Rui Ma, 500 Startups China (@MissRuiMa) – Khailee Ng, 500 Startups SE Asia (@Khailee) – Dave McClure, 500 Startups USA (@DaveMcClure)

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