Silicon Valley 2.0Lots of Little Bets +

Moneyball for Startups

Dave McClurehttp://500.co (@DaveMcClure)

January 2013http://slideshare.net/dmc500hats

Dave McClureFounding 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 StartupsGlobal 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 Fundstartup investments in over 30 countries

Last 6 months added: Germany, Korea, Peru; Russia & Turkey in Q1/13

Venture Capital 2.0: Lots of Little Bets

aka “MoneyBall for Startups”

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.

Building Product => Cheaper, Faster, Better 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 Bets2. Count Cards (Monitor Progress &

Stats)3. Double Down on Winners

70% Capital

10

500 Strategy: “Lots of Little Bets”*

1) Make lots of little bets pre-traction, early-stage startups

30% Capital

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”

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

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” Trusted Referrals + History– “Great Team” Functional Prototype + Usage– “Size of Market” 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 2.0Search, Social, Mobile

Platform Viability

Users .Users . . Money

. Money

FeaturesFeatures

Growth Profit

ProfitableGrowth

Nirvana

Successful Platforms have 3 Things:1) Features2) Users3) Money

Distribution PlatformsCustomer 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

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

Lean Startup, Lean VCCustomers, 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

• Prune losers quickly

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 Globalweb 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)