Changes in Venture Capital @DaveMcClure
#Pioneers2013 Vienna October 2013

This Talk is About… •
• • • • • Industry Changes: Daft Punk Startup Myth Busting + Deconstructing: The Series A Crunch 500 Strategy: Lots of Little Bets Venture Metrics: The Lean VC Scalable Distribution: Platforms & Community Startup Geography: Local vs. Global vs. Valley

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 • 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

500 Startups Global Seed Fund
& Startup Accelerator • What is 500? – – – – – • $75M under management 30+ people / 10 investing partners Locations: SV, NYC, MEX, BRZ, IND, CHN, SE Asia 1000+ Founders / 200+ Mentors 25+ positive exits in ~3 years 500+ Portfolio Co’s / 40+ Countries – – – – – – – – – – – – – – – Wildfire (acq GOOG, $350M) MakerBot (acq SSYS, $400M) Viki (acq Rakuten, $200M) Twilio SendGrid Credit Karma VivaReal Udemy Zozi The RealReal Virool Visually Gengo PicCollage 9GAG

500 Startups: Global Seed Fund
Over 150+ startups outside US, in 40+ countries

Industry Changes, Oh. • •
• • • • SW Startup Efficiency, Reduced CapX Costs Growing Market, Growing Platforms VC Industry Upheavals (2000, 2008) Super Angel -> Micro VC: Seed Funds (ex: FRC) Incubators & Accelerators (ex: Y Combinator) Big VC (ex: A16Z) & Platforms (ex: Angel List) more info see: http://PreMoney.co

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

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 • 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

Angel* List: It Rocks. •
• • • Startups & Investors Activity & Metrics Platform & APIs Syndicates & Backers • *ps – not just for Angels, or USA

Startup Investor Ecosystem Bootstrap, KickStarter,
Crowdfunding Y-Combinator TechStars Angels & Incubators ($0-10M) SV Angel (Conway) Floodgate (Maples) “Micro-VC” Funds ($10-100M) First Round Union Square Incubation SoftTech (Clavier) Felicis (Senkut) Series A True “Big” VC Funds ($100-500M) Seed Foundry Series B Atomico Greylock “Mega” VC Funds (>$500M) A16Z Sequoia Series C+

Got Crunched Yet? Source: Bullpen
Capital

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

Crunch Good? Crunch Bad? Series
A bar is now 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+).

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)

500 Strategy: “Lots of Little
Bets”* 1) Make lots of little bets pre-traction, early-stage startups Quantitative Investing before Traction 250+ companies @ $25-100K (1st check) - Assume high failure rate (up to 80%) 2) after 6-12 months, identify top 20% performers and double-down higher $$$ Double-Down after Traction 50+ ‘winners’ @ $100K-$1M (2nd + 3rd check) - - Target 10+ exits @ $100M+ 3) conservative model assumes - 5-10% large exits @20X ($50-100M+) - 10-20% small exits @5X ($5-50M) 15 *See Peter Sims book: “Little Bets”

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

Platforms + Distribution • •
• • • • Mentors: Engineering, Design, Marketing Distribution: Search, Social, Mobile, Video, Local Global: LatAm, Asia, India, EU, ME, Africa Social: LinkedIn, Quora, Angel List Angel List, Second Market, Trusted Insight Dashboard.io, MatterMark, Funders Club

Platforms 2.0 Search, Social, Mobile,
Video, Messaging

Distribution Platforms Customer Reach: 100M-1B+
• Search: Google, Baidu, Yahoo/Bing, Yandex • Social: Facebook, Twitter, LinkedIn, TenCent/QQ, WeChat • Mobile: Apple (iOS), Android • Media: Video (YouTube), Photos (Instagram, Pinterest), Blogs • Comm: SMS, IM (WeChat, WhatsApp), Skype, Phone/Voice, etc

Going Local, Going Global web
gets bigger -> world gets smaller

Local vs Global? • •
• • • • • The Valley is Unique… (but it’s not just California) Emerging / Developing Markets Global Languages: English, Chinese, Spanish, Arabic Startup Ecosystems: Education, Mentorship, Capital Limited History of Exits & IPOs Does the Future look different? (yes, we think so) More Coming: Payments, Logistics, Mobile/Web Penetration, Growing Middle Class, Distribution

Questions? Comments? Heckles? • Thanks
for Listening • Feedback Appreciated • Still Learning / Iterating • More Info? – – – – http://500.co (our company) http://500hats.com (my blog) https://angel.co/500startups (our fund) Dave McClure, @DaveMcClure