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Changes in Venture Capital (Pioneers, Vienna)
1. Changes in Venture Capital
@DaveMcClure
#Pioneers2013 Vienna
October 2013
2. This Talk is AboutâŚ
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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
3. Dave McClure
Founding Partner & Chief Troublemaker, 500 Startups
00âs & 10âs:
⢠VC: Founders Fund, Facebook fbFund, 500 Startups
⢠Angel: Mashery, Mint.com, SlideShare, Twilio
⢠Marketing: PayPal, Simply Hired, Mint.com, OâReilly
80âs & 90âs:
⢠Entrepreneur: Aslan Computing (acqâd by Servinet/Panurgy)
⢠Developer: Windows / SQL DB consultant (Intel, MSFT)
⢠Engineer: Johns Hopkinsâ88, BS Eng / Applied Math
4. 500 Startups
Global Seed Fund & Startup Accelerator
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What is 500?
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$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 Coâs / 40+ Countries
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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
6. Industry Changes, Oh.
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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
7. Daft Punk Lean Startup:
Simpler, Faster, Cheaper, Smarter
1. Startup Costs = Lower.
2. # Users, Bandwidth = Bigger.
3. Transaction $$$ = Better.
ď Building Product => Cheaper, Faster, Better
ď Getting Customers => Easier, More Measurable
Iterative Product & Marketing Decisions
based on Measured User Behavior
8. Changes in Tech Startups
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LESS Capital required to build product, get to market
â Dramatically reduced $$$ on servers, software, bandwidth
â Crowdfunding, KickStarter, Angel List, Funders Club, etc
â Cheap access to online platforms for 100M+ consumers, smallbiz, etc
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MORE Customers via ONLINE platforms (100M+ users)
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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
â Y Combinator, TechStars, 500 Startups
â Funding + Co-working + Mentoring -> Design, Data, Distribution
â âFast, Cheap Failâ, network effects, quantitative + iterative investments
9. Angel* List: It Rocks.
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Startups & Investors
Activity & Metrics
Platform & APIs
Syndicates & Backers
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*ps â not just for Angels, or USA
10. Startup Investor Ecosystem
Bootstrap, KickStarter,
Crowdfunding
Y-Combinator
TechStars
Angels &
Incubators
($0-10M)
SV Angel (Conway)
Floodgate (Maples)
âMicro-VCâ Funds
($10-100M)
First Round
Union Square
Incubation
SoftTech (Clavier)
Felicis (Senkut)
Series A
True
âBigâ VC Funds
($100-500M)
Seed
Foundry
Series B
Atomico
Greylock
âMegaâ VC Funds
(>$500M)
A16Z
Sequoia
Series C+
12. 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
13. 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 âfailâ
⢠BUT: Fail Budget = $50-$500K, not $5M+
⢠Many âfailedâ 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+).
14. Silicon Valley 2.0:
Lots of Little Bets
aka âMoneyBall for Startupsâ
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VC Evolution: Physician, Scale Thyself (Aug 2012)
MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)
15. 500 Strategy: âLots of Little Betsâ*
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+ âwinnersâ @ $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)
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*See Peter Sims book: âLittle Betsâ
16. 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 (âBuild & Validate Productâ)
⢠Seed: $100K-$1M (âTest & Grow Marketing Channelsââ)
⢠Venture: $1M-$10M (âMaximize Growth & Revenueâ)
17. Investment Stage #1:
Product Validation + Customer Usage
⢠Structure
â 1-3 founders
â $25-$100K investment
â Incubator environment: multiple peers, mentors/advisors
⢠Test Functional Prototype / âMinimum Viable Productâ (MVP):
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Prototype->Alpha, ~3-6 months
Develop Minimal Critical Feature Set => Get to âIt Works! Someone Uses It.â
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
â 2-10 person team
â $100K-$1M investment
â Syndicate of Angel Investors / Small VC Funds
⢠Improve Product, Expand Customers, Test Revenue:
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Alpha->Beta, ~6-12 months
Scale Customer Adoption => âMany People Use It, & They Pay.â
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
â 5-25 person team
â $1M-$10M investment
â Seed & Venture Investors
⢠Make Money (or Go Big), Get to Sustainability:
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Beta->Production, 12-24 months
Revenue / Growth => âWe Can Make (a lot of) Money!â
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. Platforms + Distribution
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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
24. Local vs Global?
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The Valley is Unique⌠(but itâs 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
25. Questions? Comments? Heckles?
⢠Thanks for Listening
⢠Feedback Appreciated
⢠Still Learning / Iterating
⢠More Info?
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http://500.co (our company)
http://500hats.com (my blog)
https://angel.co/500startups (our fund)
Dave McClure, @DaveMcClure