slides for my talk on chang

1. Silicon Valley 2.0
Lots of Little Bets +
Moneyball for Startups
Dave McClure
http://500.co
(@DaveMcClure)
Salt Lake City, January 2013
http://slideshare.net/dmc500hats

2. Dave McClure
Founding 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

3. 500 Startups
Global 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

4. 500 Startups: Global Seed Fund
startup investments in 30+ countries
• Q4/12 added: Germany, Korea, Peru; + Russia & Turkey in Q1/13
• Priorities In 2013: SE Asia, Middle East, Eastern Europe

5. Venture Capital 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, 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

7. Web 2.0 + Lean Startup
1. Startup Costs = Lower.
2. # Users, Bandwidth = Bigger.
3. Transaction $$$ = Better.
Ø Building Product => Cheaper, Faster, Better
Ø Getting Customers => Easier, More Measurable
Iterative Product & Marketing Decisions
based on Measured User Behavior

8. Think Different.

9. MoneyBall 4 Startups
http://slideshare.net/paulsingh/
moneyball-a-quantitative-approach-to-angel-investing-austin-tx-aug-2012
1. Make Lots Of Little Bets
2. Count Cards (Monitor Progress & Stats)
3. Double Down on Winners

10. 500
Strategy:
“Lots
of
Li-le
Bets”*
Quan.ta.ve
Inves.ng
before
Trac.on
1)
Make
lots
of
li?le
30%
bets
pre-­‐tracBon,
250+
companies
@
$50K
avg.
(1st
check)
-­‐
Assume
high
failure
rate
(up
to
80%)
Capital
early-­‐stage
startups
2)
aGer
6-­‐12
months,
idenBfy
Double-­‐Down
a'er
Trac.on
70%
top
20%
performers
and
50+
‘winners’
@
$100K-­‐$1M
Capital
double-­‐down
higher
$$$
(2nd
+
3rd
check)
-­‐
-­‐
Target
10+
exits
@
$100M+
3)
conservaBve
model
assumes
-­‐ 5-­‐10%
large
exits
@20X
($50-­‐100M+)
-­‐ 10-­‐20%
small
exits
@5X
($5-­‐50M)
10
*See Peter Sims book: “Little Bets”

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

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

13. 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?

14. 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” à Trusted Referrals + History
– “Great Team” à Functional Prototype + Usage
– “Size of Market” à 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.

15. Bet on Singles, Not HomeRuns.
(Look for Ichiros, Not Barry Bonds)

16. Platforms 2.0
Search, Social, Mobile

17. Platform Viability
Successful
PlaRorms
have
3
Things:
Features
1)
Features
2)
Users
3)
Money
Growth
Profit
Nirvana
Profitable
.
Users
.
Growth
Money

18. Distribution Platforms
Customer 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

19. 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

20. 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 J
* Mint acquired by Intuit in
Sept 2009 for $170M

21. Lean Startup, Lean VC
Customers, Metrics, Iteration.
Invest BEFORE Traction;
Double Down AFTER.

22. 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

23. Startup Incubators & Metrics
Lots of Little Bets. Most FAIL.
(but a few succeed :)

24. 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

25. 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

26. Education & Community
• Mentors, Investors
• Design, Data, Distribution
• Platform Partners
• Sponsors & Strategics
• Marketing & Visibility

27. 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

28. 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

29. 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
• Identify losers quickly (but don’t be an ass)

30. 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.

31. 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) 

32. 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”)

33. 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

34. 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

35. 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

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

37. 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

38. 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)