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Unlocking Silicon Valley: Investing in Tech Startups
@DaveMcClure @500Startups http://500.co
Miami, Nov 2015
Dave McClureFounding 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, 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
• What is 500? – $200M silicon valley VC fund + startup accelerator – 100+ people / 30 investing partners / 18 countries / 20+ languages – 2500+ Founders / 250+ Mentors – Community + Education + Events
• ~1300+ Portfolio Co’s / 50+ Countries – Credit Karma ($3B+) – Twilio ($1B+) – GrabTaxi ($1B+) – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Simple (acq BBVA, $117M) – Sunrise (acq MSFT, $100M) – SendGrid – Udemy – Barkbox – Intercom – TalkDesk
500 Startups Global Seed Fund & Startup Accelerator
The 500 Portfolio: Over 1,000 Companies in 50 Countries
3 Unicorns > $1B+ in valuation
30 Centaurs > $100M+ in valuation
300 Ponies > $10M+ in valuation
Udemy VivaReal Smule TalkDesk Intercom WePay Sendgrid
TheRealReal Womply Life360 StyleSeat Peertransfer Vungle
ElaCarte Ipsy Remind BarkBox Plangrid Tradesy Virool
Kinnek Sprig
Skimlinks ToutApp Recurly ContaAzul Zozi BoostCTR OwnLocal Brainient Bustle LeTote Breather Mayvenn SpotHero Canva TokyoOtakuMode ClubW Muse Geekatoo Transcriptic SnapSheet Algolia Juxta Labs
RealtyShares Unikrn Lenda AgFunder BTCjam Junglee Culture Alley Cleanify Italist AllDay Avanoo Neighborly Holidog ViralGains SilverPush StudyPool ++++
500 Startups: 100+ Investors, Entrepreneurs, Geeks from Silicon Valley / USA + 17 other Countries
The title “Partner” is used in accordance with customary business practice in the venture capital industry and does not indicate a legal
Dave McClure Christine TsaiFOUNDING FOUNDING PARTNER
Khailee NgMANAGING
Bedy YangMANAGING
SOUTH EAST ASIA LATAM/BRAZIL
Hasan Haider
Santiago Zavala
Rui Ma
Marvin Liao
Elizabeth Yin
Edith Yeung
Sean Percival
Adam Benayoun
Juan L. Salaberry
Pankaj Jain
Mojan MovassateMax Fram-Schwartz Ryan Lawler
Andrea Barrica
Zafer Younis
Krating Poonpol Natavudh P. (Moo)Cjin Cheng Binh Tran
Emily Chiu
Diana Moldavsky
Robert Neivert
Eddie Thai
Erhan ErdoganPhilipp Moehring
James Riney Mat Johnson Matt Lerner Tammy Camp
Tim Chae
Early employee Paypal, early ‘Super Angel’, venture capitalist at Founder’s Fund, led
fbFund.
Early employee YouTube, led developer community building for Google after
YouTube’s acquisition
Built and exited 2 startups in 3 years. GroupsMore sold to
Groupon + SAYS.com merged to be listed on
the Malaysian stock exchange
Founded Brazil Innovators and built
startup ecosystems in Latin America, and most
active seed investor threre. Kauffman Fellow
[ This Talk ]
• Changes in Building Technology Startups • Changes in Venture Capital Investing • Silicon Valley Investing Unlocked
Before & After 2 Dot-Com CrashesLEAN Startup: Simpler, Faster, Cheaper, Smarter
Before 2000 Big, Fat, Dinosaur Startup • 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
After 2008 Lean, Little, Cockroach Startup • 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
Changes in Tech Startups• LESS Capital required to build product, get to market
– Dramatically reduced cost for servers, software, bandwidth – Funding Platforms: KickStarter, Angel List, Funders Club, etc – Access to online platforms for 100M-1B+ consumers, smallbiz, etc
• MORE Customers via ONLINE platforms (100M+ users) – Search (Google, Baidu) – Social (Facebook, Twitter, LinkedIn) – Mobile (Apple, Android) – E-Commerce (Amazon, Ebay/PayPal, Alibaba) – Media (YouTube, Pinterest, Instagram) – Comm/Msgs (WeChat, WhatsApp, Line, SnapChat, Email, Voice, SMS, etc)
• LOTS of little bets: Accelerators, Angels, Angel List, Small Exits – Capital + Co-working + Mentoring -> Design, Data, Distribution – “Fast, Cheap Fail”, network effects, quantitative + iterative investments
Platforms 2.0 Search, Social, Mobile,
Video, Messaging
Building Tech Startups
Make lots of little bets: • Start with many small “experiments” • Filter out failures + small wins • Double-down on stuff that looks like it’s working
• Incubation: $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 / Unit Economics, Find Profitable Customer Segments
• Prove Solution/Benefit, Assess Market Size • Test Channel Cost, Unit Economics, 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
[ This Talk ]
• Changes in Building Technology Startups • Changes in Venture Capital Investing • Silicon Valley Investing Unlocked
VC Industry Changes• Lean Startup Efficiency, Reduced Capital Costs • Global Market: 3B->6B Internet/Smartphone Access • Billion-Person Distribution Platforms, “Growth Hacking” • Improved Monetization, Payments Infrastructure, Logistics
• Explosion of “Unicorns”, Private Capital Displacing IPOs • Seed Funds, Angel Investors, Accelerators, Funding Platforms • Global Market for Customers, Investors, Acquirers
more info: http://PreMoney.co
Investor Education
• Startups are NOT Real Estate • Most Startups Fail / Power Law Returns • Portfolio Approach (20-50+ investments) • Legal Structure, Financial Structure • Syndication + Co-Investment • Access to Downstream Capital • Exits & Liquidity
16
500 Strategy: Lots of Little Bets*
1) make lots (>100) of investments in early-stage startups
3) wait 3-10 years for returns: -10-20% small exits @1-5X (<25M+) -5-10% larger exits @5-20X ($25-250M+) -1-2% unicorns @20-50X+ (>$250M-1B+)
*See Peter Sims book: “Little Bets”
2) over next 2 years, double-down on top 20%
Startup Risk Reduction
ConceptEarly
Customer Usage
Scalable Customer
Acquisition
[about to be] Profitable
Unit Economics
Scalable Profitable Business
Functional Prototype
PRODUCT
MARKET
REVENUE
Exit?
When 500 Likes to Invest
Legal review Partner approval
Angel Pre-Seed Seed Post-Seed Series A/B Growth
Accelerator
How 500 Invests
Seed
“Distro"
Follow-On
Selection Criteria – Data-Driven Process Based on Pre-defined Metrics • Product or service solves a problem for a specific target customer • Capital-efficient business; operational at less than $1M in external financing • Scalable internet-based distribution (search, social, mobile) or proven ability to scale sales • Functional prototype required before investing (or previous product success) • Measurable traction: engaged users, some revenue, and attractive unit economics • Cross-functional team with design, engineering and marketing expertise
[ This Talk ]
• Changes in Building Technology Startups • Changes in Venture Capital Investing • Silicon Valley Investing Unlocked
Critical Ecosystem Factors
• Optimism & Belief (“Silicon Valley”) • Mentorship + Education (Knowledge) • Universities + Companies (People) • Capital, Legal, Finance (Infrastructure) • Engineering + Design / UX (Product) • Platforms + Distribution (Customers) • Online Payments (Monetization) • IPO / M&A Market (Exits)
21
Q: Chances of spotting unicorn? /
a) 1% b) 2% c) 5% d) 10%
Q: Chances of spotting unicorn? /
a) 1% b) 2% c) 5% d) 10% e) ZERO
Chances of spotting unicorn = ~1%/
Portfolio Diversification “Spray, not Pray”
If portfolio size = 15 companies /
/ If portfolio size = 30 companies
/ If portfolio size = 100 companies
500 Startups + Stanford University Investor Education Program
#Venture Capital Unlocked: Learn best practices of Silicon Valley Investing#Startup Accelerator: Build your own accelerator with 500 Startups #VC/Angel 101: How to build an early-stage investment thesis
#500VCs
How to build investment thesis
Meet REAL startup founders and conduct selection
Connection with Silicon Valley investors and mentors
Legal docs: cap table and standard terms
How to generate deal flow Trends and relevant area of investments
500 Startups + Stanford University Investor Education Program
#500VCs
Feb 8th-19th 2016 @ Stanford+500
signup NOW: http://500.vc
500 Startups + Stanford University Investor Education Program
#500VCs
Questions? Comments?
• More? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund) – Dave McClure, @DaveMcClure
