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Changes in Tech Startups & Venture Capital

Changes in Tech Startups & Venture Capital. @ DaveMcClure #GOAP Istanbul Nov 2013. This Talk…. Industry Changes: Daft Punk Lean Startup Myth Busting + Deconstructing: The Series A Crunch 500 Strategy: Lots of Little Bets Venture Metrics: The Lean VC

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Changes in Tech Startups & Venture Capital

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  1. Changes in Tech Startups& Venture Capital @DaveMcClure #GOAP Istanbul Nov 2013

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

  3. Dave McClureFounding 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

  4. 500 StartupsGlobal 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 (acqRakuten, $200M) • Twilio • SendGrid • Credit Karma • VivaReal • Udemy • Zozi • The RealReal • Virool • Visually • Gengo • PicCollage • 9GAG • ParlakBirGelecek

  5. 500 Startups: Global Seed FundOver 150+ startups outside US, in 40+ countries

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

  7. 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 Customersvia ONLINE platforms (100M+ users) • Search (Google) • Social (Facebook, Twitter) • Mobile (Apple, Android) • Local (Yelp, Groupon, FourSquare) • 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

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

  9. Daft Punk Lean Startup:Simpler, Faster, Cheaper, Smarter • Startup Costs = Lower. • # Users, Bandwidth = Bigger. • Transaction $$$ = Better. • Building Product=> Cheaper, Faster, Better • Getting Customers=> Easier, More Measurable • Iterative Product & Marketing Decisions • based on Measured User Behavior

  10. Before & After 2 Dot-Com CrashesDaft 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

  11. Series A Crunch: Good or Bad? Series A rqmts: $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+).

  12. 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)

  13. 500 Strategy: “Lots of Little Bets”* 1) Make lots of little bets pre-traction, early-stage startups 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”

  14. 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”)

  15. 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

  16. 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

  17. 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

  18. 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

  19. Platforms 2.0Search, Social, Mobile, Video, Messaging

  20. 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 Distribution Platforms

  21. Going Local, Going Globalweb gets bigger -> world gets smaller

  22. Local vs Global? • Emerging / Developing Markets • Global Languages: English, Chinese, Spanish, Arabic • Critical Factors: Education, Mentorship, Capital • Capital Availability: Incubation, Seed, Series A • Positive Macro: Payments, Logistics, Mobile/Web Penetration, Growing Middle Class, Distribution

  23. 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, auto, home, 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, Logistics • Dramatically Reduced Cost: Product Dev, Customer Acqstn • Global Distribution Platforms • US/EU: AAPL, FB, AMZN, GOOG (Search, YouTube, Gmail, Android), TWTR • Asia: Baidu, Tencent, Alibaba, Sina, NHN, Yahoo-J, Softbank, Rakuten, DeNA, Gree

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

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