slides from my talk for Kauffman Fellows Program (Palo Alto, July 2013)

1. Building #500STRONG
Dave McClure
Palo Alto, CA - July, 2013

2. Building 500
• Industry Changes & Challenges
• Fundraising & Team-Building
• Brand & Marketing
• Deal Flow & Selection
• Platforms, Community, Portfolio Development
• Follow-On Strategy & Downstream Investors
• Investor Relations & Reporting
• Scale, Scalability, Big Data for VC
• Local vs Global, Valley vs US Domestic vs Intl
• Feedback Loop & Metrics

3. 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, WildFire, SendGrid
• Marketing: PayPal, Simply Hired, Mint.com, oDesk, 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 Startups
Global Seed Fund & Startup Accelerator
• What is 500?
– ~$70M under management
– ~30 people / 10 investing partners
– Locations: SV, NYC, MEX, BRZ, IND, CHN, SE Asia
– 1000+ Founders / 200+ Mentors
– 22 positive exits in <3 years
• 500+ Portfolio Co’s / 30+ Countries
– Wildfire (acq GOOG, $350M)
– MakerBot (acq SSYS, $400M)
– Twilio
– SendGrid
– TaskRabbit
– Viki
– Smule
– AppStack
– 9GAG
– MediaLets
– PicCollage

5. 500 Startups: Global Seed Fund
Over 100+ startups outside US, in 35+ countries
• Q4/12 added: Germany, Korea, Peru; + Russia, Turkey, Ghana in Q2/13
• Priorities in 2012: Brazil, Mexico, India
• Priorities In 2013: China, SE Asia, MENA, Eastern Europe

6. 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)

7. Fundraising & Team-Building
• Ignorance & Inexperience
• New Fund, Small Fund
• Crazy Strategy, Crazy People
• No Money, No History
• Manufacturing a Budget
• Writing, Telling, Believing, Living Your Story
• Hustle & Humility

8. Long Journey
• East Coast -> West Coast
• Geek: Engineer & Programmer
• Entrepreneur: Small Startup, Small Exit
• Marketing: PayPal, Simply Hired, Mint.com
• Community: Blogs, Frisbee, Facebook, Twitter
• Investing: Angel, Founders Fund, fbFund
• 500 Startups

9. Industry Changes, Challenges
• 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)
• http://PreMoney.co

10. 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

11. 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

12. Strategy, Brand & Marketing
• FUN! IRREVERENCE! FLIP-FLOPS! Etc
– don’t be boring; don’t wear khakis + blue shirt + blazer
• Lots of Little Bets, Online Platforms
• Design, Data, Distribution
• Blogging, Facebook, Twitter
• #500STRONG: for Geeks, by Geeks
• Seed Fund vs Accelerator
• Community: from Silicon Valley to the World
• Conferences & Events
• GeeksOnaPlane.com

13. 13
Quantitative Investing before Traction
250+ companies @ $25-100K
(1st check)
- Assume high failure rate (up to 80%)
Double-Down after
Traction
50+ ‘winners’ @ $100K-$1M
(2nd + 3rd check)
- - Target 10+ exits @ $100M+
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. Deal Flow, Strategy & Selection
• Lots of Little Bets
• Take Lots of Small Risk, Early & Often
• Differentiation & Branding
• Revenue Emphasis, Small but Real Problems
• Focus on Online Platforms
• Hacker, Hipster, Hustler
• Global vs Local

15. Minimum Viable Team:
Hacker, Hipster, Hustler
• Hacker: engineers & developers
• Hipster: design & user experience (UX)
• Hustler: marketing & business, “growth hacker”
1. Build functional prototypes
2. Improve UX so people convert
3. Scale customer acquisition & distribution

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 (“Build & Validate Product”)
• Seed: $100K-$1M (“Test & Grow Marketing Channels””)
• Venture: $1M-$10M (“Maximize Growth & Revenue”)

17. 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

18. 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

19. 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

20. Portfolio Development
• How do we help? How can we help?
• Importance of (trying to be) Helpful
• Board seats or not? Useful to VC, not founders
• Product, Market, Revenue
• Mentorship & Connections
• Platforms & Distribution
• Downstream Investors & Syndicates

21. Platform(s) & Community
• Mentors: Engineering, Design, Marketing
• Distribution: Search, Social, Mobile
• Global: LatAm, Asia, India, EU, etc
• Social: LinkedIn, Quora, Angel List
• Angel List, Second Market, Trusted Insight
• Dashboard.io, MatterMark

22. Platforms 2.0
Search, Social, Mobile, Vide
o, Messaging

23. 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

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

25. Follow-On Strategy
• Should we follow-on? Why or Why Not?
• Signaling Risk vs Portfolio Returns
• Investor opinion shouldn’t matter more than
business fundamentals (if so, it’s a problem)
• Downstream Investor Syndicate is critical
• Using Angel List to drive visibility
• Global Strategies (more capital, connections)

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

27. Got Crunched Yet?
Source: Bullpen Capital

28. 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

29. Crunch Good? Crunch Bad?
• Series A bar 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+).

30. Investor Relations & Reporting
• What do Investors Care About?
• Returns? Dealflow? Strategy?
• How / When do you report this?
• Data Collection & Accuracy
• LPs and Co-Investors are Community too!

31. Scale & Scaling VC
• Lots of Little Bets? Or a Few Big Bets?
• Power Laws, Singles vs Home Runs
• Focus on Network Effects
• Communication Platforms
• Ideal Portfolio Size vs Investment Stage

32. Local vs Global?
• The Valley is Unique… sort of.
• Emerging / Developing Markets:
• Too Soon? Too Late? Valuation?
• English, Chinese, Spanish, Arabic
• Investor Ecosystems
• Mentorship & Community
• Limited History of Exits & IPOs
• Does the Future look different? (yes, we hope)
• Selling Into Future Rounds

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

34. 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

35. Feedback Loop & Metrics
• Bad decisions = obvious quickly
• Good decisions = not obvious for years
• Short-term metrics: revenue, users, next round
• Sharing best practices for decisions
• Lots of Little Bets helps speed up learning
• “Winners” vs Numeric Returns
• Economics of 1st check vs follow-on
• Easy to get big multiples on small checks, BUT
• Larger checks with smaller multiples still good

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