farming unicorns: building startup & investor ecosystems for emerging markets

The New ColossusNot like the brazen giant of Greek fame,

With conquering limbs astride from land to land; Here at our sea-washed, sunset gates shall stand

A mighty woman with a torch, whose flame Is the imprisoned lightning, and her name Mother of Exiles. From her beacon-hand

Glows world-wide welcome; her mild eyes command

The air-bridged harbor that twin cities frame. "Keep ancient lands, your storied pomp!"

cries she with silent lips.

"Give me your tired, your poor,Your huddled masses

yearning to breathe free,The wretched refuse

of your teeming shore.Send these, the homeless,

tempest-tost to me,I lift my lamp beside the golden door!”

- Emma LazarusNov 2, 1883

Stand for Something… or You Stand for Nothing.

@DaveMcClure @500Startups http://500.co TechWadi Forum - Jan 2017

Farming Unicorns Building Startup &

Investor Ecosystems

Dave McClureFounding Partner, 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? – $300M global seed fund + startup accelerator – 150 people / 25 languages / 20 countries – 1600+ Companies / 3000+ Founders / 200+ Mentors – Investment, Accelerator, Distro, Marketing, Events, Education – Community + Content + Conferences

• 1600+ Co’s / 60+ Countries – Twilio (NYSE: TWLO) – Credit Karma – Grab (aka GrabTaxi) – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Behance (acq Adobe, $150M) – Simple (acq BBVA, $117M) – Sunrise (acq MSFT, $100M) – Unifonic – uTurn – Kharabeesh – Fetchr – Wuzzuf

500 Startups Global Seed Fund & Startup Accelerator

500 Startups: MENA Portfolio

Dinosaurs vs. CockroachesLEAN Startup: Simpler, Faster, Cheaper, Smarter

1996 ”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

2016 ”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

Platforms:Search, Social, Mobile,

Video, Messaging

Data from ~600 companies from 500 Startups Funds I + II (2010 - 2013 cohorts)

$1-10M

Q: How Many Startups to Get 1 Unicorn? Unicorns 50:1 | Centaurs 20:1

99 VC Problems But a Batch Ain’t 1

9http://bit.ly/99VCProblems

Chances of spotting unicorn = ~1%/

If portfolio size = 15 companies /

/ If portfolio size = 30 companies

/ If portfolio size = 100 companies

Football

West Coast Offense

Baseball

MoneyBall

Basketball

3 point revolution

Venture Capital

500 Startups

“Lots of little bets”

500 Strategy: MoneyBall for Startups Re-inventing a 50-year old sport

500 Strategy: Lots of Little Bets*

1) make lots of little bets on early-stage startups when they’re just getting started

3) wait 5-10 years for returns: -10-20% small exits @1-5X ($5-25M+) -5-10% larger exits @5-20X ($25-250M+) -1-2% unicorns @20-50X+ ($250M-1B+)

*See Peter Sims book: “Little Bets”

2) over the next five years, double-down on top 20-30%

~500 co’s @ $100K 1st checks

100+ co’s @ $200-500K 2nd/3rd checks

(hope for a few big exits @ $100M-$1B+)

(assume high failure rate ~50-80%)

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

The Lean Investor

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 – $0-$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 Generation, Find Profitable Customer Segments

• Prove Solution/Benefit, Assess Market Size • Test Channel Cost, 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

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)

Investor Ecosystem

Angels & Accelerators

($0-10M)

“Seed” Funds ($10-100M)

“Traditional” VC Funds ($100-500M)

“Unicorn” VC Funds (>$500M)

Incubation 0-$100K

Seed $100K-$1M

Series A/B $1-10M

Series B/C $10-100M

Bootstrap, KickStarter, AngelList, Crowdfunding

Building Startup Ecosystems

Investor Ecosystem Funding, Liquidity, Exits

• Bootstrap, FFF, Crowdfunding (0-$100K) • Angel Investors (0-$100K) • Accelerators (0-$100K) • Seed funds ($100K-$1M) • Series A/B ($2-10M) • Later Stage Funds ($20M+) • M&A / Secondary Markets • IPOs

A) Invite VCs to Dinner? B) Give VCs some Arabic Coffee? C) Take VCs for a Ride on a Camel?

Q: How to Bring 500 VC Funds to Emerging Markets?

Umm, NO.

Q: How many VC funds do we need to build an ecosystem?

• USA: ~800 VC funds; 2.5 per 1M ppl • China: ~700 VC funds; 0.5 per 1M ppl

• MENA: ~30 funds; 0.1 per 1M ppl

NOT EVEN CLOSE!

A Brief History of US Venture Capital

• first VC funds: ARDC, JH Whitney (1946) • SBICs / Small Business Investment Act (US, 1958) • Shockley -> “Traitorous Eight” -> Fairchild (1958) -> Intel (1968) • Sutter Hill (1964), Venrock (1969), Kleiner, Sequoia (1972)

• ERISA laws + “prudent man rule” (1974, 1978) • Pension Funds in VCs: $39M (1977) -> $570M (1978) -> $4B (1989) • Tech Explosion: 80’s, 90’s, 00’s • Microsoft (1975), Apple (1976), Oracle (1977), Sun (1982), Cisco

(1984), Amazon (1994), eBay (1995), Yahoo (1995), Google (1998), PayPal (1998), LinkedIn (2002), Facebook (2004), Twitter (2006)

What’s Most Critical?• You DON’T need to be in Silicon Valley, but… • Silicon Valley Needs to be in YOU.