@DaveMcClure @500Startups http://500.co

Dublin - June 2016

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

[ This Talk ]• What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Building Investor Ecosystems • Q&A

• What is 500? – $250M silicon valley VC fund + startup accelerator – 125 people / 30 partners / 25 languages / 20 countries – 1500+ Companies / 3000+ Founders / 200+ Mentors – Investment, Accelerator, Distro, Marketing, Events, Education – Community + Content + Conferences

• 1500+ Co’s / 50+ Countries – Credit Karma ($3.5B) – Twilio ($1B+) – Grab ($1B+) – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Behance (acq Adobe, $150M) – Simple (acq BBVA, $117M) – Sunrise (acq MSFT, $100M) – Udemy – Ipsy – TalkDesk – Intercom

500 Startups Global Seed Fund & Startup Accelerator

Year People Locations AUM $ Companies

2010 5 MV 10 75

2011 10 BRZ 30 250

2012 15 MX, IND 50 450

2013 30 CHN, SEA 75 650

2014 50 SF, MENA 125 900

2015 100 Korea, UK, Thailand, Vietnam, Germany, EU, Israel, Japan, Turkey

200 1400

2016 150+ 20+ 250+ 2000+

500 Startups History

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 Startups Mission

1. Find Smart People. 2. Give Them Money. 3. Wait for Good Shit to Happen.

Investor Ecosystem

Angels & Incubators ($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

500 Startups Mission

• Provide capital, community, education to smart people (founders, investors)

• Build functional startup ecosystems (founders, team, angels, accelerators, VC funds, capital, exits, liquidity, etc)

• #HFGSD: Have Fun, Get Shit Done.

500 Startups• “Lots of little bets”: very large portfolio (>100 co’s per fund)

• Founding Partners: PayPal/Google alumni, engineering + marketing

• Global Approach: Silicon Valley HQ + Multi-Country Team/Reach

• Focus on seed-stage investing in internet startups

• Accelerator: 30-50 co’s, structured curriculum, office, support staff, founder/mentor community, investor intros, pitch prep, demo days

• Dedicated consulting svcs for customer acq (“Growth Hacking”)

• Events, Education, Community, FAMILY.

[ This Talk ]• What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Building Investor Ecosystems • Q&A

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, PayPal, Alibaba) – Media (YouTube, Pinterest, Instagram) – Comm/Msgs (WeChat, WhatsApp, 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

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

Platforms 2.0 Search, Social, Mobile,

Video, Messaging

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

Startup Education• Business Plans / Revenue Projections • Software + Design/UX • Lean Startups + Continuous Deploy (Iterate) • Metrics Framework + Continuous Testing • Functional Prototypes / Customer Development • Scalable [Internet] Marketing & Sales • Cash-Flow Positive Unit Economics • Pitching + Fundraising • Monetization + Payments • Customer Service + Support

[ This Talk ]• What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Building Investor Ecosystems • Q&A

Industry Changes• Financial Market Crises (2000, 2008) • Startup Efficiency, Lean Startup Movement, Reduced Capital Costs • Growing Market, Global Distribution Platforms, “Growth Hacking” • Improved Monetization, Payments Infrastructure • Developing Startup Ecosystems, Global M&A

• Micro VC: Seed Funds (ex: First Round Capital) • Incubators & Accelerators (ex: 500 Startups) • Funding Platforms (ex: Angel List, Kickstarter) • Global Market of Angel Investors, Accelerators, Seed Funds

more info: http://PreMoney.co

Portfolio Diversification “Spray, not Pray”

500 Strategy: Lots of Little Bets*

1) make lots of little bets on pre-traction, early-stage startups

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

100-200 co’s @ $200-500K 2nd/3rd checks

(target 25-50 exits @ $100M+)

(assume high failure rate ~50-80%)

Investor Education

• Startups are NOT Real Estate • Most Startups Fail / Power Law Returns • Portfolio Approach (20-100+ investments) • Legal Structure, Financial Structure • Syndication + Co-Investment • Access to Downstream Capital • Exits & Liquidity

99 VC Problems But a Batch Ain’t 1

23http://bit.ly/99VCProblems

Q: Chances of spotting unicorn? /

a) 1% b) 2% c) 5% d) 10% e) ZERO

Chances of spotting unicorn = ~1%/

If portfolio size = 15 companies /

/ If portfolio size = 30 companies

/ If portfolio size = 100 companies

[ This Talk ]• What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Building Investor Ecosystems • Q&A

Startup Investment Stages• Concept • Product • Functional Prototype • Early Users/Customers • Other Investors • Profitable Unit Economics? • Scalable Cust Acquisition? • Profitable Business • Scalable Organization • Exit / Liquidity?

30

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 Allocation Strategy• How long will companies take to exit / reach liquidity? (3-10 yrs) • How long is your investment cycle? (ex: 3-5 yrs) • When will capital be returned? (1X in 5-10 yrs, 2-5X in 8-12 yrs)

• Simple allocation for $10M investment budget over first 5 years • 50% 1st checks + 50% 2nd/3rd checks • ~100 1st checks @ $50K each ($5M), ~20 checks / yr • ~10-20 2nd checks @ $250-500K each ($5M), ~3 checks / yr

1 2 3 54 7 8 109 11 12 13 15146

1 5432

50

15

.. .. ..

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

[ This Talk ]• What is 500 Startups? • Changes in Building Tech Startups • Changes in Venture Capital Investing • The “Lean” Investor + Portfolio Approach • Building Investor Ecosystems • Q&A

Building Startup Ecosystems

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)

Who, What is an Entrepreneur?

Who/What is an Entrepreneur?

• someone who WANTS to start a business? • someone who can RUN a business? • someone who can run a SUSTAINABLE business

• someone who can run a PROFITABLE business that employs a LARGE # people

• someone who can run a $10M/yr business that employs 100+ people

Challenges for Investors in New Tech Markets

• Smaller Markets than USA, CHN, UK/EU • Limited Internet / Mobile / Smartphone • Online Payments / Physical Logistics

• Small # of Early-Stage Capital / Firms • Long Time to Exits / Liquidity (7-10 years) • Small # IPOs (0?) / Small # Local Acquirers

Solutions for Investors in New Tech Markets

• Increase #, frequency of early-stage investors • Increase portfolio size, Decrease check size • Increase #, frequency of acquirers

• Fund of Funds for Countries / Regions / Verticals • Equity & Debt Matching Strategies for GPs • Liquidity / Secondary for Repurchase of Series A/B • Small Cap (<$100M) Public Markets

• Use of Real Estate as Hedge / Synthetic Liquidity • Tax Incentives for Global, Local Acquirers • Tax Incentives for Investing in Startups, Innovation

Investing Resources

• The Venture Capital Cycle (Gompers, Lerner) • Venture Deals (Feld, Mendelson) • Angel Investing (Rose) • Venture Hacks (Naval, Nivi) • blogs: Fred Wilson, Brad Feld, Mark Suster • Quora: Jason Lemkin, David Rose, etc

Questions? Comments?

• More Info? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund) – Dave McClure, @DaveMcClure