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

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

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

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

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

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)

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

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

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

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

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

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 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”

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

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

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”)

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 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

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

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

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

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

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

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)

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

Got Crunched Yet? Source: Bullpen
Capital

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

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+).

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!

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

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

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

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

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

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