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@DaveMcClure
@500Startups http://500.co
Madrid - June 2016
Farming Unicorns
Building Startup &
Investor Ecosystems
Dave McClure

Founding 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?
– $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
How Many Startups
to Get to 1 Unicorn?
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
Dinosaurs vs. Cockroaches

LEAN 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
Portfolio Diversification
“Spray, not Pray”
99 VC Problems
But a Batch Ain’t 1
9
http://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
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%)
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”)
Startup Risk Reduction
Concept
Early
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
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
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)
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

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Farming Unicorns: Building Startup & Investor Ecosystems (Madrid, June 2016)

  • 1. @DaveMcClure @500Startups http://500.co Madrid - June 2016 Farming Unicorns Building Startup & Investor Ecosystems
  • 2. Dave McClure
 Founding 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
  • 3. • 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
  • 4. How Many Startups to Get to 1 Unicorn?
  • 5. 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
  • 6. Dinosaurs vs. Cockroaches
 LEAN 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
  • 9. 99 VC Problems But a Batch Ain’t 1 9 http://bit.ly/99VCProblems
  • 10. Q: Chances of spotting unicorn?/ a) 1% b) 2% c) 5% d) 10% e) ZERO
  • 12. If portfolio size = 15 companies/
  • 13. / If portfolio size = 30 companies
  • 14. / If portfolio size = 100 companies
  • 15. 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%)
  • 16. 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”)
  • 17. Startup Risk Reduction Concept Early 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
  • 18. 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
  • 19. 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
  • 20. 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
  • 22. 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)
  • 23. 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
  • 24. Questions? Comments? • More Info? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund) – Dave McClure, @DaveMcClure