This document discusses building startup ecosystems and the 500 Startups investment strategy. It begins with Dave McClure's background in venture capital and entrepreneurship. It then discusses 500 Startups, which is a $250 million global seed fund and accelerator that has invested in over 1,600 companies across more than 20 countries. McClure outlines 500 Startups' strategy of making many small "moneyball" style bets on early stage startups. He believes this approach maximizes the chances of finding unicorns, or billion dollar companies, despite the high failure rate of startups. The document concludes by discussing the critical factors for building strong startup ecosystems and emphasizes the importance of fostering an entrepreneurial spirit.

1. @DaveMcClure
@500Startups http://500.co
Stockholm TechFest - Sept 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 global seed fund + startup accelerator
– 125 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)
– Udemy
– Ipsy
– TalkDesk
– Intercom
500 Startups
Global Seed Fund & Startup Accelerator

4. 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

5. 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

6. 500 Startups Mission
1.Find Smart People.
2.Give Them Money.
3.Wait for Good Shit to Happen.

7. 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.

8. 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. Platforms:
Search, Social, Mobile,
Video, Messaging

10. How Many Startups
to Get to 1 Unicorn?

11. Perils of Becoming a Unicorn
(Before/After IPO)
2009 2016
Jeff Lawson, Founder/CEO Twilio (NYSE:TWLO)

12. The Unicorn “Hedge”
https://500hats.com/welcome-to-the-unicorn-hedge-2fd3c6b50f89
Q: Which is more overvalued? — 100 Unicorn startups or Fortune 500?
TREND: Non-tech public companies buying innovation (aka Unicorns) as a
hedge against the value of their own stock.
Examples: Dollar Shave Club -> Unilever, Cruise -> GM, Jet.com -> Walmart.

13. 99 VC Problems
But a Batch Ain’t 1
13
http://bit.ly/99VCProblems

14. Q: Chances of spotting
unicorn?/
a) 1%
b) 2%
c) 5%
d) 10%
e) ZERO

15. Chances of spotting
unicorn = ~1%/

16. If portfolio size = 15
companies/

17. /
If portfolio size = 30
companies

18. /
If portfolio size = 100
companies

19. 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%)

20. 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

21. 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”)

22. 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

23. 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

24. 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

25. Building Startup Ecosystems

26. 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)

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

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