slides for my talk on changes in the VC & Startup industry, at Tie-HK Entrepreneurs Day (Hong Kong, May 2013)

1. Silicon Valley 2.0
Lots of Little Bets +
Moneyball for Startups
Dave McClure
http://500.co
(@DaveMcClure)
Hong Kong, May 2013
http://slideshare.net/dmc500hats

2. 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

3. 500 Startups
Global Seed Fund & Startup Accelerator
• What is 500?
– ~$70M under management
– 25 people / 12 investing partners
– Locations: SV, NYC, MEX, BRZ, IND, CHN, SEasia
– 1000+ Founders / 200+ Mentors
• 500+ Portfolio Co’s / 30+ Countries
– Wildfire (acq GOOG, $350M)
– Twilio
– SendGrid
– TaskRabbit
– MakerBot
– Doodle Mobile (BJ)
– ChinaNetCloud (SH)
– 9GAG (HK)
– Viki (SG)
– PicCollage (TWN)
– Cubie (TWN)

4. 500 Startups: Global Seed Fund
Over 100+ startups outside US, in 35+ countries
• Q4/12 added: Germany, Korea, Peru; + Russia, Israel, Turkey in Q1/13
• Priorities in 2012: Brazil, Mexico, India
• Priorities In 2013: China, SE Asia, MENA, Eastern Europe

5. Venture Capital 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)

6. 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
– A few big IPOs @ $1B+, but LOTS of small acquisitions (<$100M)
• MORE Customers via ONLINE platforms (100M+ users)
– Search (Google)
– Social (Facebook, Twitter, LinkedIn)
– 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

7. Web 2.0 + Lean Startup
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

8. Think Different.

9. MoneyBall 4 Startups
http://slideshare.net/paulsingh/
moneyball-a-quantitative-approach-to-angel-investing-austin-tx-aug-2012
1. Make Lots Of Little Bets
2. Count Cards (Monitor Progress &
Stats)
3. Double Down on Winners

10. 70%
Capital
10
500 Strategy: “Lots of Little Bets”*
1) Make lots of little
bets pre-traction,
early-stage startups
30%
Capital
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”

11. Startup Investor Ecosystem
Angels &
Incubators
($0-10M)
“Micro-VC” Funds
($10-100M)
Smaller VC Funds
($100-500M)
Larger VC Funds
(>$500M)
TrueFirst Round
AndreessenAtomico
Y-Combinator
TechStars
SoftTech (Clavier)
Felicis (Senkut)
SV Angel (Conway)
SequoiaGreylock
Union Square
Floodgate (Maples)
Foundry Group
Bootstrap, KickStarter,
Crowdfunding

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

13. Early-Stage Risk Reduction
• 1st
Mtg: Crazy, Idiots, Liars or Crooks?
• Product: does it work? (crappy, not perfect)
• Market: are people using it? (not their mom)
• Revenue: will people pay for it? (just a few)
• Growth: how will it/they scale? (online? offline?)
• Finance: what will it cost?
– Q1: cost to get a customer?
– Q2: how & when do you make money?

14. Early-Stage Startups:
Your “Due Diligence” Is An Illusion
(Better approach = write a quick, small check then wait ~6 mo’s)
• Problems in Early-Stage Due Diligence:
– You Might Be Able to Detect Idiots & Liars, but…
– Not much history, product, customers, or revenue (yet), so…
– You probably can’t figure out Winners (yet).
• The New Due Diligence = Incremental Achievements
– “Due Diligence”  Trusted Referrals + History
– “Great Team”  Functional Prototype + Usage
– “Size of Market”  Evidence = Customers, Revenue
• The Odds Are: They Suck, You’re Wrong
– You’ll Be Wrong 4x out of 5x. (If U Don’t Suck).
– In 6 Months, You’ll Know If They Don’t Suck.
– In 1-2 Years, You’ll Know If They’re Awesome.

15. Bet on Singles, Not HomeRuns.
(Look for Ichiros, Not Barry Bonds)

16. Platforms 2.0
Search, Social, Mobile

17. Platform Viability
Users .Users .
.
Money
.
Money
FeaturesFeatures
Growth Profit
Profitable
Growth
Nirvana
Successful Platforms
have 3 Things:
1) Features
2) Users
3) Money

18. Distribution Platforms
Customer Reach: 100M+
• Search: Google, Baidu, Yahoo/Bing, Yandex
• Social/Games: Facebook, Twitter, LinkedIn, TenCent/QQ
• Mobile: Apple (iOS), Android
• Local: Yelp, Groupon, LivingSocial, FourSquare
• Media: Video (YouTube), Blogs (Tumblr), Photos (Pinterest)
• Comm: SMS, IM (WeChat, Line, WhatsApp, Kakao), Skype,
Phone/Voice, etc

19. Web 2.0 Business Model:
KISS (“Keep It Simple, Stupid”)
• 1) Re-invent Web 1.0 Businesses
– Make a Website, a Widget, an App
– Sell Stuff (Transactions, Subscriptions, Affiliate)
• 2) add Web 2.0 Technology
– Search, Social, Mobile, Local, Media, Comm
– Google, Facebook/Twitter, Apple/Android, YouTube
– Email, SMS, Ecommerce / Payments
• 3) Get Customers, Make Money
– Distribution, Distribution, Distribution
– (Customer Acq’stn Cost) vs. ($Rev. Per Customer)
– Low CapX + Profitable Web Businesses

20. More Acquirers (tech + non-tech);
More & Smaller Acquisitions
1. Mature Internet Platform Co’s:
– GOOG, MSFT, YHOO, EBAY, AOL, AMZN,
AAPL, INTU, ADBE, FB, TW, LNKD, GRPN
1. Non-Tech “BigCo” / Consumer Verticals
buying tech startups (for distribution)
• BigCo = Lots of Customers, $$$
• BigCo = Bureaucracy, Innovator Dilemma
• Outsource Innovation; Buy Talent / Products
• Acquiring LOTS (Small) Startups
• Great for Founders, Investors 
* Mint acquired by Intuit in
Sept 2009 for $170M

21. Lean Startup, Lean VC
Customers, Metrics, Iteration.
Invest BEFORE Traction;
Double Down AFTER.

22. The Lean Startup
• Progress ≠ Features; Measure Conversion
• Talk to Customers; Discover Problems
• Focus on “Product/Market Fit” (good solution)
• Fast, Frequent Iteration (+ Feedback Loop)
• Keep it Simple & Actionable

23. Startup Incubators & Metrics
Lots of Little Bets. Most FAIL.
(but a few succeed :)

24. Incubator 2.0: Fast, Cheap, FAIL
• Incubators = supportive startup ecosystem (+ angels, VCs)
• Efficient use of investment capital ($0-100K)
• High fail rate (60-80%) => large initial sample size

25. Incubator 2.0:
Education, Collaboration, Iteration
• Success based on:
– MANY, small experiments
– common platforms, customers, problems & solutions
– physical proximity, open/collaborative environment
– Domain-specific mentors & expertise
– fast fail, iteration, metrics & feedback loop
• Incremental investment; high-risk, but high-reward

26. Education & Community
• Mentors, Investors
• Design, Data, Distribution
• Platform Partners
• Sponsors & Strategics
• Marketing & Visibility

27. Product, Market, Revenue
• Product: assess functional use, improve design/UX
• Market: test usage, distribution channels
• Revenue: test cust acq cost, revenue, *timing*
• Work on Pitch, Help Find Co-Investors, etc

28. Hacker, Hustler, Hipster
• Hacker: engineers & developers
• Hipster: design & UX
• Hustler: marketing & business
1.Build functional prototypes
2.Improve UX so people convert
3.Scale customer acq & distribution

29. Outlier Competition +
Modeling Success Behaviors
• You want min 3-5 “rockstars” to compete
• Rockstars to model success for others
• You can’t assume >20% rockstars
• Therefore, pick 5x5 = 25 teams
• 3-5 rockstar teams emerge, compete, win
• 5-10 *other* non-rockstars learn
• Identify losers quickly (but don’t be an ass)

30. Winners, Losers, Tweeners
• Winners #WIN (with or without you)
• Losers #LOSE (with or without you)
• Tweeners #TWEEN
– They might win with your help
– They might lose with your help
– Be helpful, but don’t dally
– Note: you might be wrong about the losers &
tweeners, so don’t be an arrogant a-hole.

31. fbFund REV
fbFund REV: Facebook “Social” Incubator: invest in startups, apps,
websites based on Facebook platform & Facebook Connect.
• 22 startups @ ~$35K each (< $1M total)
• 3 month program: Technology, Design, Marketing, Business topics
• Success: 8 startups raised $500K –> 5 Series A -> 3 Series B (+ 3 small exits)
• Wildfire Interactive acquired by GOOG for $350M (>50X) 

32. 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”)

33. 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

34. 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

35. 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

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

37. 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

38. Thanks 
• Questions / More Info?
– http://500.co (our company)
– http://500hats.com (my blog)
– https://angel.co/500startups (our fund)
– Rui Ma, 500 Startups China (@MissRuiMa)
– Khailee Ng, 500 Startups SE Asia (@Khailee)
– Dave McClure, 500 Startups USA (@DaveMcClure)