Dave McClure is a founding partner at 500 Startups, a global seed fund and startup accelerator. He discusses changes in building startups and venture capital investing. Specifically, he notes that startups now require less capital to build products and reach customers due to reduced costs and access to online platforms. Venture capital has also evolved, with the rise of micro funds, accelerators, and funding platforms. McClure advocates a "lean" portfolio approach of making many small bets on startups, expecting most to fail but a few to achieve large exits.
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. How to Become a VC
• Option 1: Go to Harvard/Stanford/Wharton, Get MBA, Become
VC Associate, Work at McKinsey / Google / Facebook, Re-Join
VC as Junior Partner or Partner, Kick Back & Play Golf
• Option 2: Start Unicorn, Grow Big, Sell for $1B+, Join VC
• Option 3: Wander around lost in the forest, Work Your Ass Off
for 25 yrs, do some angel investing, Start your own Firm
4. • What is 500?
– $240M silicon valley VC fund + startup accelerator
– 110 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
16. Legal review Partner approval
Angel Pre-Seed Seed Post-Seed Series A/B Growth
Accelerator
Seed
“Distro"
Follow-On
Selection Criteria – Data-Driven Process Based on Pre-defined Metrics
• Product or service solves a problem for a specific target customer
• Capital-efficient business; operational at less than $1M in external financing
• Scalable internet-based distribution (search, social, mobile) or proven ability to scale sales
• Functional prototype required before investing (or previous product success)
• Measurable traction: engaged users, some revenue, and attractive unit economics
• Cross-functional team with design, engineering and marketing expertise
How 500 Invests:
Accelerator, Seed, Distro
25. 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%)
27. Investor Ecosystem
Angels &
Incubators
($0-10M)
“Micro-VC” Funds
($10-100M)
“Big” VC Funds
($100-500M)
“Mega” VC Funds
(>$500M)
Incubation
0-$100K
Seed
$100K-$2M
Series A/B
$2-10M
Series B/C
$10-50M
Bootstrap, KickStarter,
AngelList, Crowdfunding
stage where
500 writes
first checks
stage where 500
doubles-down
(maybe)
28. [ This Talk ]
• Changes in Building Technology Startups
• Changes in Venture Capital Investing
• The “Lean” Investor + Portfolio Approach
• Investment Workshop: “VC101 in 60m”
• Q&A
29. 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
33. [ This Talk ]
• Changes in Building Technology Startups
• Changes in Venture Capital Investing
• The “Lean” Investor + Portfolio Approach
• Investment Workshop: “VC101 in 60m”
• Q&A
34. 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: Y Combinator, 500 Startups)
• Funding Platforms (ex: Angel List, Kickstarter)
• Global Market of Angel Investors, Accelerators, Seed Funds
more info: http://PreMoney.co
39. [ This Talk ]
• Changes in Building Technology Startups
• Changes in Venture Capital Investing
• The “Lean” Investor + Portfolio Approach
• Investment Workshop: “VC101 in 60m”
• Q&A
41. 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%)
42. 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”)
43. 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
44. 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
45. 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
46. [ This Talk ]
• Changes in Building Technology Startups
• Changes in Venture Capital Investing
• The “Lean” Investor + Portfolio Approach
• Investment Workshop: “VC101 in 60m”
• Q&A
50. Investment Thesis + Model
• Define Investment Thesis (geography, technology,
customer segment, investment stage, etc)
• What’s Your Unique Insight / Advantage? Show
some proof or evidence of why you’re not crazy
(or at least not always wrong, occasionally…)
• Build Model of Potential Investments vs Returns
50
52. Investment Allocation Strategy
• How long will companies take to exit / reach liquidity? (3-7 yrs)
• How long is your investment cycle? (ex: 3-5 yrs)
• When will capital be returned? (1X in 5-8 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
.. .. ..
53. Generating Dealflow
• Writing / Speaking
• Attend (or Run!) User Groups / Conferences
• Networking / Referrals / LinkedIn / Email
• Angel List / other funding platforms
• 500 / YC / TechStars / StartX / other acc
• Sand Hill Angels / angel investing clubs
• Domain Focus: What’s Your Thesis?
• Community: Founders / Mentors
53
56. Deal Terms, Deal Memos
• Summarize Opportunity:
• Concept, Product, Problem, Market, Traction, Team,
Terms, IP, Users, Revenue, Other Investors, Conviction
• [Summary of Previous Investments made + % ownership]
• Pre-Money Valuation or Cap + Discount (Ask for Min 2x?)
• Ask for Info Rights? (YES) Ask for Pro-Rata / Follow-On Rights?
• Major Investor Status? (Usually Info Rights + Pro-Rata Rights)
• Do You Have Leverage (or Not)?
56
57. The Flat, The Elbow, The Wall
• Invest @ “The Flat”
when prices are low
• Double-down if/when
you detect “The Elbow”
(if valuation isn’t crazy)
• Don’t invest @ “The
Wall” unless capital is
infinite — if valuation
starts running away, you
usually can’t buy any
meaningful ownership
relative to existing. Time
Revenue,
Growth Startup W
Startup L
Startup K
“The Flat”
“The Elbow”
“The Wall”
1
2
3
3
58. 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
58
62. We live in a World of ABUNDANCE
• There are LOTS of talented people in the world
• There are LOTS of entrepreneurs everywhere
• There is a LOT of capital sitting around, BUT….
• Not much is available for un-tested entrepreneurs :(
• 500 Startups plans to change that.
64. 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 creates VALUE & employs LARGE # people
• someone who can run a $10M/yr business that
employs 100+people
65. How Big Is The Market?
Q: How Many Entrepreneurs?
• How Many People = 7,000,000,000 on earth
• 1% of Humanity is Entrepreneurial = 70,000,000 founders
• Live 70 years, try at least once = 1,000,000 founders / year
• How Much Do They Need? Zero? $100K? $1M? $10M?
• How Big is the Market = 1M founders x $10M = $10 TRILLION / year
• Come on, REALLY? (ok Divide by 100)
• 100,000 founders / year * $1M each = $100 BILLION / year
66. How Many VCs?
• How Many Founders? 1,000,000 founders / year
• (ok, divide by 100, let’s say 10,000 founders / year)
• 1 VC can make 20 investments / year
• 10,000 founders / 20 deals per VC = 500 VCs