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Building Startup Ecosystems (Denver, Sept 2014)
This document summarizes Dave McClure's talk on changes in venture capital and building startup ecosystems. It discusses how technology startups have become more efficient through lean startup methods and online platforms, requiring less funding. It also outlines McClure's model of "quantitative venture capital", making many small investments across different startup stages from product validation to growth. Finally, it examines factors needed to build strong startup ecosystems and the potential for micro venture capital and global entrepreneurship.
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Building Startup Ecosystems (Denver, Sept 2014)
- 1. @DaveMcClure @500Startups http://500.co Denver Startup Week - Sept 2014 Changes in Venture Capital + Building Startup Ecosystems
- 2. This Talk… •Changes in Tech + VC • “Lean VC” = Quantitative Venture Capital • Building Startup Ecosystems • Global Entrepreneurship • Q & A
- 3. Dave McClure FoundingPartner & 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, 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
- 4. 500 Startups GlobalSeed Fund & Startup Accelerator • What is 500? – $100M silicon valley VC fund + startup accelerator – 30+ people / 10 investing partners – Locations: SV/SF, MEX, BRZ, IND, CHN, SE Asia – 2000+ Founders / 200+ Mentors – Community + Content + Conferences ! • 800+ Portfolio Co’s / 40+ Countries – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Viki (acq Rakuten, $200M) – Simple (acq BBVA, $117M) – Twilio – SendGrid – Full Contact – Credit Karma – Udemy – Barkbox – HomeJoy
- 5. 500 Startups: GlobalSeed Fund Over 200+ startups outside US, in 40+ countries
- 6. This Talk… •Changes in Tech + VC • “Lean VC” = Quantitative Venture Capital • Building Startup Ecosystems • Global Entrepreneurship • Q & A
- 7. Industry Changes •Financial Market Crises (2000, 2008) • Startup Efficiency, Lean Startup Movement, Reduced Capital Costs • Growing Market, Global Distribution Platforms, Growth Hacking • Improved Monetization, Developing Payments Infrastructure • Developing Startup Ecosystems, Global M&A ! • Micro VC: Seed Funds (ex: First Round Capital) • Incubators & Accelerators (ex: Y Combinator, TechStars, 500) • Funding Platforms (ex: Angel List, Kickstarter) • Growing Global Market of Angel Investors ! more info: http://PreMoney.co (June 27th, San Francisco)
- 8. Changes in TechStartups • 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) – Social (Facebook, Twitter) – Mobile (Apple, Android) – Media (YouTube, Pinterest, Instagram, Tumblr) – Comm (Email, WeChat/WhatsApp/Line/Kakao, Voice, SMS, etc) ! • LOTS of little bets: Accelerators, Angels, Angel List, Small Exits – Y Combinator, TechStars, 500 Startups – Capital + Co-working + Mentoring -> Design, Data, Distribution – “Fast, Cheap Fail”, network effects, quantitative + iterative investments
- 9. Before & After2 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
- 10. Platforms 2.0 Search,Social, Mobile, Video, Messaging
- 11. Angel List: Platformfor Investors + Startups • Startups + Metrics • Founders + Bios • Investors + Syndicates • Accelerators + Online Applications • Jobs + Talent 11
- 12. This Talk… •Changes in Tech + VC • “Lean VC” = Quantitative Venture Capital • Building Startup Ecosystems • Global Entrepreneurship • Q & A
- 13. 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)
- 14. 500 Strategy: “Lotsof Little Bets” 14
- 15. The Lean VC: Lots of Little Bets, Incremental Investment Method: Make little bets in lots of startups using incremental investment, iterative development. Start with many small experiments, filter out failures, and expand investment in successes. ! • Incubator: $0-100K (“Build & Validate Product”) • Seed: $100K-$1M (“Test & Grow Marketing Channels””) • Venture: $1M-$10M (“Maximize Growth & Revenue”)
- 16. 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
- 17. 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
- 18. 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
- 19. This Talk… •Changes in Tech + VC • “Lean VC” = Quantitative Venture Capital • Building Startup Ecosystems • Global Entrepreneurship • Q & A
- 20. 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) 20
- 21. Startup Investor Ecosystem !! Y-Combinator TechStars Angels & Incubators ($0-10M) ! “Micro-VC” Funds ($10-100M) Floodgate (Maples) First Round True “Big” VC Funds ($100-500M) Union Square Foundry Atomico A16Z “Mega” VC Funds (>$500M) SoftTech (Clavier) Felicis (Senkut) SV Angel (Conway) Greylock Sequoia Incubation Seed Series A Series B Series C+ Bootstrap, KickStarter, AngelList, Crowdfunding
- 22. Example Startup Ecosystem • 1,000 Bootstrap Startups ($0-10K) • 300 Accelerator Startups ($10-100K) • 100 Seed-Stage Startups ($100K-$1M) • 30 Series A/B Startups ($1-10M) • 10 Later-Stage Companies ($10-100M) • 1-3 Mature Company IPOs ($100M+) 22
- 23. Entrepreneur Education •Business Plans • Functional Prototypes • Lean Startup • Software Engineering / Design & UX • Online Marketing / Unit Economics • Monetization & Payments • Customer Service + Support • Fundraising & Pitch 23
- 24. Investor Education •Startups are NOT Real Estate • Most Startups Fail / Power Law Returns • Portfolio Approach (10-20+ investments) • Legal Structure, Financial Structure • Syndication + Co-Investment • Access to Downstream Capital • Exits & Liquidity 24
- 25. This Talk… •Changes in Tech + VC • “Lean VC” = Quantitative Venture Capital • Building Startup Ecosystems • Global Entrepreneurship • Q & A
- 26. Local vs Global? • Emerging / Developing Markets • Global Languages: English, Chinese, Spanish, Arabic • Critical Factors: Education, Mentorship, Capital • Capital Availability: Incubation, Seed, Series A • Positive Macro: SmartPhones, Tablets, Payments, Logistics, Growing Middle Class, Distribution Platforms • Wealthy Global Users, Shoppers, Travelers
- 27. How Big isMicroVC / Seed Stage Market? 5,000 microVCs invest 100,000 startups/yr @ $500K/startup = $50B/yr How many people are entrepreneurs? How many startups get started every year? • ~1% of Humanity is “Entrepreneurial” (def’n: “can create a $10M rev/yr business”) • 1% x 7B ppl = 70M entrepreneurs, each of which starts 1-5 businesses lifetime • entrepreneurs can create 1-5M new startup businesses every year ! How much capital is needed globally to get seed stage startups rolling? • Assume 1M-5M startups/yr x $50K-$1M funding/each • Low: 1M x $50K = $50B/yr <-> High: 5M x $1M = $5T/yr ! How many metros? How many investors / metro? How many startups / metro? • 1 microVC can fund 10-20 startups/yr * $50K-$1M = $1M-$10M annual budget • 500+ global metros @ 1M+ ppl can generate ~100-1,000 startups / year • guesstimate = min ~100K+ startups/yr across top 100-200 global metros • 5-50 VCs / metro * 200 metros = 1,000-10,000 VCs globally • Potential: 5,000 VCs deploy $10M->20 startups = $50B/yr -> 100,000 startups 15
- 28. Questions? Comments? •More Info? – http://500.co (our company) – http://500hats.com (my blog) – https://angel.co/500startups (our fund) – Dave McClure, @DaveMcClure