@DaveMcClure

@500Startups http://500.co
Stockholm TechFest - Sept 2016

Farming Unicorns
Building Startup &
Investor Ecosystems

Dave McClure

Founding Partner, 500 Startups

00s & 10s:

VC: Founders Fund, Facebook fbFund, 500 Startups
Angel: Mashery, Mint.com, SlideShare, Twilio, Wildfire, SendGrid
Marketing: PayPal, Simply Hired, Mint.com, OReilly
80s & 90s:
Entrepreneur: Aslan Computing (acqd by Servinet/Panurgy)
Developer: Windows / SQL DB consultant (Intel, MSFT)
Engineer: Johns Hopkins88, BS Eng / Applied Math

500 Startups
Global Seed Fund & Startup Accelerator

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+ Cos / 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

Investor Ecosystem
Bootstrap, KickStarter,
AngelList, Crowdfunding

Incubation
0-$100K
Angels &
Accelerators
($0-10M)

Seed
$100K-$1M
Seed Funds
($10-100M)

Series A/B
$1-10M
Traditional VC Funds
($100-500M)

Series B/C
$10-100M
Unicorn VC Funds
(>$500M)

500 Strategy: MoneyBall for Startups

Re-inventing a 50-year old sport

Football
West Coast
Offense

Baseball

Basketball

MoneyBall

3 point
revolution

Venture Capital
500 Startups
Lots of little bets

500 Startups Mission

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

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.

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

How Many Startups

to Get to 1 Unicorn?

Perils of Becoming a Unicorn

(Before/After IPO)
Jeff Lawson, Founder/CEO Twilio (NYSE:TWLO)

2009

2016

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.

99 VC Problems
But a Batch Aint 1

http://bit.ly/99VCProblems

13

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 early-stage
startups when theyre
just getting started

2) over the next five years,

double-down on top 20-30%

~500 cos @ $100K 1st checks

(assume high failure rate ~50-80%)

100+ cos @ $200-500K

2nd/3rd checks
(hope for a few big exits @
$100M-$1B+)

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

Startup Risk Reduction

PRODUCT

Early
Customer
Usage

Functional
Prototype

Concept

[about to be]

Scalable
Customer
Acquisition

Profitable
Unit
Economics

When 500
Likes to
Invest

MARKET

REVENUE

Scalable
Profitable
Business

Exit?

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 its working
Incubation: $0-100K (Build & Validate Product)
Seed: $100K-$1M (Test & Grow Marketing Channels)
Venture: $1M-$10M (Maximize Growth & Revenue)

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)

Whats Most Critical?

You DONT need to be in Silicon Valley, but
Silicon Valley Needs to be in YOU.

Questions? Comments?
More Info?

http://500.co (our company)

http://500hats.com (my blog)
https://angel.co/500startups (our fund)
Dave McClure, @DaveMcClure