slides from my talk at the International Startup Festival (Montreal, July 2013)

1. Beating The
Series A Crunch
+ Why Growth Hacking / Online Marketing Matters (a lot)
Dave McClure
http://500.co
(@DaveMcClure)
Intl Startup Festival 2013
Montreal, July 2013
http://slideshare.net/dmc500hats

2. This Talk
• You’re a Geek (or traditional marketing flack)
• You SUCK at online marketing / growth hacking
• You spend WAY TOO MUCH TIME on product
• You can’t scale customer acquisition (profitably)
• You won’t get funding / Series A,B / break-even
Therefore: YOU WILL DIE.
• Want to Fix This? Listen Up.

3. 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

4. 500 Startups
Global Seed Fund & Startup Accelerator
• What is 500?
– ~$70M under management
– 26 people / 12 investing partners
– Locations: SV, NYC, MEX, BRZ, IND, CHN, SE Asia
– 1000+ Founders / 200+ Mentors
– 22 positive exits in <3 years
• 500+ Portfolio Co’s / 30+ Countries
– Wildfire (acq GOOG, $350M)
– MakerBot (acq SSYS, $400M)
– Twilio
– SendGrid
– TaskRabbit
– Viki
– Smule
– AppStack
– 9GAG
– MediaLets
– PicCollage

5. 500 Startups: Global Seed Fund
Over 100+ startups outside US, in 35+ countries
• Q4/12 added: Germany, Korea, Peru; + Russia, Turkey, Ghana in Q2/13
• Priorities in 2012: Brazil, Mexico, India
• Priorities In 2013: China, SE Asia, MENA, Eastern Europe

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
• MORE Customers via ONLINE platforms (100M+ users)
– Search (Google)
– Social (Facebook, Twitter)
– 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. Daft Punk Lean Startup:
Simpler, Faster, Cheaper, Smarter
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. Startup Investor Ecosystem
Angels &
Incubators
($0-10M)
“Micro-VC” Funds
($10-100M)
“Big” VC Funds
($100-500M)
“Mega” 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

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

10. 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”)

11. Build Product -> Get Customers
• Product = Activation / Retention
• Market(ing) = Acquisition / Referral
• Revenue = Monetization
…
<collect underpants>
…
• Profit!

12. 12
500 Strategy: “Lots of Little Bets”*
1) Make lots of little
bets pre-traction,
early-stage startups
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”

13. 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

14. 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

15. 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

16. Beating The Series A “Crunch”
Customers
Distribution
Revenue

17. Got Crunched Yet?
Source: Bullpen Capital

18. Before & After 2 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

19. Crunch Good? Crunch Bad?
• Series A bar higher: $1M revenue, 1M active users,
10M downloads, 100% YoY growth
• Lots of Incubation / Seed startups will “fail”
• BUT: Fail Budget = $50-$500K, not $5M+
• Many “failed” startups = ramen-profitable, small
acquisition, or MBA alternative (<$100K)
• Series A/B VCs have lots to choose from
• Overall, founders / market getting smarter
• More focus on customers, problems, revenue
• Many die, some survive (1-5x), a few thrive (20x+).

21. Online Customer Acquisition
(aka “Marketing & Sales”)
Search (Google)
Social (Facebook, Twitter)
Mobile (Apple, Android)
Video (YouTube)
Messaging (Email, SMS, Chat, Voice)

22. Platforms 2.0
Search, Social, Mobile,
Video, Messaging

23. Distribution Platforms
Customer Reach: 100M-1B+
• Search: Google, Baidu, Yahoo/Bing, Yandex
• Social: Facebook, Twitter, LinkedIn, TenCent/QQ, WeChat
• Mobile: Apple (iOS), Android
• Media: Video (YouTube), Photos (Instagram, Pinterest), Blogs
• Comm: SMS, IM (WeChat, WhatsApp), Skype, Phone/Voice, etc

24. Minimum Viable Team:
Hacker, Hipster, Hustler
• Hacker: engineers & developers
• Hipster: design & user experience (UX)
• Hustler: marketing & business, “growth hacker”
1.Build functional prototypes
2.Improve UX so people convert
3.Scale customer acquisition & distribution

25. Marketing Strategy
(aka Growth Hacking Strategy)
• PR
• Contests
• Biz Dev
• Direct Marketing
• Radio / TV / Print
• Telemarketing
• Email
• SEO / SEM
• Social (Paid, Organic)
• Blogs / Bloggers
• Mobile Apps
• Affiliate / CPA
… how do you get customers & distribution?
lots of old, new channels & decisions:
3 Things That Matter / To Measure :
1. Volume
2. Cost
3. Conversion

26. Unit Economics
for Customer Acquisition
• What does product cost to build/deliver?
• What do customers cost to acquire?
– by channel? by campaign?
• What are customers worth?
– 1st
visit / transaction? In a year? Lifetime?
• When do expenses get incurred?
• When is revenue generated?
• Is customer acquisition break-even or better?
– For which distribution channels / methods?
– For what kind of campaigns?
– Does the channel / campaign scale?
– Do the #’s change?
• When does a customer become profitable?
• unit economics @ scale -> marketing strategy / campaigns

27. Marketing Strategy
& Financial Modeling
• Volume, Cost, Conversion
• Est. volume of available leads / customers
• Est. cust acq costs by channel / campaign
• Est. customer value / revenue generated
• Build financial model for scalable, profitable growth
• Hack, Tweak to scale up
• Hack, Tweak to break-even
• If it’s not working: don’t scale up / keep testing
• If it’s working: stop building / go raise $$$ 

28. 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)

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

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