Silicon Valley 2.0Lean Startup, Lean VC

Dave McClurehttp://500.co (@DaveMcClure)

May 2012http://slideshare.net/dmc500hats

Re-Inventing Venture Capital throughInnovation, Incubation, & Iteration

Changes in Tech Startups• LESS Capital required to build product, get to market

– Dramatically reduced $$$ on servers, software, bandwidth– 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 (Groupon, Living Social, Yelp)– Media (YouTube, Pinterest, Tumblr)– Communications (Email, IM/Chat, Voice, SMS, etc)

• LOTS of little bets: Accelerators, Angels, Angel List– Y Combinator, TechStars, 500 Startups, AngelPad– Funding + Co-working + Mentoring -> Design, Data, Distribution– “Fast Cheap Fail”, network effects, quantitative + iterative investments

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

Dave McClure

00’s & 10’s:• Investor: Founders Fund, Facebook fbFund, 500 Startups• Companies: Mint.com, SlideShare, Twilio, WildFire, SendGrid• Marketing: PayPal, Simply Hired, Mint.com, O’Reilly Media• Speaker: Lean Startup, Web 2.0, Stanford/Facebook

80’s & 90’s:• Entrepreneur: Founder/CEO Aslan Computing (acq’d)• Developer: Windows / SQL DB consultant (Intel, MSFT)• Engineer: Johns Hopkins‘88, BS Eng / Applied Math

500 Startups: “Super-Angel / Micro-VC” Fund

• Seed Fund & Startup Accelerator– 250+ Companies (Fund I, $29M)– 9-person team, 4 partners– 10,000 sq ft, HQ in Silicon Valley– 100+ Mentors in 10+ Countries

• Fund I Portfolio: 250– Twilio (Union Square, Bessemer)– Wildfire (Summit)– SendGrid (Foundry, Bessemer)– TaskRabbit (First Round)– MakerBot (Foundry)– Viki (Greylock, Andreessen)– Smule (Bessemer, Granite)

70 % Fund

Capital

6

500 Strategy: Lots of Little Bets

1. Start with large, well-screened funnel of early-stage companies.

30% Fund

Capital

2. After first 6-12 months, identify best performers double-down on top 20%

3. Build conservative model assuming 5-10% larger exits @ > $100M, 10-20% smaller exits @ <$100M

Tech Investor Ecosystem

Angels & Incubators($0-10M)

“Micro-VC” Funds ($10-100M)

Smaller VC Funds ($100-500M)

Larger VC Funds (>$500M)

True VenturesFirst Round

Andreessen-HorowitzAccel

Partners

Y-Combinator

TechStars

SoftTech (Clavier)

Felicis (Senkut)

SV Angel (Conway)

SequoiaGreylock

Union Square

Floodgate (Maples)

Foundry Group

Platforms 2.0Search, Social, Mobile

Platform Viability

Users . . Money

Features

Growth Profit

ProfitableGrowth

Nirvana

Successful Platforms have 3 Things:1) Features2) Users3) Money

Distribution PlatformsCustomer Reach: 100M+

• Search: Google

• Social: Facebook, Twitter, Zynga, LinkedIn

• Mobile: Apple (iOS), Android

• Local: Groupon, LivingSocial, Yelp

• Media: Video (YouTube), Blogs (Tumblr), Photos (Pinterest)

• Comm: Email, IM/Chat, Skype, Phone/Voice

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– 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

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

2. 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

Lean Startup, Lean VCCustomers, Metrics, Iteration.

Invest BEFORE Traction; Double Down AFTER.

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

Startup Metrics for Pirates

• Acquisition: users come to site from various channels• Activation: users enjoy 1st visit: "happy” experience• Retention: users come back, visit site multiple times• Referral: users like product enough to refer others• Revenue: users conduct some monetization behavior

AARRR!

(note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video)

AARRR!: 5-Step Startup Metrics Model

Website.com

Revenue $$$

Biz DevAds, Lead Gen,

Subscriptions, ECommerce

ACQUISITION

SEOSEM

Apps & Widgets

Affiliates

Email

PR Biz Dev

Campaigns, Contests

Direct, Tel, TV

Social Networks

Blogs

Domains

Retention

Emails & Alerts

System Events & Time-based Features

Blogs, RSS, News Feeds

Startup Incubators & Metrics

Lots of Little Bets. Most FAIL.(but a few succeed :)

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

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

fbFund REVfbFund REV: Facebook “Social” Incubator: invest in startups, apps,

websites based on Facebook platform & Facebook Connect.

• 22 startups @ ~$35K each ($850K total)• 3 month program: Technology, Design, Marketing, Business topics • Success: 8 startups raised $500K –> 5 raised Series A -> 2 raised Series B• Wildfire Interactive now 300+ people

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”)

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

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

Underpants 2.01. Make a Good Product: Activation & Retention2. Market the Product: Acquisition & Referral3. Make Money: Revenue & Profitability