Silicon Valley 2.0: The Lean Investor

The Lean VC: a Silicon Valley 2.0 Story Dave McClure Founding Partner, 500 Startups ( @DaveMcClure ) http://500startups.com Nokia Growth Partners – Nov 2010, SF Re-Inventing Venture Capital & Angel Investing through Innovation, Incubation, & Iteration

Changes, Oh.
Venture Capital 2.0 = Fewer, Smaller Funds (<$100M)
Death of Large Funds
Birth of Super Angel Funds
M&A Market Changes
Platforms = Distribution + Monetization (not Tech)
Search (Google)
Social (Facebook, Twitter)
Mobile (Apple, Android)
Incubators & Metrics = Many Small Experiments (most FAIL )
Y-Combinator, TechStars, SeedCamp
Betaworks, fbFund REV, AngelPad
500 Startups

Dave McClure: Bio
2000-2010:
Investor : 100+ Startups (Mint, SlideShare, Twilio, WildFire)
Blogger: Ranked #7 on Top 10 VC blogs (2009)
Marketing : PayPal, Simply Hired, Mint, O’Reilly, Founders Fund
Community : Startup2Startup , GeeksOnaPlane , StartupVisa
Speaker : Startup Metrics for Pirates, Stanford Facebook class
80’s & 90’s:
Entrepreneur : Founder/CEO Aslan Computing (acq.)
Developer : Windows App Dev / SQL DB Admin
Engineer : Johns Hopkins ‘88, BS Eng / Applied Math

500 Startups LP Mountain View, CA – Founded 2010
Seed Fund & Startup Accelerator Program
Design , Distribution , Data ( AARRR! )
50+ Portfolio Companies
Twilio
Wildfire
SendGrid
MyGengo
Erply
Payvment
FlowTown
Medialets

500 Hats LLC (Personal Investments: 13 deals, 2004-2008, ~$300K) Results: 1 exit @ $170M (9x), +3-6 future wins 2 addtl exits @ $50M, $70M (advisory roles) Bix (acq YHOO) Jambool (acq GOOG)

Founders Fund (Incubator/Seed Program: 43 deals, 2008-2010, ~$3M) Results : 8 raised seed rd $500K+ 3 small exits Results : 6 raised Series A $2M+ 2 raised Series B $5-10M+ 1 early exit @ 4x FanBridge Facebook fbFund 22 incubator deals ($850K) FF Angel LLC 21 seed deals ($2M)

500 Startups LP Fund I (50+ investments @ ~$100K avg) Wildfire Crave Tello AwayFind Indinero MyGengo Revnetics Mogotix EcoMom Zencoder GazeHawk Crocodoc SayHired Recurly AppBistro Foodspotting Gantto Medialets Rapportive TransFS SiteJabber GinzaMetrics Estately FlowTown OneForty Twilio Postling Plancast ElaCarte WePay Zappli Format Baydin GroupSpaces Rapportive Apsalar Bunndle Udemy Brainient ReadyForZero Graphicly StoryJumper OtherInbox Viikii Zozi One True Fan Formative Labs Networked Blogs

Venture Capital 1.0 = Too Big To FAIL WIN ? (at least for *Internet* Startups) Venture Capitalist? Super Angel.

Silicon Valley Investor Ecosystem True Ventures First Round Capital Union Square Blue Run Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) VC Funds ($50-250M) VC Funds (>$250M) Y-Combinator TechStars SoftTech (Clavier) FloodGate (Maples) Felicis (Senkut) SV Angel (Conway)

Venture Capital: Still Relevant?
Good 4 big CAPex:
Hardware
Enterprise SW
Clean Tech
BioScience
Facebook, Zynga,
Groupon
Not So Great 4:
Consumer / SMB Internet Startups ?
Consulting Shops
Lifestyle Biz
Porn, Gambling

More & Smaller Acquisitions
Mature Internet Platform Co’s:
GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, Fbook
Lots of Users, $$$
Outsourcing Innovation
Lots of M&A (but small)
Great for Angels & Entrepreneurs
Not so Great for (big) VCs

Platforms 2.0 Search, Social, Mobile

Web 2.0 : Good Times .
# Users, Bandwidth = Bigger .
Startup Costs = Lower .
Transaction $$$ = Better .
Building Product => Cheaper, Faster, Better
Getting Customers => Easier, More Measurable
Product & Marketing Decisions based on
Measured User Behavior
R.I.P. *BAD* TIMES

Platform Viability Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana

Distribution Platforms
Customer Reach: 100M+
Search : Google (SEO/SEM)
Social : Facebook , Twitter , Zynga, LinkedIn
Mobile : Apple (iPhone, iPad), Android , Blackberry
Media : YouTube /Video, Blogs, Photos
Inbox : Gmail , Yahoo, Microsoft

Web 2.0 Business Model: KISS 
1) Re-invent Web 1.0 Businesses
Make a Website, a Widget, an App
Sell Stuff to People (Transactions, Subscriptions)
2) add Web 2.0 Tech nology
Search , Social , Mobile
Google , Facebook/Twitter , Apple/Android
Email, ECommerce
3) Get Customers , Make Money
Distribution, Distribution, Distribution

Startup Incubators Lots of Hot, Cool, Web 2.0! (+ lots of FAIL .)

Incubator 2.0: Fast, Cheap, FAIL
Incubators growing in popularity, acceptance
Supportive ecosystem for startups (angels, VCs)
Efficient use of investment capital ($0-100K)
High fail rate (60-80%) => large initial sample size

Incubator 2.0: Education, Collaboration, Iteration
Focus on education & shared resources
Success based:
many small startup experiments
common platforms, problems & solutions
physical proximity, open/collaborative environment
fast fail, iteration, metrics & feedback
Incremental investment; high-risk, but high-reward

fbFund REV
fbFund 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 funded >$500K – Wildfire Interactive raised $4M

Startup Metrics: Lean Startup -> Lean VC Measure Stuff, Iterate. (Rinse & Repeat.)

“ Just Gimme the GOOD Leads” Users, Pages, Clicks, Emails, $$$...?
Q: Which of these is best? How do you know?
1,000,000 one-time, unregistered unique visitors
500,000 visitors who view 2+ pages / stay 10+ sec
200,000 visitors who clicked on a link or button
20,000 registered users w/ email address
2,000 passionate fans who refer 5+ users / mo.
1,000 monthly subscribers @ $5/mo
the good stuff.

Lean Startup Challenges
Startups have problems in 3 main areas:
Management : Set Priorities, Define Key Metrics, Make Decisions .
Product : Build the “Right” Features. Measure, Iterate .
Marketing : Distribution, Distribution, Distribution .

Role: Founder/CEO
Q: Which Metrics? Why?
A: Focus on Critical Few Actionable Metrics
(if you don’t use the metric to make a decision, it’s not actionable)
Hypothesize Customer Lifecycle
Target ~3-5 Conversion Events (tip: Less = More)
Test, Measure, Iterate to Improve

Role: Product / Engineering
Q: What Features to Build? Why? When are you “Done”?
A: Easy-to-Find , Fun / Useful , Unique features that
Increase Conversion (stop iterating when increase decelerates)
Wireframes = Conversion Steps
Measure, A/B Test, Iterate FAST (daily/weekly)
Optimize for Conversion Improvement
80% on existing feature optimization
20% on new feature development

Role: Marketing / Sales
Q: What channels? Which users? Why?
A: High Volume (#), Low Cost ($), High Conv (%)
Design & Test Multiple Marketing Channels + Campaigns
Select & Focus on Best-Performing Channels & Themes
Optimize for conversion to target CTAs, not just site/landing page
Match/Drive channel cost to/below revenue potential
Low-Hanging Fruit:
Blogs
SEO/SEM
Landing Pages
Automated Emails

“ Lean Investor” Model
Method : Invest in many startups using incremental investment, iterative development. Start with lots of small experiments, filter out failure, and expand investment upon success… ( Rinse & Repeat) .
Incubator : $0-100K (“ Build & Validate Product ”)
Seed : $100K-$1M (“ Test & Grow Market ing Channels” ”)
Venture : $1M-$10M (“ Maximize Growth & Revenue ”)

Investment #1: Incubate (“Product”)
Structure
1-3 founders
$25K-$100K investment
Incubator environment: multiple peers, mentors/advisors
Build Functional Prototype / “ Minimum Viable Product ” ( MVP ):
Prototype->Alpha, ~3-6 months
Develop Minimal Critical Feature Set => Get to “ It Works ”
Instrument Basic Dashboard, Conversion Metrics
Test Cust. Adoption (10-1000 users) / Cust. Satisfaction (Scale: 1-10)
Demonstrate Concept, Reduce Product Risk, Test Functional Use
Develop Metrics & Filter for Possible Future Investment

Investment #2: Seed (“Market”)
Structure
2-5 person team
$100K-$1M investment
Syndicate of Angel Investors / Small VC Funds
Improve Product, Expand Market , Test Revenue:
Alpha->Beta, ~6-12 months
Customer Sat ≥ 6 => Get to “ Doesn’t Suck ”
Setup A/B Testing Framework, Optimize Conversion
Test Marketing Campaigns, Cust Acqstn Channels
Prove Solution/Benefit, Assess Market Size
Test Channel Cost, Revenue Opportunity
Determine Org Structure, Key Hires

Investment #3: Venture (“Revenue”)
Structure
5-10 person team
$1M-$5M investment
VC Investors
Make Money , Get to Sustainability:
Beta->Production, 12-18 months
Customer Sat ≥ 8 => “ It Rocks, I’ll Tell My Friends ”
MktgPlan => Predictable Channels / Campaigns + Budget
Scalability & Infrastructure, Customer Service & Operations
Connect with Distribution Partners
Prove/Expand Market, Operationalize Business
Future Milestones: Profitable/Sustainable, Exit Options

Summary
Venture Capital 2.0 = Fewer, Smaller Funds (<$100M) + More, Smaller Exits (<$100M)
Platforms 2.0 = Distribution + Monetization, not Tech
Incubators, Metrics = Many small Experiments (most FAIL ).
Measure Stuff.
Iterate, Iterate, Iterate.

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Silicon Valley 2.0: The Lean Investor

by 500 Startups on Nov 03, 2010

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Silicon Valley 2.0: The Lean Investor — Presentation Transcript