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The Lean VC: a Silicon Valley 2.0 Story Dave McClure, 500 Startups ( @DaveMcClure )  http://500startups.com GROW conferenc...
Lean VC - Topics <ul><li>Venture Capital 2.0  = Fewer, Smaller Funds (<$100M) </li></ul><ul><ul><li>Death of Large Funds <...
[Pardon The Blatant Commercial]
Dave McClure <ul><ul><li>2001-2009: </li></ul></ul><ul><ul><li>Startup Investor:  500 Hats LLC, Founders Fund </li></ul></...
Professional Investments  (Founders Fund: 43 deals, Q4/08-Q1/10, ~$3M) fbFund REV 22 incubator deals ($850K)  FF Angel 21 ...
Personal Investments (500 Hats: 26 deals, 2004-2010, ~$400K) LinkDex oneforty Networked Blogs MyGengo Votizen Postling Eco...
500 Startups LP Mountain View, CA – Founded 2010 <ul><li>Seed Fund & Incubator Program </li></ul><ul><li>Design ,  Distrib...
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 Benchmark Sequoia Angels &  Incubators ($0-10M) “ Seed...
Venture Capital: Still Relevant? <ul><li>Good 4 big CAPex: </li></ul><ul><li>Hardware </li></ul><ul><li>Enterprise SW </li...
More & Smaller Acquisitions <ul><li>Mature Internet Platform Co’s: </li></ul><ul><ul><li>GOOG, MSFT, YHOO, EBAY, AOL, AMZN...
Platforms 2.0 Search, Social, Mobile
Web 2.0 :  Good Times, G . <ul><li># Users, Bandwidth =  Bigger . </li></ul><ul><li>Startup Costs =  Lower . </li></ul><ul...
Platform Viability Successful Platforms  have 3 Things: 1)  Features 2)  Users 3)  Money Users   . .  Money Features Growt...
Distribution Platforms <ul><ul><li>Customer Reach: 100M+  </li></ul></ul><ul><ul><ul><li>Search :  Google  (SEO/SEM) </li>...
Web 2.0 Business Model:  KISS   <ul><li>1)  Re-invent Web 1.0  Businesses </li></ul><ul><ul><li>Make  a Website, a Widget...
Startup Incubators  Lots of Hot, Cool, Web 2.0! (+ lots of  FAIL .)
Incubator 2.0: Fast, Cheap, FAIL <ul><li>Incubators growing in popularity, acceptance </li></ul><ul><li>Supportive ecosyst...
Incubator 2.0:  Education, Collaboration, Iteration <ul><li>Focus on education & shared resources </li></ul><ul><li>Succes...
fbFund REV <ul><li>fbFund REV : Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform...
Startup Metrics:  Lean Startup  &  Lean VC Measure Stuff, Iterate.  (Rinse & Repeat.)
Startup 2.0:  “Lean Investor” Model <ul><li>Method : Invest in many startups using incremental investment, iterative devel...
Investment #1: Incubate (“Product”) <ul><li>Structure </li></ul><ul><ul><li>1-3 founders </li></ul></ul><ul><ul><li>$25K-$...
Investment #2: Seed (“Market”) <ul><li>Structure </li></ul><ul><ul><li>2-5 person team </li></ul></ul><ul><ul><li>$100K-$1...
Investment #3: Venture (“Revenue”) <ul><li>Structure </li></ul><ul><ul><li>5-10 person team </li></ul></ul><ul><ul><li>$1M...
Summary <ul><li>Venture Capital 2.0  = Fewer, Smaller Funds (<$100M) +  More, Smaller Exits (<$100M) </li></ul><ul><li>Pla...
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GROW2010 Conference - Dave mcclure

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  1. 1. The Lean VC: a Silicon Valley 2.0 Story Dave McClure, 500 Startups ( @DaveMcClure ) http://500startups.com GROW conference - August 2010 – Vancouver, CA Re-Inventing Venture Capital & Angel Investing through Innovation, Incubation, & Iteration
  2. 2. Lean VC - Topics <ul><li>Venture Capital 2.0 = Fewer, Smaller Funds (<$100M) </li></ul><ul><ul><li>Death of Large Funds </li></ul></ul><ul><ul><li>Birth of Super Angel Funds </li></ul></ul><ul><ul><li>M&A Market Changes </li></ul></ul><ul><li>Platforms = Distribution + Monetization (not Tech) </li></ul><ul><ul><li>Search (Google) </li></ul></ul><ul><ul><li>Social (Facebook, Twitter) </li></ul></ul><ul><ul><li>Mobile (Apple, Android) </li></ul></ul><ul><li>Incubators & Metrics = Many Small Experiments (most FAIL ) </li></ul><ul><ul><li>Y-Combinator, TechStars, SeedCamp </li></ul></ul><ul><ul><li>Betaworks, fbFund REV, Nitobi </li></ul></ul><ul><ul><li>500 Startups </li></ul></ul>
  3. 3. [Pardon The Blatant Commercial]
  4. 4. Dave McClure <ul><ul><li>2001-2009: </li></ul></ul><ul><ul><li>Startup Investor: 500 Hats LLC, Founders Fund </li></ul></ul><ul><ul><li>Tech Marketing : PayPal, Simply Hired, Mint </li></ul></ul><ul><ul><li>Advisor, Angel Investor : 40+ Startups </li></ul></ul><ul><ul><li>Conf. Organizer : Web 2.0, O’Reilly, Startonomics </li></ul></ul><ul><ul><li>Stanford Visiting Lecturer : Facebook, Startup Metrics </li></ul></ul><ul><ul><li>80’s & 90’s: </li></ul></ul><ul><ul><li>Entrepreneur : Founder/CEO Aslan Computing (acq.) </li></ul></ul><ul><ul><li>Developer : Windows Apps / SQL DB Admin </li></ul></ul><ul><ul><li>User Groups : E-Commerce, Internet, Client-Server </li></ul></ul><ul><ul><li>Engineer : Johns Hopkins ‘88, BS Eng / Applied Math </li></ul></ul>GEEK, CODER, ENTREPRENEUR Blogger, Startup Advisor Internet Marketing, SuperAngel/Micro-VC
  5. 5. Professional Investments (Founders Fund: 43 deals, Q4/08-Q1/10, ~$3M) fbFund REV 22 incubator deals ($850K) FF Angel 21 seed deals ($2M)
  6. 6. Personal Investments (500 Hats: 26 deals, 2004-2010, ~$400K) LinkDex oneforty Networked Blogs MyGengo Votizen Postling EcoMom SiteJabber Graphicly WePay Plancast Recurly
  7. 7. 500 Startups LP Mountain View, CA – Founded 2010 <ul><li>Seed Fund & Incubator Program </li></ul><ul><li>Design , Distribution , Metrics ( AARRR! ) </li></ul><ul><li>30+ Portfolio Companies ($50K-250K) </li></ul><ul><ul><li>Twilio </li></ul></ul><ul><ul><li>Wildfire </li></ul></ul><ul><ul><li>Sendgrid </li></ul></ul><ul><ul><li>MyGengo </li></ul></ul><ul><ul><li>Erply </li></ul></ul><ul><ul><li>MyGengo </li></ul></ul><ul><ul><li>Payvment </li></ul></ul><ul><ul><li>Tello </li></ul></ul><ul><ul><li>… </li></ul></ul>
  8. 8. Venture Capital 1.0 = Too Big To FAIL WIN ? (at least for *Internet* Startups) Venture Capitalist? Super Angel.
  9. 9. Silicon Valley Investor Ecosystem True Ventures First Round Capital Benchmark Sequoia Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) “ Small” VC Funds ($50-250M) “ Large” VC Funds (>$250M) Y-Combinator TechStars SoftTech (Clavier) FloodGate (Maples) Felicis (Senkut) SV Angel (Conway)
  10. 10. Venture Capital: Still Relevant? <ul><li>Good 4 big CAPex: </li></ul><ul><li>Hardware </li></ul><ul><li>Enterprise SW </li></ul><ul><li>Clean Tech </li></ul><ul><li>BioScience </li></ul><ul><li>Facebook, Zynga , </li></ul><ul><li>Groupon </li></ul><ul><li>Not So Great 4: </li></ul><ul><li>Most Consumer / SMB Internet Startups </li></ul><ul><li>Consulting Shops </li></ul><ul><li>Lifestyle Biz </li></ul><ul><li>Porn, Gambling </li></ul>
  11. 11. More & Smaller Acquisitions <ul><li>Mature Internet Platform Co’s: </li></ul><ul><ul><li>GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, Fbook </li></ul></ul><ul><li>Lots of Users, $$$ </li></ul><ul><li>Outsourcing Innovation </li></ul><ul><li>Lots of M&A (but small) </li></ul><ul><li>Great for Angels & Entrepreneurs </li></ul><ul><li>Not so Great for (big) VCs </li></ul>
  12. 12. Platforms 2.0 Search, Social, Mobile
  13. 13. Web 2.0 : Good Times, G . <ul><li># Users, Bandwidth = Bigger . </li></ul><ul><li>Startup Costs = Lower . </li></ul><ul><li>Transaction$$$ = Better . </li></ul><ul><li>Building Product => Cheaper, Faster, Measurable </li></ul><ul><li>Getting Customers => Easier, More Predictable </li></ul><ul><li>Product & Market Decisions based on </li></ul><ul><li>Measured User Behavior </li></ul>R.I.P. *BAD* TIMES
  14. 14. Platform Viability Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana
  15. 15. Distribution Platforms <ul><ul><li>Customer Reach: 100M+ </li></ul></ul><ul><ul><ul><li>Search : Google (SEO/SEM) </li></ul></ul></ul><ul><ul><ul><li>Social : Facebook , Twitter, Zynga, LinkedIn </li></ul></ul></ul><ul><ul><ul><li>Mobile : Apple (iPhone, iPad), Android, Blackberry </li></ul></ul></ul><ul><ul><ul><li>Media : YouTube /Video, Blogs, Photos </li></ul></ul></ul><ul><ul><ul><li>Email/IM : Gmail , Yahoo, Microsoft </li></ul></ul></ul>
  16. 16. Web 2.0 Business Model: KISS  <ul><li>1) Re-invent Web 1.0 Businesses </li></ul><ul><ul><li>Make a Website, a Widget, an App </li></ul></ul><ul><ul><li>Sell Stuff to People (Transactions, Subscriptions) </li></ul></ul><ul><li>2) add Web 2.0 Tech nology </li></ul><ul><ul><li>Search , Social , Mobile </li></ul></ul><ul><ul><li>Google , Facebook , Apple </li></ul></ul><ul><ul><li>Email, ECommerce </li></ul></ul><ul><li>3) Get Customers , Make Money G </li></ul><ul><ul><li>Distribution </li></ul></ul><ul><ul><li>Distribution </li></ul></ul><ul><ul><li>Distribution </li></ul></ul>
  17. 17. Startup Incubators Lots of Hot, Cool, Web 2.0! (+ lots of FAIL .)
  18. 18. Incubator 2.0: Fast, Cheap, FAIL <ul><li>Incubators growing in popularity, acceptance </li></ul><ul><li>Supportive ecosystem for startups (angels, VCs) </li></ul><ul><li>Efficient use of investment capital ($0-100K) </li></ul><ul><li>High fail rate (60-80%) => large initial sample size </li></ul>
  19. 19. Incubator 2.0: Education, Collaboration, Iteration <ul><li>Focus on education & shared resources </li></ul><ul><li>Success based: </li></ul><ul><ul><li>many small startup experiments </li></ul></ul><ul><ul><li>common platforms, problems & solutions </li></ul></ul><ul><ul><li>physical proximity, open/collaborative environment </li></ul></ul><ul><ul><li>fast fail, iteration, metrics & feedback </li></ul></ul><ul><li>Incremental investment; high-risk, but high-reward </li></ul>
  20. 20. fbFund REV <ul><li>fbFund REV : Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform & Facebook Connect. </li></ul><ul><li>22 startups @ ~$35K each ($850K total) </li></ul><ul><li>3 month program: Technology, Design, Marketing, Business topics </li></ul><ul><li>Success: ~ 8 startups funded >$500K – Wildfire Interactive raised $4M </li></ul>
  21. 21. Startup Metrics: Lean Startup & Lean VC Measure Stuff, Iterate. (Rinse & Repeat.)
  22. 22. Startup 2.0: “Lean Investor” Model <ul><li>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) . </li></ul><ul><li>Incubator : $0-100K (“ Build & Validate Product ”) </li></ul><ul><li>Seed : $100K-$1M (“ Test & Grow Market ing Channels” ”) </li></ul><ul><li>Venture : $1M-$10M (“ Maximize Growth & Revenue ”) </li></ul>
  23. 23. Investment #1: Incubate (“Product”) <ul><li>Structure </li></ul><ul><ul><li>1-3 founders </li></ul></ul><ul><ul><li>$25K-$100K investment </li></ul></ul><ul><ul><li>Incubator environment: multiple peers, mentors/advisors </li></ul></ul><ul><li>Build Functional Prototype / “ Minimum Viable Product ” ( MVP ): </li></ul><ul><ul><li>Prototype->Alpha, ~3-6 months </li></ul></ul><ul><ul><li>Develop Minimal Critical Feature Set => Get to “ It Works ” </li></ul></ul><ul><ul><li>Instrument Basic Dashboard, Conversion Metrics </li></ul></ul><ul><ul><li>Test Cust. Adoption (10-1000 users) / Cust. Satisfaction (Scale: 1-10) </li></ul></ul><ul><li>Demonstrate Concept, Reduce Product Risk, Test Functional Use </li></ul><ul><li>Develop Metrics & Filter for Possible Future Investment </li></ul>
  24. 24. Investment #2: Seed (“Market”) <ul><li>Structure </li></ul><ul><ul><li>2-5 person team </li></ul></ul><ul><ul><li>$100K-$1M investment </li></ul></ul><ul><ul><li>Syndicate of Angel Investors / Small VC Funds </li></ul></ul><ul><li>Improve Product, Expand Market , Test Revenue: </li></ul><ul><ul><li>Alpha->Beta, ~6-12 months </li></ul></ul><ul><ul><li>Customer Sat ≥ 6 => Get to “ Doesn’t Suck ” </li></ul></ul><ul><ul><li>Setup A/B Testing Framework, Optimize Conversion </li></ul></ul><ul><ul><li>Test Marketing Campaigns, Cust Acqstn Channels </li></ul></ul><ul><li>Prove Solution/Benefit, Assess Market Size </li></ul><ul><li>Test Channel Cost, Revenue Opportunity </li></ul><ul><li>Determine Org Structure, Key Hires </li></ul>
  25. 25. Investment #3: Venture (“Revenue”) <ul><li>Structure </li></ul><ul><ul><li>5-10 person team </li></ul></ul><ul><ul><li>$1M-$5M investment </li></ul></ul><ul><ul><li>VC Investors </li></ul></ul><ul><li>Make Money , Get to Sustainability: </li></ul><ul><ul><li>Beta->Production, 12-18 months </li></ul></ul><ul><ul><li>Customer Sat ≥ 8 => “ It Rocks, I’ll Tell My Friends ” </li></ul></ul><ul><ul><li>MktgPlan => Predictable Channels / Campaigns + Budget </li></ul></ul><ul><ul><li>Scalability & Infrastructure, Customer Service & Operations </li></ul></ul><ul><ul><li>Connect with Distribution Partners </li></ul></ul><ul><li>Prove/Expand Market, Operationalize Business </li></ul><ul><li>Future Milestones: Profitable/Sustainable, Exit Options </li></ul>
  26. 26. Summary <ul><li>Venture Capital 2.0 = Fewer, Smaller Funds (<$100M) + More, Smaller Exits (<$100M) </li></ul><ul><li>Platforms 2.0 = Distribution + Monetization, not Tech </li></ul><ul><li>Incubators, Metrics = Many small Experiments (most FAIL ). </li></ul><ul><ul><li>Measure Stuff. </li></ul></ul><ul><ul><li>Iterate, Iterate, Iterate. </li></ul></ul>
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