Incubator 2.0: A Silicon Valley Success Story

Incubator 2.0: A Silicon Valley Story Engineering Better High-Tech Startups with Incubators, Investment, & Iterative Development Dave McClure (@DaveMcClure) Founders Fund & GeeksOnaPlane.com Sept-Oct 2009

Startup Funding Ecosystem Union Square Ventures First Round Capital SoftTech (Jeff Clavier) SV Angel (Ron Conway) Benchmark Sequoia Y-Combinator TechStars FF Angel FF II fbFund REV (FF, Accel, Facebook) FF I Angels & Incubators ($0-10M) Seed Funds ($10-50M) Small VC Funds ($50-250M) Traditional VC Funds (>$250M)

[Pardon The Hype]

Dave McClure
2001-2009:
Startup Investor: 500 Hats LLC, Founders Fund
Tech Marketing : PayPal, Simply Hired, Mint
Advisor, Angel Investor : 40+ Startups
Conf. Organizer : Web 2.0, O’Reilly, Startonomics
Stanford Visiting Lecturer : Facebook, Startup Metrics
80’s & 90’s:
Entrepreneur : Founder/CEO Aslan Computing (acq.)
Developer : Windows Apps / SQL DB Admin
User Groups : E-Commerce, Internet, Client-Server
Engineer : Johns Hopkins ‘88, BS Eng / Applied Math
GEEK, CODER, ENTREPRENEUR Blogger, Startup Advisor Internet Marketing, Angel/VC Investor

Angel Investments (Personal, 2004-2008, 13 deals, avg $25K)

Angel Investments (via FF Angel, Q408-Q309, 30+ deals) FF Angel – 12 deals @$50-250K fbFund REV – 22 deals @ ~$15-75K

Founders Fund (2005-2009)

Startup Incubators (lots of little deals… some of which work :)

Incubator: Hatching Startups
Idealab (Bill Gross, 1996-2001)
Goto.com -> Yahoo Search Marketing
CitySearch, PayMyBills, Commission Junction, NetZero
Y-Combinator (Paul Graham, 2005-pres.)
9+ “vintages”, 100+ companies
Reddit, Scribd, Xobni, Omnisio, DropBox
TechStars (CO), SeedCamp (UK), LaunchBox (DC)
fbFund REV (Silicon Valley, 2008-2009)
Facebook, Founders Fund, Accel

Incubator 2.0
Incubators growing in popularity, acceptance
Supportive ecosystem for startups (angels, VCs)
Efficient use of investment capital ($25-100K)
High fail rate (60-80%) => large initial sample size

Incubator 2.0
Success based on common platforms, physical proximity, open & collaborative environment
Success based on fast fail, iteration & 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.
25 startups (2 non-profits)
$850K total investment (~$35K each)
12-week mentorship program in Palo Alto, CA
~25 Advisors / Speakers (Entrepreneurs, Geeks, Investors)

fbFund REV
fbFund REV : Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform, Facebook Connect.
Education on Tech, Design, Marketing, Business topics
Demo Day with >200 VC, Angel Investors
Target: ~7-10 seed round investments ($250K-$1M)
Success: ~5 startups already funded, ~5 @ break-even

Startup Funding 1, 2, 3: Incubator, Angel, VC.

Startup Funding Ecosystem Union Square Ventures First Round Capital Benchmark Sequoia FF II FF I Angels & Incubators ($0-10M) Seed Funds ($10-50M) Small VC Funds ($50-250M) Traditional VC Funds (>$250M) Y-Combinator TechStars FF Angel fbFund REV (FF, Accel, Facebook ) SoftTech (Clavier) Maples Investments Felicis (Senkut) SV Angel (Conway)

I^3 : Incremental Investment & Iteration
Method : Invest in startups using incremental investment, iterative development. Start with lots of small experiments, filter out failure, and expand investment upon success.
Incubator : $0-100K (“Micro-Seed”)
Angel : $100-$1M (“Seed”)
VC : $1M-$5M (“Series A, B”)

Investment #1: Micro-Seed (“Incubator”)
Structure
1-3 founders
$25-100K investment
Incubator environment: multiple peers, mentors/advisors
Build Functional Prototype / “ Minimum Viable Product ” ( MVP ):
Concept->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)
Connect with Advisors & Mentors, Angels/VCs
Demonstrate Concept , Reduce Product Risk, Test Functional Use
Develop Metrics & Filter for Follow-on Investment

Investment #2: Seed (“Angel”)
Structure
2-5 person team
$100-$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, Customer Acquisition Channels
Connect with Advisors, Investors, Key Hires
Prove Solution/Benefit, Assess Market Size
Test Channel Cost, Revenue Opportunity
Determine Org Structure, Key Hires

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

Startup Metrics Create. Measure. Iterate.

Startup Metrics: Lean & Mean
Progress ≠ Features ( Less = More )
Focus on User Experience (& Distribution )
Measure Conversion ; Compare 2+ Options
Fast, Frequent Iteration (+ Feedback Loop )
Keep it Simple & Actionable

Startup Metrics for Pirates: AARRR !
A cquisition : What channels do customers come from?
A ctivation : Do they have “happy” 1st experience?
R etention : Will they come back?
R eferral : Do they tell other people?
R evenue : How to make money?

Minimize TOTAL time through the loop LEARN BUILD MEASURE IDEAS CODE DATA Source: Eric Ries, The Lean Startup

Startup Metrics for Pirates
A cquisition: users come to site from various channels
A ctivation: users enjoy 1 st visit: " happy ” experience
R etention: users come back , visit site multiple times
R eferral: users like product enough to refer others
R evenue: users conduct some monetization behavior
(note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video) AARRR !

AARRR!: 5-Step Startup Metrics Model Website.com R evenue $$$ Biz Dev Ads, Lead Gen, Subscriptions, ECommerce A CQUISITION SEO SEM Apps & Widgets Affiliates Email PR Biz Dev Campaigns, Contests Direct, Tel, TV Social Networks Blogs Domains R etention Emails & Alerts System Events & Time-based Features Blogs, RSS, News Feeds

Startup Challenges
Startups have problems in 3 key areas:
Management : Setting Priorities, Defining Key Metrics, Creating Dashboard, Reporting Progress
Product : Building the “Right” Features, Getting Product Out Quickly, Testing for User Conversion / Adoption
Marketing : Accessing “Web 2.0” Channels (Search, Social, Viral, New Media), Cost-Efficient 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

Links & Resources
Additional References:
Influence: The Psychology of Persuasion Robert Cialdini (book)
Putting the Fun in Functional Amy Jo Kim (etech 2006 preso)
Futuristic Play Andrew Chen (blog)
Don’t Make Me Think Steve Krug (book)
Designing for the Social Web Joshua Porter (book, website)
Startup Lessons Learned Eric Ries (blog)
Customer Development Methodology Steve Blank (presentation , blog )
Startup-Marketing.com Sean Ellis (blog)
KISSmetrics.com Hiten Shah / Neil Patel (website)
How To Pitch a VC Dave McClure (slides, NSFW)

Silicon Valley Innovation = Entrepreneurs + Technology + Immigrants Immigration as Critical to American Economic Leadership as Technology Innovation

Q: Where are the Startups? Source: TechCrunch.com

A: Where Legal Immigrants Reside. Source: TechCrunch.com

Summary
1) Incubators are capital efficient method for stimulating tech innovation, job creation
2) Metrics & Iteration, Feedback loop key to startup process and success
3) Immigration = Critical to Entrepreneurship as Technology Innovation & Capital

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Incubator 2.0: A Silicon Valley Success Story

by Dave McClure on Sep 18, 2009

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