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

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

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

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

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

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 : 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

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”)

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

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

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

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

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?

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 !

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

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

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

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

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

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)

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

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

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