Silicon Valley 2.0 Lean Startup, Lean VCRe-Inventing Venture Capital through Innovation, Incubation, & Iteration Dave McClure http://500.co (@DaveMcClure) May 2012 http://slideshare.net/dmc500hats
Changes in Tech Startups• LESS Capital required to build product, get to market – Dramatically reduced $$$ on servers, software, bandwidth – Cheap access to online platforms for 100M+ consumers, smallbiz, etc – A few big IPOs @ $1B+, but LOTS of small acquisitions (<$100M)• MORE Customers via ONLINE platforms (100M+ users) – Search (Google) – Social (Facebook, Twitter, LinkedIn) – Mobile (Apple, Android) – Local (Groupon, Living Social, Yelp) – Media (YouTube, Pinterest, Tumblr) – Communications (Email, IM/Chat, Voice, SMS, etc)• LOTS of little bets: Accelerators, Angels, Angel List – Y Combinator, TechStars, 500 Startups, AngelPad – Funding + Co-working + Mentoring -> Design, Data, Distribution – “Fast Cheap Fail”, network effects, quantitative + iterative investments
Web 2.0 + Lean Startup 2. Startup Costs = Lower. 3. # Users, Bandwidth = Bigger. 4. Transaction $$$ = Better. Building Product => Cheaper, Faster, Better Getting Customers => Easier, More MeasurableIterative Product & Marketing Decisionsbased on Measured User Behavior
Dave McClure00’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/Facebook80’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)
500 Strategy: Lots of Little Bets1. Start with large, well-screened 30% funnel of early- Fund stage companies. Capital2. After first 6-12 months, 70 % identify best performers Fund double-down on top 20% Capital1. Build conservative model assuming 5-10% larger exits @ > $100M, 10-20% smaller exits @ <$100M 6
Distribution PlatformsCustomer Reach: 100M+ • Search: Google • Social: Facebook, Twitter, Zynga, LinkedIn • Mobile: Apple (iOS), Android • Local: Groupon, LivingSocial, Yelp • Media: Video (YouTube), Blogs (Tumblr), Photos (Pinterest) • Comm: Email, IM/Chat, Skype, Phone/Voice
Web 2.0 Business Model: KISS (“Keep It Simple, Stupid”)• 1) Re-invent Web 1.0 Businesses – Make a Website, a Widget, an App – Sell Stuff (Transactions, Subscriptions, Affiliate)• 2) add Web 2.0 Technology – Search, Social, Mobile, Local, Media, Comm – Google, Facebook/Twitter, Apple/Android – Email, SMS, Ecommerce / Payments• 3) Get Customers, Make Money – Distribution, Distribution, Distribution – (Customer Acq’stn Cost) vs. ($Rev. Per Customer) – Low CapX + Profitable Web Businesses
More Acquirers (tech + non-tech); More & Smaller Acquisitions1. Mature Internet Platform Co’s: – GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, FB, TW, LNKD, GRPN2. Non-Tech “BigCo” / Consumer Verticals buying tech startups (for distribution)• BigCo = Lots of Customers, $$$• BigCo = Bureaucracy, Innovator Dilemma• Outsource Innovation; Buy Talent / Products• Acquiring LOTS (Small) Startups• Great for Founders, Investors * Mint acquired by Intuit in Sept 2009 for $170M
Lean Startup, Lean VC Customers, Metrics, Iteration. Invest BEFORE Traction; Double Down AFTER.
The Lean Startup• Progress ≠ Features; Measure Conversion• Talk to Customers; Discover Problems• Focus on “Product/Market Fit” (good solution)• Fast, Frequent Iteration (+ Feedback Loop)• Keep it Simple & Actionable
Startup Metrics for Pirates• Acquisition: users come to site from various channels• Activation: users enjoy 1st visit: "happy” experience• Retention: users come back, visit site multiple times• Referral: users like product enough to refer others• Revenue: users conduct some monetization behavior AARRR! (note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video)
AARRR!: 5-Step Startup Metrics Model SEO Campaigns, SEM PR Contests Biz Social Networks Dev Blogs Affiliates Apps & Direct, Tel, Widgets Email TV ACQUISITION Domains Emails & AlertsBlogs, RSS, nNews Feeds Retentio Ads, Lead Gen, Biz Dev System Events & Subscriptions, Re v Time-based Features ECommerce en u Website.com e $$ $
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 InvestmentMethod: 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
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