Silicon Valley 2.0: The Lean VC

Silicon Valley 2.0 The Lean VC Dave McClure http://500startups.com ( @DaveMcClure ) Moscow – Oct 2011 http://slideshare.net/dmc500hats Re-Inventing Venture Capital through Innovation, Incubation, & Iteration

Changes in Tech & VC
Platforms = Distribution + Monetization ( not Technology)
Search (Google)
Social (Facebook, Twitter, LinkedIn, YouTube)
Mobile (Apple, Android)
Venture Capital = Fewer, Smaller Funds (<$100M)
Decline of Large Funds (> $250m), except for HUGE ONES (>$1B).
Birth of “Super Angel” / “Micro-VC” seed funds (<$100M)
Market Changes: a Few Big IPOs (>$1B), Lots of Small Acquisitions (<$250M)
Incubators, Metrics = Many Small Experiments (most FAIL )
Y-Combinator, TechStars, 500 Startups
The “Lean Startup”, Design/UX, Distribution
Lots of Little Bets; Incremental Investment

Read Geoffrey Miller Sex + Evolution + Consumer Mktg = Awesome

Dave McClure
2000-2010:
Investor : 200+ Startups (Mint, SlideShare, Twilio, WildFire)
Marketing : PayPal, Simply Hired, Mint, Founders Fund
Community : Startup2Startup , GeeksOnaPlane , StartupVisa
Speaker : Lean Startup Metrics, 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 – “Super-Angel” Fund Mountain View, CA – Founded 2010
Design , Distribution , Data
Seed Fund & Startup Accelerator
25-30 companies @ 3x/yr
Silicon Valley HQ
Total Portfolio: 200+ Companies
Twilio
Wildfire
SendGrid
FeeFighters (Chi)
MyGengo (JPN)
BugHerd (AU)
Erply (EST)
MoonFruit (UK)
ChinaNetCloud (CH)

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
Media : YouTube (Video), Blogs, Photos
Inbox : Gmail , Yahoo, Microsoft

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 to People (Transactions, Subscriptions)
2) add Web 2.0 Tech nology
Search , Social , Mobile
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

Venture Capital 2.0 (smaller / bigger, faster, better? ) Venture Capital 1.0 “ Super” Angel (aka Micro-VC)

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

Big VC: Still Necessary?
Good 4 BIG CAPx:
Hardware
Enterprise SW
Clean Tech
BioScience
Facebook, Zynga,
Groupon
May Not Be Needed 4:
Consumer Internet
Small Business
Consulting
(Pr0n, Gambling, etc…)

More & Smaller Acquisitions
Mature Internet Platform Co ’s:
GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, Fbook
Non-Tech BigCo / Consumer Verticals buying tech startups (for distribution)
Lots of Users, $$$
Outsourcing Innovation
* Mint acquired by Intuit in Sept 2009 for $170M
Lots of M&A (but small)
Founders own MORE %
Will Sell for LESS $
Great for Angels & Entrepreneurs
Not so Great for (big) VCs

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 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

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

Discover Customers (Steve Blank, SteveBlank.com)

Iterate : Learn, Measure, Build. (Eric Ries, StartupLessonsLearned.com) LEARN BUILD MEASURE IDEAS CODE DATA

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

One Step at a Time.
Make a Good Product : Activation & Retention
Market the Product : Acquisition & Referral
Make Money : Revenue & Profitability

The “Lean” VC: Lots of Little Bets, Incremental Investment
Method : 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 Market ing 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-$5M 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

Going Local, Going Global web gets bigger -> world gets smaller

Global Trends
Growth of Global Languages (see MyGengo.com )
1B+ speakers: Mandarin , English
500M+ spkrs: Spanish , Hindi, Arabic
Smart Device Proliferation
mobile, tablet, TV, console, etc
More Young, More Old ($$$) Users Online
More Bandwidth, More Video, More Social, More Mobile
Wealthy Chinese + Indian , Web + IRL Globetrotters ($$$B)
Acceleration of Global Payment , E-Commerce
Dramatically Reduced Cost : Product Dev, Customer Acqstn
Global Distribution Platforms
US/EU: Apple, Facebook, AMZN, GOOG (Search, YouTube, Gmail, Android), Twitter
Asia: Tencent/QQ, Taobao/Alibaba/AliPay, Youku, MediaTek, Rakuten, DeNA, Gree

Local Hacks
Dominate your local/native market first
Or, move so that your local market is bigger (China, US, India)
Language + Visual Design Matters
Read: Spent , Influence, Understanding Comics
Niche 2 Win: Big Enough Markets + Great Customer
1M users @ $9/mo = ~$100M+/yr business
Sell Something : Shoes, Clicks, Bits, Anything.
Transactns, Subscriptns, Virtual Goods, LeadGen
You Don ’t Need to Be [in] Silicon Valley
But, Silicon Valley Needs to BE IN YOU .
(Use The Force Luke… Close Yo ur Eyes, Let Go  )

Summary
Platforms 2.0 = Distribution + Monetization (not Tech)
Customer Acquisition MUCH easier, MUCH faster
Monetization keeps getting BETTER
Capital Rqmts MUCH lower
Incubators, Metrics = Lots of Small Bets / Experiments
Most Fail, a Few Succeed
Quantity Over (Perceived) Quality
Incremental Investment after Success
Venture Capital 2.0 =
Fewer, Smaller Funds (<$100M)
More, Smaller Exits (<$100M)
Globalization, Specialization, Verticalization

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Silicon Valley 2.0: The Lean VC

by Dave McClure on Oct 24, 2011

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