Startup 2.0: a Silicon Valley Story
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Slides from my talk "Startup 2.0: A Silicon Valley Story" for Echelon conf (Singapore, May 2010)

Slides from my talk "Startup 2.0: A Silicon Valley Story" for Echelon conf (Singapore, May 2010)

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  • BUILT TO LEARN This is the core feedback loop that powers startups. Their goal is not to optimize the time it takes to do any one of these steps. There are many specific practices that can power lean startups, and we’ll cover a few in this presentation. But more important than any specific practice is this core idea: startups should be built to learn.
  • I know, too many bullets…

Startup 2.0: a Silicon Valley Story Startup 2.0: a Silicon Valley Story Presentation Transcript

  • Startup 2.0: A Silicon Valley Story Engineering Better Startups with Incubators, Metrics & Iterative Development Dave McClure ( @DaveMcClure ) Founders Fund / 500 Hats Echelon May 2010 (Singapore)
  • Topics
    • Venture Capital 1.0 = * Broken Model* (for Internet Startups)
    • M&A Trends : More & Smaller Acquisitions (Very Few IPOs)
    • Incubators : Many Experiments (most FAIL , a few winners)
    • Metrics : Define “Success”, Measure & Iterate (Fast + Feedback)
    • Platforms 2.0 : Search, Social, Mobile, Inbox, Media (Distribution)
  • [Pardon The Blatant Commercial]
  • 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
  • Professional Investments (43 deals, 2008-2010, ~$3M) fbFund REV 22 incubator deals ($850K) FF Angel 21 seed deals ($2M)
  • Personal Investments (26 deals, 2004-2010, ~$400K) LinkDex oneforty Networked Blogs MyGengo Votizen Postling EcoMom SiteJabber Graphicly WePay Plancast Recurly
  • Venture Capital 1.0 = Too Big To FAIL WIN ? (at least for *Internet* Startups)
  • Startup 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)
  • Venture Capital: Still Relevant?
    • Good 4 big CAPex:
    • Hardware
    • Enterprise SW
    • Clean Tech
    • BioScience
    • Not So Great 4:
    • Internet Startups
    • Consulting Shops
    • Lifestyle Biz
    • Porn, Gambling
  • Web 2.0: Hell Yes , Good Times.
    • # Users, Bandwidth = Bigger .
    • Startup Costs = Lower .
    • Transaction $ Growing = Better .
    • Building Product => Cheaper, Faster, Measurable
    • Getting Customers => Easier, More Predictable
    • Product & Market Decisions Based on Measured User Behavior
    R.I.P. *BAD* TIMES
  • Distribution Platforms
      • Customer Reach: 100M+
        • Search : Google (SEO/SEM)
        • Social : Facebook, Twitter, LinkedIn
        • Mobile : Apple (iPhone, iPad), Android
        • Media : YouTube/Video, Blogs, Photos
        • Inbox/IM : Gmail, Yahoo, MSFT, AOL
  • More & Smaller Acquisitions
    • Mature Internet Platform Co’s:
      • GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, Fbook
      • etc
    • Lots of Users, $$$
    • Outsourcing Innovation
    • Lots of M&A (but small)
    • Great for Angels & Entrepreneurs
    • Not so Great for (big) VCs
  • Startup Incubators Lots of Hot, Cool, Web 2.0! (+ lots of FAIL, too.)
  • Startup 2.0: “Lean Investor” Model
    • 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) .
    • Incubator : $0-100K (“ Build & Validate Product ”)
    • Seed : $100K-$1M (“ Test & Grow Market ing Channels” ”)
    • Venture : $1M-$10M (“ Maximize Growth & Revenue ”)
  • Incubator 2.0: Fast, Cheap, FAIL
    • Incubators growing in popularity, acceptance
    • Supportive ecosystem for startups (angels, VCs)
    • Efficient use of investment capital ($0-100K)
    • High fail rate (60-80%) => large initial sample size
  • Incubator 2.0: Education, Collaboration
    • Emphasis on education, access to shared resources
    • 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.
    • 22 startups @ ~$35K each (+2 non-profits)
    • 12-week prog + 25 Advisors / Spkrs on Tech, Design, Mktg, Business topics
    • Target: ~7 seed round investments ($250K-$1M)
    • Success: ~8 startups funded >$250K, ~6 @ break-even
  • Investment #1: Incubate (“Product”)
    • Structure
      • 1-3 founders
      • $25K-$100K investment
      • Incubator environment: multiple peers, mentors/advisors
    • Build Functional Prototype / “ Minimum Viable Product ” ( MVP ):
      • Prototype->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)
    • Demonstrate Concept, Reduce Product Risk, Test Functional Use
    • Develop Metrics & Filter for Possible Future Investment
  • Investment #2: Seed (“Market”)
    • Structure
      • 2-5 person team
      • $100K-$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, Cust Acqstn Channels
    • Prove Solution/Benefit, Assess Market Size
    • Test Channel Cost, Revenue Opportunity
    • Determine Org Structure, Key Hires
  • Investment #3: Venture (“Revenue”)
    • Structure
      • 5-10 person team
      • $1M-$5M investment
      • VC Investors
    • Make Money , Get to Sustainability:
      • Beta->Production, 12-18 months
      • Customer Sat ≥ 8 => “ It Rocks, I’ll Tell My Friends ”
      • MktgPlan => Predictable Channels / Campaigns + Budget
      • Scalability & Infrastructure, Customer Service & Operations
      • Connect with Distribution Partners
    • Prove/Expand Market, Operationalize Business
    • Future Milestones: Profitable/Sustainable, Exit Options
  • Startup Metrics & The Lean Startup Measure Stuff. Iterate. Rinse & Repeat.
  • Lean Startup Church of Metrics
    • Progress ≠ Features ( Less = More )
    • Focus on User Experience (& Distribution )
    • Measure Conversion ; Compare 2+ Options
    • Fast, Frequent Iteration (+ Feedback Loop )
    • Keep it Simple & Actionable
  • Minimize TOTAL time through the loop LEARN BUILD MEASURE IDEAS CODE DATA Source: Eric Ries, The Lean Startup
  • The Startup Pyramid (Sean Ellis, Startup-Marketing.com) [email_address] Blog: startup-marketing.com
  • 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
  • Q: What’s My Business Model?
    • Can be one of the following:
      • 2. Get Users (= Acquisition, Referral)
      • Drive Usage (= Activation, Retention)
      • 3. Make Money (= Revenue*)
        • * ideally profitable revenue
    • (note: eventually need to turn Users / Usage -> Money )
  • 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
  • Just Gimme the GOOD Metrics. Users, Pages, Clicks, Emails, $$$...?
    • Q: Which of these is best? How do you know?
      • 1,000,000 one-time, unregistered unique visitors
      • 500,000 visitors who view 2+ pages / stay 10+ sec
      • 200,000 visitors who clicked on a link or button
      • 20,000 registered users w/ email address
      • 2,000 passionate fans who refer 5+ users / mo.
      • 1,000 monthly subscribers @ $5/mo
    the good stuff.
  • Optimize 4 Happiness (both User + Business)
    • Define States of User + Business Value
    • Prioritize (Estimate) Relative Value of Each State
    • Move Users: Lower Value -> Higher Value
    • Optimize for User Happiness / Business $$$
    • Achieve Low Cost + High Value @ Scale
    $$$
  • 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
  • Discover Meaning What Do Users Care About Enough to F**k or Kill ? Kathy Sierra: “ Creating Passionate Users”
  • Role: Marketing / Sales
    • Q: What channels? Which users? Why?
    • A: High Volume (#), Low Cost ($), High Conv (%)
    • Design & Test Multiple Marketing Channels + Campaigns
    • Select & Focus on Best-Performing Channels & Themes
    • Optimize for conversion to target CTAs, not just site/landing page
    • Match/Drive channel cost to/below revenue potential
    • Low-Hanging Fruit:
      • Blogs
      • SEO/SEM
      • Landing Pages
      • Automated Emails
  • Example Marketing Channels
    • PR
    • Contest
    • Biz Dev
    • Direct Marketing
    • Radio / TV / Print
    • Dedicated Sales
    • Telemarketing
    • Email
    • SEO / SEM
    • Blogs / Bloggers
    • Viral / Referral
    • Affiliate / CPA
    • Widgets / Apps
    • LOLCats !!!
  • M AARRR keting Plan
    • Marketing Plan = Target Customer Acquisition Channels
      • 3 Important Factors = Volume (#), Cost ($), Conversion (%)
      • Measure conversion to target customer actions
      • Test audience segments, campaign themes, Call-To-Action ( CTAs )
    • [Gradually] Match Channel Costs => Revenue Potential
      • Increase Vol. & Conversion, Decrease Cost, Optimize for Revenue Potential
      • Avg Txn Value ( ATV ), Ann Rev Per User ( ARPU ), Cust Lifetime Value ( CLV )
      • Design channels that (eventually) cost <20-50% of target ATV, ARPU, CLV
    • Consider Costs, Scarce Resource Tradeoffs
      • Actual $ expenses
      • Marketing time & resources
      • Product/Engineering time & resources
      • Cashflow timing of expense vs. revenue, profit
  • One Step at a Time.
      • Make a Good Product : Activation & Retention
      • Market the Product : Acquisition & Referral
      • Make Money : Revenue & Profitability
    “ You probably can’t save your Ass and your Fac e at the same time… so choose carefully .” – DMC
  • Platforms 2.0 Search, Social, Mobile, Inbox, Media
  • Web 2.0 = Good Business
    • 1) Take Existing Good Business Ideas
    • 2) Add [a little] Technology
      • Facebook (Connect), Twitter
      • SEO/SEM, Blogs, Email
      • E-Commerce & Payments
    • 3) Generate Revenue, Increase Distribution, Reduce Customer Acquisition Cost (see Platforms)
    • PROFIT!
  • Platform Viability Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana
  • Platforms: HOT or NOT ?
    • Search : Google
    • Social : Facebook, Twitter, LinkedIn?
    • Mobile : iPhone/iPad, Android
    • Media : YouTube, Blogs
    • Inbox : Gmail, YahooMail, Hotmail?, AOL?
    • Other : Zynga, Skype, MySpace, Meebo, PayPal, AMZN
  • Summary
    • VC 2.0 = Fewer, Smaller Funds (<$100M)
    • Liquidity = More, Smaller Acquisitions (<$100M)
    • Model = Singles (Ichiro), not Home Runs (Barry Bonds)
    • Diligence = Lots of Little Checks (+ Metrics + Time)
    • Incubators = Many Small Experiments (most FAIL), Education + Shared Resources, Incremental Investment
    • Startup Metrics = Define, Measure, Iterate
    • Platforms = Distribution + Monetization, not Technology
  • Links & Resources
    • Additional References:
    • Influence: The Psychology of Persuasion Robert Cialdini (book)
    • The Mating Mind Geoffrey Miller (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)
    • Understanding Comics Scott McCloud (book)