Startup 2.0: a Silicon Valley Story

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)

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Startup 2.0: a Silicon Valley Story

by Dave McClure on May 31, 2010

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