Startup 2.0: A Silicon Valley Story (Jan 2010)

Startup 2.0:A Silicon Valley StorySourcing, Selecting & Engineering Better Startups via Incubators, Metrics & Iterative Development
Dave McClure, Founders Fund
(twitter: @DaveMcClure)
China Mobile Internet Exec Reception
January2010

Angels &
Incubators
($0-10M)
“Seed” Funds
($10-50M)
“Small” VC Funds
($50-250M)
“Large” VC Funds
(>$250M)
Silicon Valley Startup Funding Ecosystem
fbFund
REV
Y-Combinator
TechStars
FF Angel
SoftTech (Clavier)
Maples Investments
Felicis (Senkut)
SV Angel (Conway)
FF I
Union Square Ventures
First Round Capital
FF II
Benchmark
Sequoia

Topics
Venture Capital 1.0 = *Broken Model* (for Internet Startups)
M&A Trends: More, but Smaller Acquisitions, Very Few IPOs
Incubators: Many Experiments (most FAIL, a few winners)
Metrics: Define “Success”, Measure & Iterate (Fast + Feedback)
Platforms 2.0: Social, Mobile, Micro, Inbox, SEO

[Pardon The Blatant Commercial]

Dave McClure
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
GEEK, CODER, ENTREPRENEUR

Personal Investments (16 deals, 2004-2009, ~$25K avg)

Professional Investments (40 deals, Dec 2008 – Dec 2009, ~$75K avg)
fbFund Incubator
22 deals ($850K)
~$15-75K
FF Angel LLC
18 deals ($1.8M)
~$50-250K

Founders Fund (Selected Investments, 2005-2009, range $1M-20M)

Venture Capital 1.0 = Too Big To FAILWIN?(at least for *Internet* Startups)

Angels &
Incubators
($0-10M)
“Seed” Funds
($10-50M)
“Small” VC Funds
($50-250M)
“Large” VC Funds
(>$250M)
Startup Funding Ecosystem
fbFund
REV
Y-Combinator
TechStars
FF Angel
SoftTech (Clavier)
Maples Investments
Felicis (Senkut)
SV Angel (Conway)
FF I
Union Square Ventures
First Round Capital
FF II
Benchmark
Sequoia

Venture Capital: Still Relevant?
Good 4 big CAPex:
Hardware
Enterprise SW
Clean Tech
BioScience
Wineries (?)
Not So Great 4:
Internet Startups
Consulting Shops
Lifestyle Biz
Porn, Gambling

More & Smaller Acquisitions
Big, Mature Internet Platform Co’s:
Google, MSFT, Yahoo, Ebay, Amazon, AOL, IAC, Facebook, NewsCorp, Apple, etc
Lots of Users, $$$
Outsourcing Innovation
Lots of M&A (but small)
Great for Angels & Entrepreneurs
… Not so Great for VCs

Startup Incubators Lots of Hot, Cool, Web 2.0!(+ lots of FAIL, too.)

Incubator 2.0 Model
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”)

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.
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 seed round investments ($250K-$1M)
Success: ~8 startups funded >$250K, ~5 @ break-even

Investment #1: Micro-Seed(“Incubator”)
Structure
1-3 founders
$25K-$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)
Demonstrate Concept, Reduce Product Risk, Test Functional Use
Develop Metrics & Filter for Follow-on Investment

Investment #2: Seed(“Angel”)
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, Customer Acquisition Channels
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
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 StartupMeasure Stuff. Iterate. Rinse & Repeat.

The Startup Metrics Religion
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
IDEAS
LEARN
BUILD
DATA
CODE
MEASURE
Source: Eric Ries, The Lean Startup

The Startup Pyramid(Sean Ellis, Startup-Marketing.com)
sean@12in6.com
Blog: startup-marketing.com

AARRR!
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
(note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video)

SEO
Campaigns, Contests
SEM
PR
Biz Dev
Social Networks
Affiliates
Blogs
Acquisition
Apps & Widgets
Direct, Tel, TV
Referral
Email
Viral Loops
Domains
Activation
Homepage / Landing Page
Retention
Emails & widgets
Emails & Alerts
Product Features
Affiliates, Contests
Blogs, RSS, News Feeds
Biz Dev
Revenue $$$
Ads, Lead Gen, Subscriptions, ECommerce
System Events & Time-based Features
AARRR!: 5-Step Startup Metrics Model
Website.com

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

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

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

Platforms 2.0Social, Mobile,Comm, Inbox, Search

Web 2.0 = Good Business
1) Take Existing Good Business Ideas
2) Add [a little] Technology
Blogs, Twitter, Facebook Connect
Email & SEO
Social Networks & Friend/Follower lists
Online Payments
3) Increase Distribution, Lower Customer Acquisition Cost with Internet
PROFIT!

Platform Viability
Features
Successful Platforms have 3 Things:
1) Features
2) Users
3) Money
Users.
. Money
Profit
Growth
Nirvana
Profitable
Growth

Platforms: HOT or NOT?
Social: Facebook, Twitter, LinkedIn, MySpace?
Mobile: iPhone, Android?, Palm?
Comm: Twitter, IM/Chat, Skype, Meebo
Inbox: Gmail, YahooMail, Hotmail?, AOL?
Search: Google, Bing/Yahoo
Payments: Amazon (1-Click), eBay (PayPal), Apple (iTunes), Facebook?, Google?
Dev: Amazon (AWS), Google AppEngine, Ruby/Rails, Python/Django, etc
Gaming: Zynga, Playdom, Playfish, RockYou, Slide,
Other: SalesForce, Craigslist, Wikipedia, YouTube

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

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Startup 2.0: A Silicon Valley Story (Jan 2010)

by Dave McClure on Jan 13, 2010

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