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Startup 2.0: A Silicon Valley Story Sourcing, Selecting & Engineering Better Startups  via Incubators, Metrics & Iterative...
Silicon Valley  Startup Funding Ecosystem Union Square Ventures First Round Capital Benchmark Sequoia FF II FF I Angels & ...
Topics <ul><li>Venture Capital 1.0  = * Broken Model*  (for Internet Startups) </li></ul><ul><li>M&A Trends : More, but Sm...
[Pardon The Blatant Commercial]
Dave McClure <ul><ul><li>2001-2009: </li></ul></ul><ul><ul><li>Startup Investor:  500 Hats LLC, Founders Fund </li></ul></...
Personal Investments  (13 deals, 2004-2008, ~$25K avg)
Professional Investments  (37 deals, Dec 2008 - Nov 2009, ~$75K avg) fbFund Incubator 22 deals ($850K)  ~$15-75K FF Angel ...
Founders Fund  (Selected Investments, 2005-2009, range $1M-20M)
Venture Capital 1.0 =  Too Big To  FAIL   WIN ? (at least for *Internet* Startups)
Startup Funding Ecosystem Union Square Ventures First Round Capital Benchmark Sequoia FF II FF I Angels &  Incubators ($0-...
Venture Capital: Still Relevant? <ul><li>Good 4 big CAPex: </li></ul><ul><li>Hardware </li></ul><ul><li>Enterprise SW </li...
More & Smaller Acquisitions <ul><li>Big, Mature Internet Platform Co’s: </li></ul><ul><ul><li>Google, MSFT, Yahoo, Ebay, A...
Startup Incubators  Lots of Hot, Cool, Web 2.0! (+ lots of FAIL, too.)
Incubator 2.0 Model <ul><li>Method : Invest in startups using incremental investment, iterative development.  Start with l...
Incubator 2.0: Fast, Cheap, FAIL <ul><li>Incubators growing in popularity, acceptance </li></ul><ul><li>Supportive ecosyst...
Incubator 2.0:  Education, Collaboration <ul><li>Emphasis on education, access to shared resources </li></ul><ul><li>Succe...
fbFund REV <ul><li>fbFund REV : Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform...
fbFund REV <ul><li>fbFund REV : Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform...
Investment #1: Micro-Seed (“Incubator”) <ul><li>Structure </li></ul><ul><ul><li>1-3 founders </li></ul></ul><ul><ul><li>$2...
Investment #2: Seed (“Angel”) <ul><li>Structure </li></ul><ul><ul><li>2-5 person team </li></ul></ul><ul><ul><li>$100-$1M ...
Investment #3: Series A (“Venture”) <ul><li>Structure </li></ul><ul><ul><li>5-10 person team </li></ul></ul><ul><ul><li>$1...
Startup Metrics  & The Lean Startup Measure Stuff. Iterate.  Rinse & Repeat.
The Startup Metrics Religion <ul><li>Progress ≠ Features ( Less   =  More ) </li></ul><ul><li>Focus on  User Experience  (...
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 <ul><li>A cquisition:   users come to site from various  channels </li></ul><ul><li>A ctivatio...
AARRR!: 5-Step Startup Metrics Model Website.com R evenue $$$ Biz Dev Ads, Lead Gen, Subscriptions, ECommerce A cquisition...
Startup Challenges <ul><li>Startups have problems in 3 key areas: </li></ul><ul><ul><li>Management : Setting Priorities, D...
Role: Founder/CEO <ul><li>Q: Which Metrics? Why? </li></ul><ul><li>A: Focus on  Critical Few Actionable  Metrics </li></ul...
Role: Product / Engineering <ul><li>Q: What Features to Build?  Why?  When are you “Done”? </li></ul><ul><li>A:  Easy-to-F...
Role: Marketing / Sales <ul><li>Q: What channels?  Which users?  Why? </li></ul><ul><li>A: High  Volume  (#), Low  Cost  (...
Platforms 2.0 Social, Mobile, Micro, Inbox, SEO
Web 2.0 = Good Business <ul><li>1) Take Existing Good Business Ideas </li></ul><ul><li>2) Add [a little] Technology </li><...
Platform Viability Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users   . .  Money Features Growth Pr...
Platforms:  HOT  or  NOT ? <ul><li>Social : Facebook, Twitter, LinkedIn, MySpace? </li></ul><ul><li>Mobile : iPhone, Andro...
Summary <ul><li>VC 2.0  = Fewer, Smaller Funds (<$100M) </li></ul><ul><li>Liquidity  = More, Smaller Acquisitions (<$100M)...
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Startup 2.0: From Silicon Valley to Hong Kong

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Slides from my talk at the Cyberport Venture Capital Forum, Hong Kong (November 2009).

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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.
  • Transcript of "Startup 2.0: From Silicon Valley to Hong Kong"

    1. 1. Startup 2.0: A Silicon Valley Story Sourcing, Selecting & Engineering Better Startups via Incubators, Metrics & Iterative Development Dave McClure, Founders Fund (twitter: @DaveMcClure ) Hong Kong Cyberport VC Forum November 2009
    2. 2. Silicon Valley Startup Funding Ecosystem Union Square Ventures First Round Capital Benchmark Sequoia FF II FF I Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) “ Small” VC Funds ($50-250M) “ Large” VC Funds (>$250M) Y-Combinator TechStars FF Angel fbFund REV SoftTech (Clavier) Maples Investments Felicis (Senkut) SV Angel (Conway)
    3. 3. Topics <ul><li>Venture Capital 1.0 = * Broken Model* (for Internet Startups) </li></ul><ul><li>M&A Trends : More, but Smaller Acquisitions, Very Few IPOs </li></ul><ul><li>Incubators : Many Experiments (most FAIL , a few winners) </li></ul><ul><li>Metrics : Define “Success”, Measure & Iterate (Fast + Feedback) </li></ul><ul><li>Platforms 2.0 : Social, Mobile, Micro, Inbox, SEO </li></ul>
    4. 4. [Pardon The Blatant Commercial]
    5. 5. Dave McClure <ul><ul><li>2001-2009: </li></ul></ul><ul><ul><li>Startup Investor: 500 Hats LLC, Founders Fund </li></ul></ul><ul><ul><li>Tech Marketing : PayPal, Simply Hired, Mint </li></ul></ul><ul><ul><li>Advisor, Angel Investor : 40+ Startups </li></ul></ul><ul><ul><li>Conf. Organizer : Web 2.0, O’Reilly, Startonomics </li></ul></ul><ul><ul><li>Stanford Visiting Lecturer : Facebook, Startup Metrics </li></ul></ul><ul><ul><li>80’s & 90’s: </li></ul></ul><ul><ul><li>Entrepreneur : Founder/CEO Aslan Computing (acq.) </li></ul></ul><ul><ul><li>Developer : Windows Apps / SQL DB Admin </li></ul></ul><ul><ul><li>User Groups : E-Commerce, Internet, Client-Server </li></ul></ul><ul><ul><li>Engineer : Johns Hopkins ‘88, BS Eng / Applied Math </li></ul></ul>GEEK, CODER, ENTREPRENEUR Blogger, Startup Advisor Internet Marketing, Angel/VC Investor
    6. 6. Personal Investments (13 deals, 2004-2008, ~$25K avg)
    7. 7. Professional Investments (37 deals, Dec 2008 - Nov 2009, ~$75K avg) fbFund Incubator 22 deals ($850K) ~$15-75K FF Angel LLC 15 deals ($1.5M) ~$50-250K
    8. 8. Founders Fund (Selected Investments, 2005-2009, range $1M-20M)
    9. 9. Venture Capital 1.0 = Too Big To FAIL WIN ? (at least for *Internet* Startups)
    10. 10. Startup Funding Ecosystem Union Square Ventures First Round Capital Benchmark Sequoia FF II FF I Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) “ Small” VC Funds ($50-250M) “ Large” VC Funds (>$250M) Y-Combinator TechStars FF Angel fbFund REV SoftTech (Clavier) Maples Investments Felicis (Senkut) SV Angel (Conway)
    11. 11. Venture Capital: Still Relevant? <ul><li>Good 4 big CAPex: </li></ul><ul><li>Hardware </li></ul><ul><li>Enterprise SW </li></ul><ul><li>Clean Tech </li></ul><ul><li>BioScience </li></ul><ul><li>Wineries (?) </li></ul><ul><li>Not So Great 4: </li></ul><ul><li>Internet Startups </li></ul><ul><li>Consulting Shops </li></ul><ul><li>Lifestyle Biz </li></ul><ul><li>Porn, Gambling </li></ul>
    12. 12. More & Smaller Acquisitions <ul><li>Big, Mature Internet Platform Co’s: </li></ul><ul><ul><li>Google, MSFT, Yahoo, Ebay, Amazon, AOL, IAC, Facebook, NewsCorp, Apple, etc </li></ul></ul><ul><li>Lots of Users, $$$ </li></ul><ul><li>Outsourcing Innovation </li></ul><ul><li>Lots of M&A (but small) </li></ul><ul><li>Great for Angels & Entrepreneurs </li></ul><ul><li>… Not so Great for VCs </li></ul>
    13. 13. Startup Incubators Lots of Hot, Cool, Web 2.0! (+ lots of FAIL, too.)
    14. 14. Incubator 2.0 Model <ul><li>Method : Invest in startups using incremental investment, iterative development. Start with lots of small experiments, filter out failure, and expand investment upon success. </li></ul><ul><li>Incubator : $0-100K (“Micro-Seed”) </li></ul><ul><li>Angel : $100-$1M (“Seed”) </li></ul><ul><li>VC : $1M-$5M (“Series A, B”) </li></ul>
    15. 15. Incubator 2.0: Fast, Cheap, FAIL <ul><li>Incubators growing in popularity, acceptance </li></ul><ul><li>Supportive ecosystem for startups (angels, VCs) </li></ul><ul><li>Efficient use of investment capital ($0-100K) </li></ul><ul><li>High fail rate (60-80%) => large initial sample size </li></ul>
    16. 16. Incubator 2.0: Education, Collaboration <ul><li>Emphasis on education, access to shared resources </li></ul><ul><li>Success based on common platforms, physical proximity, open & collaborative environment </li></ul><ul><li>Success based on fast fail, iteration & feedback </li></ul><ul><li>Incremental investment; high-risk, but high-reward </li></ul>
    17. 17. fbFund REV <ul><li>fbFund REV : Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform, Facebook Connect. </li></ul><ul><li>25 startups (2 non-profits) </li></ul><ul><li>$850K total investment (~$35K each) </li></ul><ul><li>12-week mentorship program in Palo Alto, CA </li></ul><ul><li>~25 Advisors / Speakers (Entrepreneurs, Geeks, Investors) </li></ul>
    18. 18. fbFund REV <ul><li>fbFund REV : Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform, Facebook Connect. </li></ul><ul><li>Education on Tech, Design, Marketing, Business topics </li></ul><ul><li>Demo Day with >200 VC, Angel Investors </li></ul><ul><li>Target: ~7-10 seed round investments ($250K-$1M) </li></ul><ul><li>Success: ~6 startups already funded, ~5 @ break-even </li></ul>
    19. 19. Investment #1: Micro-Seed (“Incubator”) <ul><li>Structure </li></ul><ul><ul><li>1-3 founders </li></ul></ul><ul><ul><li>$25-100K investment </li></ul></ul><ul><ul><li>Incubator environment: multiple peers, mentors/advisors </li></ul></ul><ul><li>Build Functional Prototype / “ Minimum Viable Product ” ( MVP ): </li></ul><ul><ul><li>Concept->Alpha , ~3-6 months </li></ul></ul><ul><ul><li>Develop Minimal Critical Feature Set => Get to “ It Works ” </li></ul></ul><ul><ul><li>Instrument Basic Dashboard, Conversion Metrics </li></ul></ul><ul><ul><li>Test Cust. Adoption (10-1000 users) / Cust. Satisfaction (Scale: 1-10) </li></ul></ul><ul><ul><li>Connect with Advisors & Mentors, Angels/VCs </li></ul></ul><ul><li>Demonstrate Concept , Reduce Product Risk, Test Functional Use </li></ul><ul><li>Develop Metrics & Filter for Follow-on Investment </li></ul>
    20. 20. Investment #2: Seed (“Angel”) <ul><li>Structure </li></ul><ul><ul><li>2-5 person team </li></ul></ul><ul><ul><li>$100-$1M investment </li></ul></ul><ul><ul><li>Syndicate of Angel Investors / Small VC Funds </li></ul></ul><ul><li>Improve Product, Expand Market, Test Revenue: </li></ul><ul><ul><li>Alpha->Beta , ~6-12 months </li></ul></ul><ul><ul><li>Customer Sat ≥ 6 => Get to “ Doesn’t Suck ” </li></ul></ul><ul><ul><li>Setup A/B Testing Framework, Optimize Conversion </li></ul></ul><ul><ul><li>Test Marketing Campaigns, Customer Acquisition Channels </li></ul></ul><ul><ul><li>Connect with Advisors, Investors, Key Hires </li></ul></ul><ul><li>Prove Solution/Benefit, Assess Market Size </li></ul><ul><li>Test Channel Cost, Revenue Opportunity </li></ul><ul><li>Determine Org Structure, Key Hires </li></ul>
    21. 21. Investment #3: Series A (“Venture”) <ul><li>Structure </li></ul><ul><ul><li>5-10 person team </li></ul></ul><ul><ul><li>$1M-$5M investment </li></ul></ul><ul><ul><li>VC Investors </li></ul></ul><ul><li>Scale Business, Get to Sustainability: </li></ul><ul><ul><li>Beta->Production , 12-18 months </li></ul></ul><ul><ul><li>Rigorous A/B Testing, Optimize Conversion </li></ul></ul><ul><ul><li>Customer Sat ≥ 8 => “ It Rocks, I’ll Tell My Friends ” </li></ul></ul><ul><ul><li>MktgPlan => Predictable Channels / Campaigns + Budget </li></ul></ul><ul><ul><li>Scalability & Infrastructure, Customer Service & Operations </li></ul></ul><ul><ul><li>Connect with Marketing / Distribution Partners </li></ul></ul><ul><li>Prove/Expand Market, Operationalize Business </li></ul><ul><li>Future Milestones: Profitable/Sustainable, Exit Options </li></ul>
    22. 22. Startup Metrics & The Lean Startup Measure Stuff. Iterate. Rinse & Repeat.
    23. 23. The Startup Metrics Religion <ul><li>Progress ≠ Features ( Less = More ) </li></ul><ul><li>Focus on User Experience (& Distribution ) </li></ul><ul><li>Measure Conversion ; Compare 2+ Options </li></ul><ul><li>Fast, Frequent Iteration (+ Feedback Loop ) </li></ul><ul><li>Keep it Simple & Actionable </li></ul>
    24. 24. Minimize TOTAL time through the loop LEARN BUILD MEASURE IDEAS CODE DATA Source: Eric Ries, The Lean Startup
    25. 25. The Startup Pyramid (Sean Ellis, Startup-Marketing.com) [email_address] Blog: startup-marketing.com
    26. 26. Startup Metrics for Pirates <ul><li>A cquisition: users come to site from various channels </li></ul><ul><li>A ctivation: users enjoy 1 st visit: &quot; happy ” experience </li></ul><ul><li>R etention: users come back , visit site multiple times </li></ul><ul><li>R eferral: users like product enough to refer others </li></ul><ul><li>R evenue: users conduct some monetization behavior </li></ul>(note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video) AARRR !
    27. 27. 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
    28. 28. Startup Challenges <ul><li>Startups have problems in 3 key areas: </li></ul><ul><ul><li>Management : Setting Priorities, Defining Key Metrics, Creating Dashboard, Reporting Progress </li></ul></ul><ul><ul><li>Product : Building the “Right” Features, Getting Product Out Quickly, Testing for User Conversion / Adoption </li></ul></ul><ul><ul><li>Marketing : Accessing “Web 2.0” Channels (Search, Social, Viral, New Media), Cost-Efficient Distribution </li></ul></ul>
    29. 29. Role: Founder/CEO <ul><li>Q: Which Metrics? Why? </li></ul><ul><li>A: Focus on Critical Few Actionable Metrics </li></ul><ul><ul><li>(if you don’t use the metric to make a decision, it’s not actionable) </li></ul></ul><ul><li>Hypothesize Customer Lifecycle </li></ul><ul><li>Target ~3-5 Conversion Events (tip: Less = More) </li></ul><ul><li>Test, Measure, Iterate to Improve </li></ul>
    30. 30. Role: Product / Engineering <ul><li>Q: What Features to Build? Why? When are you “Done”? </li></ul><ul><li>A: Easy-to-Find , Fun / Useful , Unique Features that </li></ul><ul><li> Increase Conversion (stop iterating when increase decelerates) </li></ul><ul><li>Wireframes = Conversion Steps </li></ul><ul><li>Measure, A/B Test, Iterate FAST (daily/weekly) </li></ul><ul><li>Optimize for Conversion Improvement </li></ul><ul><ul><li>80% on existing feature optimization </li></ul></ul><ul><ul><li>20% on new feature development </li></ul></ul>
    31. 31. Role: Marketing / Sales <ul><li>Q: What channels? Which users? Why? </li></ul><ul><li>A: High Volume (#), Low Cost ($), High Conv (%) </li></ul><ul><li>Design & Test Multiple Marketing Channels + Campaigns </li></ul><ul><li>Select & Focus on Best-Performing Channels & Themes </li></ul><ul><li>Optimize for conversion to target CTAs, not just site/landing page </li></ul><ul><li>Match/Drive channel cost to/below revenue potential </li></ul><ul><li>Low-Hanging Fruit: </li></ul><ul><ul><li>Blogs </li></ul></ul><ul><ul><li>SEO/SEM </li></ul></ul><ul><ul><li>Landing Pages </li></ul></ul><ul><ul><li>Automated Emails </li></ul></ul>
    32. 32. Platforms 2.0 Social, Mobile, Micro, Inbox, SEO
    33. 33. Web 2.0 = Good Business <ul><li>1) Take Existing Good Business Ideas </li></ul><ul><li>2) Add [a little] Technology </li></ul><ul><ul><li>Blogs, Twitter, Facebook Connect </li></ul></ul><ul><ul><li>Email & SEO </li></ul></ul><ul><ul><li>Social Networks & Friend/Follower lists </li></ul></ul><ul><ul><li>Online Payments </li></ul></ul><ul><li>3) Increase Distribution, Lower Customer Acquisition Cost with Internet </li></ul><ul><li>PROFIT! </li></ul>
    34. 34. Platform Viability Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana
    35. 35. Platforms: HOT or NOT ? <ul><li>Social : Facebook, Twitter, LinkedIn, MySpace? </li></ul><ul><li>Mobile : iPhone, Android?, Palm?, </li></ul><ul><li>Micro : Twitter, IM/Chat </li></ul><ul><li>Inbox : Gmail, YahooMail, Hotmail?, AOL? </li></ul><ul><li>SEO : Google (Search), Yahoo?, Bing? </li></ul><ul><li>Social Networks : Facebook, MySpace, LinkedIn, Twitter, Orkut, hi5, Friendster </li></ul><ul><li>Email & IM : Yahoo, MSFT, Google, AOL, Skype </li></ul><ul><li>Mobile : iPhone, Palm, Android, Blackberry, etc </li></ul><ul><li>Gaming : Zynga, RockYou, Slide, Playfish, SGN </li></ul><ul><li>E-Commerce : Amazon (1-Click), eBay (PayPal), Apple (iTunes), Facebook? </li></ul><ul><li>Dev : Amazon (AWS), Google AppEngine, Ruby/Rails, Python/Django, etc </li></ul><ul><li>Other : SalesForce, Craigslist, Wikipedia, YouTube </li></ul>
    36. 36. Summary <ul><li>VC 2.0 = Fewer, Smaller Funds (<$100M) </li></ul><ul><li>Liquidity = More, Smaller Acquisitions (<$100M) </li></ul><ul><li>Model = Singles (Ichiro), not Home Runs (Barry Bonds) </li></ul><ul><li>Diligence = Lots of Little Checks (+ Metrics + Time) </li></ul><ul><li>Incubators = Many Small Experiments (most FAIL), Education + Shared Resources, Incremental Investment </li></ul><ul><li>Startup Metrics = Define, Measure, Iterate </li></ul><ul><li>Platforms = Distribution + Monetization, not Technology </li></ul>
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