Startup 2.0: From Silicon Valley to Hong Kong

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

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)

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
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

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 LLC 15 deals ($1.5M) ~$50-250K

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 ($0-10M) “ 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)

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: ~7-10 seed round investments ($250K-$1M)
Success: ~6 startups already funded, ~5 @ break-even

Investment #1: Micro-Seed (“Incubator”)
Structure
1-3 founders
$25-100K 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)
Connect with Advisors & Mentors, Angels/VCs
Demonstrate Concept , Reduce Product Risk, Test Functional Use
Develop Metrics & Filter for Follow-on Investment

Investment #2: Seed (“Angel”)
Structure
2-5 person team
$100-$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
Connect with Advisors, Investors, Key Hires
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
Scale Business, Get to Sustainability:
Beta->Production , 12-18 months
Rigorous A/B Testing, Optimize Conversion
Customer Sat ≥ 8 => “ It Rocks, I’ll Tell My Friends ”
MktgPlan => Predictable Channels / Campaigns + Budget
Scalability & Infrastructure, Customer Service & Operations
Connect with Marketing / Distribution Partners
Prove/Expand Market, Operationalize Business
Future Milestones: Profitable/Sustainable, Exit Options

Startup Metrics & The Lean Startup Measure 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 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

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 2.0 Social, Mobile, Micro, Inbox, SEO

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

Platforms: HOT or NOT ?
Social : Facebook, Twitter, LinkedIn, MySpace?
Mobile : iPhone, Android?, Palm?,
Micro : Twitter, IM/Chat
Inbox : Gmail, YahooMail, Hotmail?, AOL?
SEO : Google (Search), Yahoo?, Bing?
Social Networks : Facebook, MySpace, LinkedIn, Twitter, Orkut, hi5, Friendster
Email & IM : Yahoo, MSFT, Google, AOL, Skype
Mobile : iPhone, Palm, Android, Blackberry, etc
Gaming : Zynga, RockYou, Slide, Playfish, SGN
E-Commerce : Amazon (1-Click), eBay (PayPal), Apple (iTunes), Facebook?
Dev : Amazon (AWS), Google AppEngine, Ruby/Rails, Python/Django, etc
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: From Silicon Valley to Hong Kong

by Dave McClure

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