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

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

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

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

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

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”)

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

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

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 : 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

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

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

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

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

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 !

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

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

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

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

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

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!

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

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

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