Startonomics / Tokyo - June 9, 2009 Dave McClure, Founders Fund Joyce Kim, Soompi & Fortis General Counsel David Troy, Baltimore Angels Ryan Pipkin, AngelSoft US Startup Investment Market

Startup Investment Trends Venture Capital Turmoil: “ R.I.P. Good Times ” Not so bad for startups (valuation), however.. Pretty bad for VCs (fundraising) if poor returns Slowdown Later Stage Deals, Reduced Valuations Legal Trends and Changes? Growth -> Monetization, Revenue -> Profitability Growth of Seed Funds, Incubators Y-Combinator, TechStars, fbFund REV Startonomics / Startup Metrics / Lean Startup

Venture Capital Turmoil: “ R.I.P. Good Times ”

Not so bad for startups (valuation), however..

Pretty bad for VCs (fundraising) if poor returns

Slowdown Later Stage Deals, Reduced Valuations

Legal Trends and Changes?

Growth -> Monetization, Revenue -> Profitability

Growth of Seed Funds, Incubators

Y-Combinator, TechStars, fbFund REV

Startonomics / Startup Metrics / Lean Startup

Dave McClure PROPRIETARY & CONFIDENTIAL 2001-2008: Startup Investor: 500 Hats LLC, Founders Fund Tech Marketing : PayPal, Simply Hired, Mint Advisor, Angel Investor : 20+ 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

2001-2008:

Startup Investor: 500 Hats LLC, Founders Fund

Tech Marketing : PayPal, Simply Hired, Mint

Advisor, Angel Investor : 20+ 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 (2004-2008) PROPRIETARY & CONFIDENTIAL

Professional Investments (2009) FF Angel LLC Twilio 1000 Markets UserVoice Bit.ly DailyBurn

FF Angel LLC

Twilio

1000 Markets

UserVoice

Bit.ly

DailyBurn

Changing Focus

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

Angelsoft.net Data Metrics Angelsoft represents over 80% of the Organized Angel Networks in the United States

From Q4 ‘08 - Q1 ‘09 Growth by 17.83% in # of companies actively looking for angel capital Decline by 35% in total $ investment amount Decline by 23.42% in valuations

Growth by 17.83% in # of companies actively looking for angel capital

Decline by 35% in total $ investment amount

Decline by 23.42% in valuations

From Q4 ‘08 - Q1 ‘09 Decreased by 50% in time it took to make an investment Increase by 31.19% in average amount of money entrepreneurs are seeking Increase by 86% in average investment amount per deal that closed

Decreased by 50% in time it took to make an investment

Increase by 31.19% in average amount of money entrepreneurs are seeking

Increase by 86% in average investment amount per deal that closed

Legal Trends Convertible Notes / Caps Priced Rounds Terms are very pro-investor Valuations are down Tip – ask your attorney how to control costs.

Convertible Notes / Caps

Priced Rounds

Terms are very pro-investor

Valuations are down

Tip – ask your attorney how to control costs.

Investment Stages Micro-Seed: $0-$100K –> Prototype Seed: $100K-$1M –> Market Development Series A: $1-5M+ –> Revenue / Profitability Series B: $2-20M+ -> Profitability / ?

Micro-Seed: $0-$100K –> Prototype

Seed: $100K-$1M –> Market Development

Series A: $1-5M+ –> Revenue / Profitability

Series B: $2-20M+ -> Profitability / ?

Example #1: Micro-Seed (“Prototype / Incubate”) 1-2 person startup Founder / Angel Investors => $25-100K @ $500K-2M pre-money valuation FF&F: Friends, Family, & Fools Credit Cards, 2 nd Mortgage, Customer-Financed, etc Examples: Y-Combinator, TechStars, fbFund REV Goal: Build Functional Prototype Concept->Alpha , ≤ 3-6 mo’s Develop Minimal Critical Feature Set => Get to “ It Works ” Instrument Basic Dashboard, Conversion Metrics Setup Build/Release/Test Cycle Test Cust. Adoption (10-1000 users) / Cust. Satisfaction (Scale: 1-10) Connect with Advisors & Mentors, Angels/VCs Demonstrate Concept , Reduce Product Risk, Vet Team Develop Metrics & Filter for Follow-on Investment PROPRIETARY & CONFIDENTIAL

1-2 person startup

Founder / Angel Investors

=> $25-100K @ $500K-2M pre-money valuation

FF&F: Friends, Family, & Fools

Credit Cards, 2 nd Mortgage, Customer-Financed, etc

Examples: Y-Combinator, TechStars, fbFund REV

Goal: Build Functional Prototype

Concept->Alpha , ≤ 3-6 mo’s

Develop Minimal Critical Feature Set => Get to “ It Works ”

Instrument Basic Dashboard, Conversion Metrics

Setup Build/Release/Test Cycle

Test Cust. Adoption (10-1000 users) / Cust. Satisfaction (Scale: 1-10)

Connect with Advisors & Mentors, Angels/VCs

Demonstrate Concept , Reduce Product Risk, Vet Team

Develop Metrics & Filter for Follow-on Investment

Example #2: Seed (“Angel / Syndicate”) 2-5 person startup Angel Investor / Syndicate => $100K-$1M @ $1-3M pre-money valuation Examples: First Round, True Ventures, Union Square, FF Angel Goal: Develop/Expand Prototype -> Functional, Growing Beta Alpha->Beta , ≤ 3-6 mo’s Test Cust. Sat ≥ 6 / 10 => Get to “ Doesn’t Suck ” Setup A/B Testing Framework, Optimize Conversion Test Mktg Campaigns, Cust. Acq. Channels: Volume, Cost IF/WHEN Cust. Sat ≥ 8 (“ It’s Good! ”), THEN Grow User Base Connect with Advisors, Series A Investors, Key Hires Test/Develop Revenue Model Prove Solution/Benefit, Assess Market Size, Initial Lines of Revenue Test Channel Cost, Revenue Opportunity Determine Org Structure, Key Hires PROPRIETARY & CONFIDENTIAL

2-5 person startup

Angel Investor / Syndicate

=> $100K-$1M @ $1-3M pre-money valuation

Examples: First Round, True Ventures, Union Square, FF Angel

Goal: Develop/Expand Prototype -> Functional, Growing Beta

Alpha->Beta , ≤ 3-6 mo’s

Test Cust. Sat ≥ 6 / 10 => Get to “ Doesn’t Suck ”

Setup A/B Testing Framework, Optimize Conversion

Test Mktg Campaigns, Cust. Acq. Channels: Volume, Cost

IF/WHEN Cust. Sat ≥ 8 (“ It’s Good! ”), THEN Grow User Base

Connect with Advisors, Series A Investors, Key Hires

Test/Develop Revenue Model

Prove Solution/Benefit, Assess Market Size, Initial Lines of Revenue

Test Channel Cost, Revenue Opportunity

Determine Org Structure, Key Hires

Example #3: Series A (“Venture”) 3-10 person team; bring in key CXO/VP roles Large Seed / Small Series A => $500K-$5M @ $2-20M pre Examples: Founders Fund , Sequoia Capital, Benchmark Capital Goal: Market Expansion: Beta->Production , ≤ 6-12 mo’s Rigorous A/B Testing, Optimize Conversion Get Cust. Sat ≥ 8 / 10 => “ It Rocks, I’ll Tell My Friends ” Marketing Plan => Predictable Channels / Campaigns + Budget Vet Scalability & Infrastructure, Customer Service & Ops IF/WHEN Predictable, Scalable Growth THEN Step On Gas Connect with Marketing / Distribution Partners Revenue / Profit focus Prove/Expand Market, Operationalize Business Future Milestones: Expansion, Sustainable, Exit Options PROPRIETARY & CONFIDENTIAL

3-10 person team; bring in key CXO/VP roles

Large Seed / Small Series A

=> $500K-$5M @ $2-20M pre

Examples: Founders Fund , Sequoia Capital, Benchmark Capital

Goal: Market Expansion:

Beta->Production , ≤ 6-12 mo’s

Rigorous A/B Testing, Optimize Conversion

Get Cust. Sat ≥ 8 / 10 => “ It Rocks, I’ll Tell My Friends ”

Marketing Plan => Predictable Channels / Campaigns + Budget

Vet Scalability & Infrastructure, Customer Service & Ops

IF/WHEN Predictable, Scalable Growth THEN Step On Gas

Connect with Marketing / Distribution Partners

Revenue / Profit focus

Prove/Expand Market, Operationalize Business

Future Milestones: Expansion, Sustainable, Exit Options

Startup Metrics PROPRIETARY & CONFIDENTIAL A cquisition : What channels do customers come from? A ctivation : Do they have “happy” 1st experience? R etention : Will they come back? R eferral : Do they tell other people? R evenue : How to make money?

A cquisition : What channels do customers come from?

A ctivation : Do they have “happy” 1st experience?

R etention : Will they come back?

R eferral : Do they tell other people?

R evenue : How to make money?

STARTonomics 2008 Conference 300+ Startup Entrepreneurs & Investors Startup Metrics Education for Product, Marketing, Tech Startup Metrics Product Development Scalability Game Mechanics Design 101 Activation & Retention Marketing PROPRIETARY & CONFIDENTIAL SEO Social Media Viral Marketing Social Platforms Revenue Optimization Customer Service Funding & Financing

Startup Metrics

Product Development

Scalability

Game Mechanics

Design 101

Activation & Retention

Marketing

SEO

Social Media

Viral Marketing

Social Platforms

Revenue Optimization

Customer Service

Funding & Financing

Links & Resources FoundersFund.com , follow @DaveMcClure Fortis General Counsel , follow @JoyceKim AngelSoft.net , follow @ripkin follow @BaltimoreAngels, @DaveTroy Yokum Taku, StartupCompanyLawyer.com Eric Ries, Startup Lessons Learned Dave McClure, Startup Metrics for Pirates Finance4Founders.com Startonomics SF (2008)

FoundersFund.com , follow @DaveMcClure

Fortis General Counsel , follow @JoyceKim

AngelSoft.net , follow @ripkin

follow @BaltimoreAngels, @DaveTroy

Yokum Taku, StartupCompanyLawyer.com

Eric Ries, Startup Lessons Learned

Dave McClure, Startup Metrics for Pirates

Finance4Founders.com

Startonomics SF (2008)