Venture Capital 2.0: The Lean VC

Venture Capital 2.0 : The Lean VC Dave McClure 500 Startups ( @DaveMcClure ) http://500startups.com SlideShare ZipCast, Feb 2011 Re-Inventing Venture Capital Investing through Innovation, Incubation, & Iteration

Changes.
Venture Capital = Fewer, Smaller Funds (<$100M)
Decline of Large Funds (> $250m)
Birth of “ Super Angel” Funds ($10-100M)
Market Changes: Fewer IPOs (>$1B), More/Smaller Acq’stns (<$250M)
Platforms = Distribution + Monetization (not Technology)
Search (Google)
Social (Facebook, Twitter, YouTube)
Mobile (Apple, Android)
Incubators & Metrics = Many Small Experiments (most FAIL )
Y-Combinator, TechStars, SeedCamp
Betaworks, fbFund REV, AngelPad
500 Startups

Dave McClure: Bio
2000-2010:
Investor : 100+ Startups (Mint, SlideShare, Twilio, WildFire)
Marketing : PayPal, Simply Hired, Mint.com, Founders Fund
Community : Startup2Startup , GeeksOnaPlane , StartupVisa
Speaker : Startup Metrics, Stanford Facebook class
80’s & 90’s:
Entrepreneur : Founder/CEO Aslan Computing (acq.)
Developer : Windows App Dev / SQL DB Admin
Engineer : Johns Hopkins ‘88, BS Eng / Applied Math

500 Startups Seed Fund Mountain View, CA – Founded 2010
Seed Fund & Startup Accelerator
Design , Distribution , Data
90+ Portfolio Companies
Twilio
Wildfire
SendGrid
MyGengo
Erply
Payvment
FlowTown
Medialets
ChinaNetCloud

500 Hats LLC (Personal Investments: 13 deals, 2004-2008, ~$300K) Results: 1 exit @ $170M (9x), +3-6 future wins 2 addtl exits @ $50M, $70M (advisory roles) Bix (acq YHOO) Jambool (acq GOOG)

Founders Fund (Incubator/Seed Program: 43 deals, 2008-2010, ~$3M) Results : 8 raised seed rd $500K+ 3 small exits Results : 6 raised Series A $2M+ 2 raised Series B $5-10M+ 1 early exit @ 4x FanBridge Facebook fbFund 22 incubator deals ($850K) FF Angel LLC 21 seed deals ($2M)

500 Startups LP Fund I (90+ investments @ ~$75K avg) Wildfire Crave Tello AwayFind Indinero MyGengo Revnetics Mogotix EcoMom Zencoder GazeHawk Crocodoc SayHired Recurly AppBistro Foodspotting Gantto Medialets Rapportive TransFS SiteJabber GinzaMetrics Estately FlowTown OneForty Twilio Postling Plancast ElaCarte WePay Zappli Format Baydin GroupSpaces Rapportive Apsalar Bunndle Udemy Brainient ReadyForZero Graphicly StoryJumper OtherInbox Viikii Zozi One True Fan Formative Labs Networked Blogs

Venture Capital 2.0 (smaller, faster, better) Venture Capital 1.0 “ Super” Angel (aka Micro-VC)

Silicon Valley Investor Ecosystem True Ventures First Round Capital Benchmark Accel Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) VC Funds ($50-250M) VC Funds (>$250M) Y-Combinator TechStars SoftTech (Clavier) FloodGate (Maples) Felicis (Senkut) SV Angel (Conway)

Venture Capital: Still Relevant?
Good for big CAP:
Hardware
Enterprise SW
Clean Tech
BioScience
Facebook, Zynga,
Groupon
Not So Great for:
Consumer Internet
Small Business
Consulting
Games, Porn ;)

More & Smaller Acquisitions
Mature Internet Platform Co’s:
GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, Fbook
Lots of Users, $$$
Outsourcing Innovation
Lots of M&A (but small)
Great for Angels & Entrepreneurs
Not so Great for (big) VCs
* Mint acquired by Intuit in Sept 2009 for $170M

Platforms 2.0 Search, Social, Mobile

Web 2.0 : Good Times .
# Users, Bandwidth = Bigger .
Startup Costs = Lower .
Transaction $$$ = Better .
Building Product => Cheaper, Faster, Better
Getting Customers => Easier, More Measurable
Product & Marketing Decisions based on
Measured User Behavior
R.I.P. *BAD* TIMES

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

Distribution Platforms
Customer Reach: 100M+
Search : Google (SEO/SEM)
Social : Facebook , Twitter , Zynga, LinkedIn
Mobile : Apple (iPhone, iPad), Android , Blackberry
Media : YouTube /Video, Blogs, Photos
Inbox : Gmail , Yahoo, Microsoft

Web 2.0 Business Model: KISS (“Keep It Simple, Stupid”)
1) Re-invent Web 1.0 Businesses
Make a Website, a Widget, an App
Sell Stuff to People (Transactions, Subscriptions)
2) add Web 2.0 Tech nology
Search , Social , Mobile
Google , Facebook/Twitter , Apple/Android
Email, SMS, Ecommerce / Payments
3) Get Customers , Make Money
Distribution, Distribution, Distribution

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

Incubator 2.0: Fast, Cheap, FAIL
Incubators = supportive startup ecosystem (+ angels, VCs)
Efficient use of investment capital ($0-100K)
High fail rate (60-80%) => large initial sample size

Incubator 2.0: Education, Collaboration, Iteration
Success based on:
many small startup experiments
common platforms, problems & solutions
physical proximity, open/collaborative environment
fast fail, iteration, metrics & feedback loop
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.
22 startups @ ~$35K each ($850K total)
3 month program: Technology, Design, Marketing, Business topics
Success: ~ 8 startups funded >$500K – Wildfire Interactive raised $4M

Startup Metrics & The Lean Startup Measure Shit, Iterate .

“ What Metrics Should I Measure ?” Users, Pages, Clicks, Emails, $$$...?
Q: Which of these is best? How do you know?
1,000,000 one-time, unregistered unique visitors
500,000 visitors who view 2+ pages / stay 10+ sec
200,000 visitors who clicked on a link or button
20,000 registered users w/ email address
2,000 passionate fans who refer 5+ users / mo.
1,000 monthly subscribers @ $5/mo
the good stuff.

Read Geoffrey Miller Sex + Evolution + Consumer Mktg = Awesome Sauce

Other Great Shit. Psychology + Comics

Discover Meaning What Do Users Care About Enough to F**k or Kill ? Kathy Sierra: “ Creating Passionate Users”

The Lean Startup
Progress ≠ Features; Measure Conversion
Talk to Customers ; Discover Problems
Focus on “ Product/Market Fit” (good solution)
Fast, Frequent Iteration (+ Feedback Loop )
Keep it Simple & Actionable

Discover Customers (Steve Blank, SteveBlank.com)

Iterate : Learn, Measure, Build. (Eric Ries, StartupLessonsLearned.com) LEARN BUILD MEASURE IDEAS CODE DATA

Product/Market Fit Before “Launch” (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

Q: What is My Business Model?
One of the following:
Drive Usage (= Activation, Retention)
2. Get Users (= Acquisition, Referral)
3. Make Money (= Revenue*)
(Note: eventually need to turn Users/Usage -> Money)

Lean Startup Challenges
Startups have problems in 3 main areas:
Management : Set Priorities, Define Key Metrics, Make Decisions .
Product : Build the “Right” Features. Measure, Iterate .
Marketing : Distribution, Distribution, 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

M AARRR keting Plan
Marketing Plan = Target Customer Acquisition Channels
3 Important Factors = Volume (#), Cost ($), Conversion (%)
Measure conversion to target customer actions
Test audience segments, campaign themes, Call-To-Action (CTAs)
[Gradually] Match Channel Costs => Revenue Potential
Increase Vol. & Conversion, Decrease Cost, Optimize for Revenue Potential
Avg Txn Value (ATV), Ann Rev Per User (ARPU), Cust Lifetime Value (CLV)
Design channels that (eventually) cost <20-50% of target ATV, ARPU, CLV
Consider Costs, Scarce Resource Tradeoffs
Actual $ expenses
Marketing time & resources
Product/Engineering time & resources
Cashflow timing of expense vs. revenue, profit

One Step at a Time.
Make a Good Product : Activation & Retention
Market the Product : Acquisition & Referral
Make Money : Revenue & Profitability
“ You probably can’t save your Ass and your Face at the same time… choose carefully .” – DMC

Investor Metrics: “Super Angel” -> Lean VC Not “Spray & Pray”, but rather “ Quantitative, Incremental, Selective Follow-on ” Investing. (Product, Market, Revenue.)

“ Lean Investor” Model
Method : Invest in many startups using incremental investment, iterative development. Start with lots of small experiments, filter out failure, and expand investment upon success… ( Rinse & Repeat) .
Incubator : $0-100K (“ Build & Validate Product ”)
Seed : $100K-$1M (“ Test & Grow Market ing Channels” ”)
Venture : $1M-$10M (“ Maximize Growth & Revenue ”)

Investment #1: Incubate (“Product”)
Structure
1-3 founders
$25K-$100K investment
Incubator environment: multiple peers, mentors/advisors
Build Functional Prototype / “ Minimum Viable Product ” ( MVP ):
Prototype->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 Possible Future Investment

Investment #2: Seed (“Market”)
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, Cust Acqstn Channels
Prove Solution/Benefit, Assess Market Size
Test Channel Cost, Revenue Opportunity
Determine Org Structure, Key Hires

Investment #3: Venture (“Revenue”)
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

Summary
Venture Capital 2.0 = Fewer, Smaller Funds (<$100M) + More, Smaller Exits (<$100M)
Platforms 2.0 = Distribution + Monetization, not Tech
Incubators, Metrics = Many Small Experiments (most FAIL ).
Measure Stuff.
Iterate, Iterate, Iterate.

Venture Capital 2.0: The Lean VC

by Dave McClure

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