Startup 2.0: A Silicon Valley Story


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Dave McClure's presentation on Startups, Incubators, Angel Investors, & Venture Capital to the Canada National Angel Investors conference (Oct 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.
  • Startup 2.0: A Silicon Valley Story

    1. 1. Startup 2.0: A Silicon Valley Story Engineering Better High-Tech Startups via Incubators, Angel Investment, & Iterative Development Dave McClure (twitter: @DaveMcClure ) Canada National Angel Summit, October 2009
    2. 2. Topics <ul><li>Venture Capital = Broken [for Internet Startups] </li></ul><ul><li> , M&A Trends : more, smaller acquisitions </li></ul><ul><li>Incubators : Lots of FAIL , Metrics , UX & Distribution </li></ul><ul><li>Web 2.0 : 80% Boring Biz + 20% New Tech = WIN! </li></ul><ul><li>Platforms 2.0 : Social, Mobile, Micro, Inbox, SEO </li></ul><ul><li> : Importing Immigrants & Innovation </li></ul>
    3. 3. [Please Excuse The Commercial]
    4. 4. 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, Itty-Bitty Angel/VC
    5. 5. Angel Investments (Personal, 13 deals, 2004-2008)
    6. 6. Professional Investments (2009) FF Angel – 12 deals @$50-250K fbFund REV – 22 deals @ ~$15-75K
    7. 7. Founders Fund (2005-2009)
    8. 8. Venture Capital = BROKEN? (at least for *Internet* Startups)
    9. 9. Startup 2.0 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) Traditional VC Funds (>$250M) Y-Combinator TechStars FF Angel fbFund REV (FF, Accel, Facebook ) SoftTech (Clavier) Maples Investments Felicis (Senkut) SV Angel (Conway)
    10. 10. Venture Capital: Still Relevant? <ul><li>Good 4: </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>
    11. 11. FAIL or WIN? (um… definitely WIN .)
    12. 12., Jason Fried, & “Flipping Is Good” post
    13. 13. 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>
    14. 14. Startup Incubators (Hot, Cool, Web 2.0… and lots o’ FAIL.)
    15. 15. The Startup 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>
    16. 16. Startup 2.0 <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 ($25-100K) </li></ul><ul><li>High fail rate (60-80%) => large initial sample size </li></ul>
    17. 17. Startup 2.0 <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>
    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>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>
    19. 19. 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: ~5 startups already funded, ~5 @ break-even </li></ul>
    20. 20. 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>
    21. 21. 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>
    22. 22. 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>
    23. 23. Startup Metrics / The Lean Startup Measure Stuff. Iterate.
    24. 24. 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>
    25. 25. Minimize TOTAL time through the loop LEARN BUILD MEASURE IDEAS CODE DATA Source: Eric Ries, The Lean Startup
    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 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. The Startup Pyramid (Sean Ellis, [email_address] Blog:
    29. 29. 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>
    30. 30. 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>
    31. 31. 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>
    32. 32. 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>
    33. 33. 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>
    34. 34. 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>
    35. 35. Investment 2.0: Boring Biz + Tech = Win A little Web 2.0 goes a long way
    36. 36. 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>
    37. 37. Platforms 2.0 Social, Mobile, Micro, Inbox, SEO
    38. 38. Platform Viability Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana
    39. 39. 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>
    40. 40. Immigration & Innovation