Incubator 2.0: A Silicon Valley Success Story


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Presentation on incubators & startups to DC GovTech meetup with White House & State Dept (9/19/09).

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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.
  • Incubator 2.0: A Silicon Valley Success Story

    1. Incubator 2.0: A Silicon Valley Story Engineering Better High-Tech Startups with Incubators, Investment, & Iterative Development Dave McClure (@DaveMcClure) Founders Fund & Sept-Oct 2009
    2. Startup Funding Ecosystem Union Square Ventures First Round Capital SoftTech (Jeff Clavier) SV Angel (Ron Conway) Benchmark Sequoia Y-Combinator TechStars FF Angel FF II fbFund REV (FF, Accel, Facebook) FF I Angels & Incubators ($0-10M) Seed Funds ($10-50M) Small VC Funds ($50-250M) Traditional VC Funds (>$250M)
    3. [Pardon The Hype]
    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, Angel/VC Investor
    5. Angel Investments (Personal, 2004-2008, 13 deals, avg $25K)
    6. Angel Investments (via FF Angel, Q408-Q309, 30+ deals) FF Angel – 12 deals @$50-250K fbFund REV – 22 deals @ ~$15-75K
    7. Founders Fund (2005-2009)
    8. Startup Incubators (lots of little deals… some of which work :)
    9. Incubator: Hatching Startups <ul><li>Idealab (Bill Gross, 1996-2001) </li></ul><ul><ul><li> -> Yahoo Search Marketing </li></ul></ul><ul><ul><li>CitySearch, PayMyBills, Commission Junction, NetZero </li></ul></ul><ul><li>Y-Combinator (Paul Graham, 2005-pres.) </li></ul><ul><ul><li>9+ “vintages”, 100+ companies </li></ul></ul><ul><ul><li>Reddit, Scribd, Xobni, Omnisio, DropBox </li></ul></ul><ul><li>TechStars (CO), SeedCamp (UK), LaunchBox (DC) </li></ul><ul><li>fbFund REV (Silicon Valley, 2008-2009) </li></ul><ul><ul><li>Facebook, Founders Fund, Accel </li></ul></ul>
    10. Incubator 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>
    11. Incubator 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>
    12. 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>
    13. 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>
    14. Startup Funding 1, 2, 3: Incubator, Angel, VC.
    15. 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) Traditional VC Funds (>$250M) Y-Combinator TechStars FF Angel fbFund REV (FF, Accel, Facebook ) SoftTech (Clavier) Maples Investments Felicis (Senkut) SV Angel (Conway)
    16. I^3 : Incremental Investment & Iteration <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>
    17. 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>
    18. 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>
    19. 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>
    20. Startup Metrics Create. Measure. Iterate.
    21. Startup Metrics: Lean & Mean <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>
    22. Startup Metrics for Pirates: AARRR ! <ul><ul><li>A cquisition : What channels do customers come from? </li></ul></ul><ul><ul><li>A ctivation : Do they have “happy” 1st experience? </li></ul></ul><ul><ul><li>R etention : Will they come back? </li></ul></ul><ul><ul><li>R eferral : Do they tell other people? </li></ul></ul><ul><ul><li>R evenue : How to make money? </li></ul></ul>
    23. Minimize TOTAL time through the loop LEARN BUILD MEASURE IDEAS CODE DATA Source: Eric Ries, The Lean Startup
    24. 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 !
    25. 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
    26. 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>
    27. 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>
    28. 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>
    29. 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>
    30. Links & Resources <ul><li>Additional References: </li></ul><ul><li>Influence: The Psychology of Persuasion Robert Cialdini (book) </li></ul><ul><li>Putting the Fun in Functional Amy Jo Kim (etech 2006 preso) </li></ul><ul><li>Futuristic Play Andrew Chen (blog) </li></ul><ul><li>Don’t Make Me Think Steve Krug (book) </li></ul><ul><li>Designing for the Social Web Joshua Porter (book, website) </li></ul><ul><li> Startup Lessons Learned Eric Ries (blog) </li></ul><ul><li> Customer Development Methodology Steve Blank (presentation , blog ) </li></ul><ul><li> Sean Ellis (blog) </li></ul><ul><li> Hiten Shah / Neil Patel (website) </li></ul><ul><li>How To Pitch a VC Dave McClure (slides, NSFW) </li></ul>
    31. Silicon Valley Innovation = Entrepreneurs + Technology + Immigrants Immigration as Critical to American Economic Leadership as Technology Innovation
    32. Q: Where are the Startups? Source:
    33. A: Where Legal Immigrants Reside. Source:
    34. A: Where Legal Immigrants Reside. Source:
    35. Summary <ul><li>1) Incubators are capital efficient method for stimulating tech innovation, job creation </li></ul><ul><li>2) Metrics & Iteration, Feedback loop key to startup process and success </li></ul><ul><li>3) Immigration = Critical to Entrepreneurship as Technology Innovation & Capital </li></ul>