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Silicon Valley 2.0: The Lean VC

slides from my talk at TechWeek (Chicago, July 2011)

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Silicon Valley 2.0: The Lean VC

  1. Silicon Valley 2.0 The Lean VC Dave McClure ( @DaveMcClure ) Chicago – July 2011 Re-Inventing Venture Capital through Innovation, Incubation, & Iteration
  2. Changes in Tech & VC <ul><li>Platforms = Distribution + Monetization ( not Technology) </li></ul><ul><ul><li>Search (Google) </li></ul></ul><ul><ul><li>Social (Facebook, Twitter, LinkedIn, YouTube) </li></ul></ul><ul><ul><li>Mobile (Apple, Android) </li></ul></ul><ul><li>Venture Capital = Fewer, Smaller Funds (<$100M) </li></ul><ul><ul><li>Decline of Large Funds (> $250m), except for HUGE ONES (>$1B). </li></ul></ul><ul><ul><li>Birth of “Super Angel” / “Micro-VC” seed funds (<$100M) </li></ul></ul><ul><ul><li>Market Changes: a Few Big IPOs (>$1B), Lots of Small Acquisitions (<$250M) </li></ul></ul><ul><li>Incubators, Metrics = Many Small Experiments (most FAIL ) </li></ul><ul><ul><li>Y-Combinator, TechStars, 500 Startups </li></ul></ul><ul><ul><li>The “Lean Startup”, Design/UX, Distribution </li></ul></ul><ul><ul><li>Lots of Little Bets; Incremental Investment </li></ul></ul>
  3. Read Geoffrey Miller Sex + Evolution + Consumer Mktg = Awesome
  4. Dave McClure <ul><ul><li>2000-2010: </li></ul></ul><ul><ul><li>Investor : 200+ Startups (Mint, SlideShare, Twilio, WildFire) </li></ul></ul><ul><ul><li>Marketing : PayPal, Simply Hired, Mint, Founders Fund </li></ul></ul><ul><ul><li>Community : Startup2Startup , GeeksOnaPlane , StartupVisa </li></ul></ul><ul><ul><li>Speaker : Lean Startup Metrics, Stanford Facebook class </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 App Dev / SQL DB Admin </li></ul></ul><ul><ul><li>Engineer : Johns Hopkins ‘88, BS Eng / Applied Math </li></ul></ul>
  5. 500 Startups – “Super-Angel” Fund Mountain View, CA – Founded 2010 <ul><li>Design , Distribution , Data </li></ul><ul><li>Seed Fund & Startup Accelerator </li></ul><ul><ul><li>25 companies @ 3x/yr </li></ul></ul><ul><ul><li>Silicon Valley HQ </li></ul></ul><ul><li>Total Portfolio: 165+ Companies </li></ul><ul><ul><li>Twilio </li></ul></ul><ul><ul><li>Wildfire </li></ul></ul><ul><ul><li>SendGrid </li></ul></ul><ul><ul><li>FeeFighters (Chi) </li></ul></ul><ul><ul><li>MyGengo (JPN) </li></ul></ul><ul><ul><li>BugHerd (AU) </li></ul></ul><ul><ul><li>Erply (EST) </li></ul></ul><ul><ul><li>MoonFruit (UK) </li></ul></ul><ul><ul><li>ChinaNetCloud (CH) </li></ul></ul>
  6. Platforms 2.0 Search, Social, Mobile
  7. Web 2.0 : Good Times . <ul><li># Users, Bandwidth = Bigger . </li></ul><ul><li>Startup Costs = Lower . </li></ul><ul><li>Transaction $$$ = Better . </li></ul><ul><li>Building Product => Cheaper, Faster, Better </li></ul><ul><li>Getting Customers => Easier, More Measurable </li></ul><ul><li>Product & Marketing Decisions based on </li></ul><ul><li>Measured User Behavior </li></ul>R.I.P. *BAD* TIMES
  8. Platform Viability Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana
  9. Distribution Platforms <ul><ul><li>Customer Reach: 100M+ </li></ul></ul><ul><ul><ul><li>Search : Google (SEO/SEM) </li></ul></ul></ul><ul><ul><ul><li>Social : Facebook , Twitter , Zynga, LinkedIn </li></ul></ul></ul><ul><ul><ul><li>Mobile : Apple (iPhone, iPad), Android </li></ul></ul></ul><ul><ul><ul><li>Media : YouTube (Video), Blogs, Photos </li></ul></ul></ul><ul><ul><ul><li>Inbox : Gmail , Yahoo, Microsoft </li></ul></ul></ul>
  10. Web 2.0 Business Model: KISS (“Keep It Simple, Stupid”) <ul><li>1) Re-invent Web 1.0 Businesses </li></ul><ul><ul><li>Make a Website, a Widget, an App </li></ul></ul><ul><ul><li>Sell Stuff to People (Transactions, Subscriptions) </li></ul></ul><ul><li>2) add Web 2.0 Tech nology </li></ul><ul><ul><li>Search , Social , Mobile </li></ul></ul><ul><ul><li>Google , Facebook/Twitter , Apple/Android </li></ul></ul><ul><ul><li>Email, SMS, Ecommerce / Payments </li></ul></ul><ul><li>3 ) Get Customers , Make Money </li></ul><ul><ul><li>Distribution, Distribution, Distribution </li></ul></ul><ul><ul><li>(Customer Acq’stn Cost) vs. ($Rev. Per Customer) </li></ul></ul><ul><ul><li>Low CapX + Profitable Web Businesses </li></ul></ul>
  11. Venture Capital 2.0 (smaller / bigger, faster, better? ) Venture Capital 1.0 “ Super” Angel (aka Micro-VC)
  12. Silicon Valley Investor Ecosystem True Ventures First Round Capital Founders Fund Accel SoftTech (Clavier) Felicis (Senkut) SV Angel (Conway) Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) VC Funds ($50-250M) VC Funds (>$250M) Y-Combinator TechStars
  13. Big VC: Still Necessary? <ul><li>Good 4 BIG CAPx: </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>Facebook, Zynga, </li></ul><ul><li>Groupon </li></ul><ul><li>May Not Be Needed 4: </li></ul><ul><li>Consumer Internet </li></ul><ul><li>Small Business </li></ul><ul><li>Consulting </li></ul><ul><li>(Pr0n, Gambling, etc…) </li></ul>
  14. More & Smaller Acquisitions <ul><li>Mature Internet Platform Co’s: </li></ul><ul><ul><li>GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, Fbook </li></ul></ul><ul><li>Non-Tech BigCo / Consumer Verticals buying tech startups (for distribution) </li></ul><ul><li>Lots of Users, $$$ </li></ul><ul><li>Outsourcing Innovation </li></ul>* Mint acquired by Intuit in Sept 2009 for $170M <ul><li>Lots of M&A (but small) </li></ul><ul><li>Founders own MORE % </li></ul><ul><li>Will Sell for LESS $ </li></ul><ul><li>Great for Angels & Entrepreneurs </li></ul><ul><li>Not so Great for (big) VCs </li></ul>
  15. Startup Incubators & Metrics Lots of Little Bets. Most FAIL . (but a few succeed :)
  16. Incubator 2.0: Fast, Cheap, FAIL <ul><li>Incubators = supportive startup ecosystem (+ angels, VCs) </li></ul><ul><li>Efficient use of investment capital ($0-100K) </li></ul><ul><li>High fail rate (60-80%) => large initial sample size </li></ul>
  17. Incubator 2.0: Education, Collaboration, Iteration <ul><li>Success based on: </li></ul><ul><ul><li>MANY , small experiments </li></ul></ul><ul><ul><li>common platforms , customers , problems & solutions </li></ul></ul><ul><ul><li>physical proximity , open/collaborative environment </li></ul></ul><ul><ul><li>Domain-specific mentors & expertise </li></ul></ul><ul><ul><li>fast fail, iteration , metrics & feedback loop </li></ul></ul><ul><li>Incremental investment; high-risk, but high-reward </li></ul>
  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>22 startups @ ~$35K each ($850K total) </li></ul><ul><li>3 month program: Technology, Design, Marketing, Business topics </li></ul><ul><li>Success: ~ 8 startups funded >$500K – Wildfire Interactive raised $4M </li></ul>
  19. Lean Startup, Lean VC Customers , Metrics, Iteration. Invest BEFORE Traction; Double Down AFTER .
  20. The Lean Startup <ul><li>Progress ≠ Features; Measure Conversion </li></ul><ul><li>Talk to Customers ; Discover Problems </li></ul><ul><li>Focus on “ Product/Market Fit” (good solution) </li></ul><ul><li>Fast, Frequent Iteration (+ Feedback Loop ) </li></ul><ul><li>Keep it Simple & Actionable </li></ul>
  21. Discover Customers (Steve Blank,
  22. Iterate : Learn, Measure, Build. (Eric Ries, LEARN BUILD MEASURE IDEAS CODE DATA
  23. 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 !
  24. 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
  25. One Step at a Time. <ul><ul><li>Make a Good Product : Activation & Retention </li></ul></ul><ul><ul><li>Market the Product : Acquisition & Referral </li></ul></ul><ul><ul><li>Make Money : Revenue & Profitability </li></ul></ul>
  26. The “Lean” VC: Lots of Little Bets, Incremental Investment <ul><li>Method : Invest in lots of startups using incremental investment, iterative development. Start with many small experiments, filter out failures, and expand investment in successes… ( Rinse & Repeat) . </li></ul><ul><li>Incubator : $0-100K (“ Build & Validate Product ”) </li></ul><ul><li>Seed : $100K-$1M (“ Test & Grow Market ing Channels” ”) </li></ul><ul><li>Venture : $1M-$10M (“ Maximize Growth & Revenue ”) </li></ul>
  27. Investment Stage #1: Product Validation + Customer Usage <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>Test Functional Prototype / “ Minimum Viable Product ” ( MVP ): </li></ul><ul><ul><li>Prototype->Alpha, ~3-6 months </li></ul></ul><ul><ul><li>Develop Minimal Critical Feature Set => Get to “ It Works! Someone Uses It. ” </li></ul></ul><ul><ul><li>Improve Design & Usability, Setup Conversion Metrics </li></ul></ul><ul><ul><li>Test Small-Scale Customer Adoption (10-1000 users) </li></ul></ul><ul><li>Demonstrate Concept, Reduce Product Risk, Test Functional Use </li></ul><ul><li>Develop Metrics & Filter for Possible Future Investment </li></ul>
  28. Investment Stage #2: Market Validation + Revenue Testing <ul><li>Structure </li></ul><ul><ul><li>2-10 person team </li></ul></ul><ul><ul><li>$100K-$1M investment </li></ul></ul><ul><ul><li>Syndicate of Angel Investors / Small VC Funds </li></ul></ul><ul><li>Improve Product, Expand Customers , Test Revenue: </li></ul><ul><ul><li>Alpha->Beta, ~6-12 months </li></ul></ul><ul><ul><li>Scale Customer Adoption => “ Many People Use It, & They Pay. ” </li></ul></ul><ul><ul><li>Test Marketing Campaigns, Customer Acquisition Channels + Cost </li></ul></ul><ul><ul><li>Test Revenue Generation, Find Profitable Customer Segments </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>
  29. Investment Stage #3: Revenue Validation + Growth <ul><li>Structure </li></ul><ul><ul><li>5-25 person team </li></ul></ul><ul><ul><li>$1M-$5M investment </li></ul></ul><ul><ul><li>Seed & Venture Investors </li></ul></ul><ul><li>Make Money (or Go Big) , Get to Sustainability: </li></ul><ul><ul><li>Beta->Production, 12-24 months </li></ul></ul><ul><ul><li>Revenue / Growth => “ We Can Make (a lot of) Money! ” </li></ul></ul><ul><ul><li>Mktg Plan => Predictable Channels / Campaigns + Budget </li></ul></ul><ul><ul><li>Scalability & Infrastructure, Customer Service & Operations </li></ul></ul><ul><ul><li>Connect with Distribution Partners, Expand Growth </li></ul></ul><ul><li>Prove/Expand Market, Operationalize Business </li></ul><ul><li>Future Milestones: Profitable/Sustainable, Exit Options </li></ul>
  30. Going Local, Going Global web gets bigger -> world gets smaller
  31. Global Trends <ul><li>Growth of Global Languages (see ) </li></ul><ul><ul><li>1B+ speakers: Mandarin , English </li></ul></ul><ul><ul><li>500M+ spkrs: Spanish , Hindi, Arabic </li></ul></ul><ul><li>Smart Device Proliferation </li></ul><ul><ul><li>mobile, tablet, TV, console, etc </li></ul></ul><ul><li>More Young, More Old ($$$) Users Online </li></ul><ul><li>More Bandwidth, More Video, More Social, More Mobile </li></ul><ul><li>Wealthy Chinese + Indian , Web + IRL Globetrotters ($$$B) </li></ul><ul><li>Acceleration of Global Payment , E-Commerce </li></ul><ul><li>Dramatically Reduced Cost : Product Dev, Customer Acqstn </li></ul><ul><li>Global Distribution Platforms </li></ul><ul><ul><li>US/EU: Apple, Facebook, AMZN, GOOG (Search, YouTube, Gmail, Android), Twitter </li></ul></ul><ul><ul><li>Asia: Tencent/QQ, Taobao/Alibaba/AliPay, Youku, MediaTek, Rakuten, DeNA, Gree </li></ul></ul>
  32. Local Hacks <ul><li>Dominate your local/native market first </li></ul><ul><ul><li>Or, move so that your local market is bigger (China, US, India) </li></ul></ul><ul><li>Language + Visual Design Matters </li></ul><ul><ul><li>Read: Spent , Influence, Understanding Comics </li></ul></ul><ul><li>Niche 2 Win: Big Enough Markets + Great Customer </li></ul><ul><ul><li>1M users @ $9/mo = ~$100M+/yr business </li></ul></ul><ul><li>Sell Something : Shoes, Clicks, Bits, Anything. </li></ul><ul><ul><li>Transactns, Subscriptns, Virtual Goods, LeadGen </li></ul></ul><ul><li>You Don’t Need to Be [in] Silicon Valley </li></ul><ul><ul><li>But, Silicon Valley Needs to BE IN YOU . </li></ul></ul><ul><ul><li>(Use The Force Luke… Close Yo ur Eyes, Let Go  ) </li></ul></ul>
  33. Summary <ul><li>Platforms 2.0 = Distribution + Monetization (not Tech) </li></ul><ul><ul><li>Customer Acquisition MUCH easier, MUCH faster </li></ul></ul><ul><ul><li>Monetization keeps getting BETTER </li></ul></ul><ul><ul><li>Capital Rqmts MUCH lower </li></ul></ul><ul><li>Incubators, Metrics = Lots of Small Bets / Experiments </li></ul><ul><ul><li>Most Fail, a Few Succeed </li></ul></ul><ul><ul><li>Quantity Over (Perceived) Quality </li></ul></ul><ul><ul><li>Incremental Investment after Success </li></ul></ul><ul><li>Venture Capital 2.0 = </li></ul><ul><ul><li>Fewer, Smaller Funds (<$100M) </li></ul></ul><ul><ul><li>More, Smaller Exits (<$100M) </li></ul></ul><ul><ul><li>Globalization, Specialization, Verticalization </li></ul></ul>