Silicon Valley 2.0: The Lean VC


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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.
  • Silicon Valley 2.0: The Lean VC

    1. Silicon Valley 2.0 The Lean VC Dave McClure ( @DaveMcClure ) London – Sept 2011 Re-Inventing Venture Capital through Innovation, Incubation, & Iteration
    2. Changes in Tech & VC <ul><li>Platforms = Distribution + Monetization ( not Tech) </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 Acquist’ns (<$250M) </li></ul></ul><ul><li>Incubators, Metrics = Many Small Experiments (most FAIL ) </li></ul><ul><ul><li>Y-Combinator, SeedCamp, 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><ul><li>165+ Mentors in 10+ Countries </li></ul></ul><ul><li>Seed Fund + Startup Accelerator </li></ul><ul><ul><li>20-25 accelerator companies @ 3x/yr </li></ul></ul><ul><ul><li>50-75 / yr seed investments </li></ul></ul><ul><li>Fund I: 175+ 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>Erply (EST) </li></ul></ul><ul><ul><li>MoonFruit (UK) </li></ul></ul><ul><ul><li>MyGengo (JPN) </li></ul></ul><ul><ul><li>BugHerd (AU) </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>Monetization $$$ = 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 Eden Ventures First Round Capital Index Ventures Accel Passion Capital ProFounders SV Angel (Conway) Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) VC Funds ($50-250M) VC Funds (>$250M) Y-Combinator SeedCamp
    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. Lean Startup, Lean VC Customers , Metrics, Iteration. Invest BEFORE Traction; Double Down AFTER .
    19. 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>
    20. Discover Customers (Steve Blank,
    21. Iterate : Learn, Measure, Build. (Eric Ries, LEARN BUILD MEASURE IDEAS CODE DATA
    22. 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 !
    23. 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
    24. 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>
    25. 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>
    26. 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 => “ 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>
    27. 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 (& 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>
    28. 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>
    29. Going Local, Going Global web gets bigger -> world gets smaller
    30. 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>
    31. 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, Brazil) </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>
    32. 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>