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Silicon Valley 2.0: The Lean VC (Waterloo)


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slides from my talk on changes in the Startup & Venture Capital industry, at Entrepreneur Week, Waterloo, Canada (Nov 2010).

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Silicon Valley 2.0: The Lean VC (Waterloo)

  1. The Lean VC : a Silicon Valley 2.0 Story Dave McClure 500 Startups ( @DaveMcClure ) Entrepreneur Week – Waterloo, Nov 2010 Re-Inventing Venture Capital Investing through Innovation, Incubation, & Iteration
  2. Changes. <ul><li>Venture Capital = Fewer, Smaller Funds (<$100M) </li></ul><ul><ul><li>Decline of Large Funds (> $250m) </li></ul></ul><ul><ul><li>Birth of “ Super Angel” Funds ($10-100M) </li></ul></ul><ul><ul><li>Market Changes: Fewer IPOs (>$1B), More/Smaller Acq’stns (<$250M) </li></ul></ul><ul><li>Platforms = Distribution + Monetization (not Technology) </li></ul><ul><ul><li>Search (Google) </li></ul></ul><ul><ul><li>Social (Facebook, Twitter, YouTube) </li></ul></ul><ul><ul><li>Mobile (Apple, Android) </li></ul></ul><ul><li>Incubators & Metrics = Many Small Experiments (most FAIL ) </li></ul><ul><ul><li>Y-Combinator, TechStars, SeedCamp </li></ul></ul><ul><ul><li>Betaworks, fbFund REV, AngelPad </li></ul></ul><ul><ul><li>500 Startups </li></ul></ul>
  3. Dave McClure: Bio <ul><ul><li>2000-2010: </li></ul></ul><ul><ul><li>Investor : 100+ Startups (Mint, SlideShare, Twilio, WildFire) </li></ul></ul><ul><ul><li>Marketing : PayPal, Simply Hired,, Founders Fund </li></ul></ul><ul><ul><li>Community : Startup2Startup , GeeksOnaPlane , StartupVisa </li></ul></ul><ul><ul><li>Speaker : 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>
  4. 500 Startups Seed Fund Mountain View, CA – Founded 2010 <ul><li>$30M Seed Fund & Startup Accelerator </li></ul><ul><li>Design , Distribution , Data </li></ul><ul><li>60+ Portfolio 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>MyGengo </li></ul></ul><ul><ul><li>Erply </li></ul></ul><ul><ul><li>Payvment </li></ul></ul><ul><ul><li>FlowTown </li></ul></ul><ul><ul><li>Medialets </li></ul></ul><ul><ul><li>ChinaNetCloud </li></ul></ul>
  5. 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)
  6. 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)
  7. 500 Startups LP Fund I (60+ investments @ ~$100K 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
  8. Venture Capital 2.0 (smaller, faster, better) Venture Capital 1.0 “ Super” Angel (aka Micro-VC)
  9. 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)
  10. Venture Capital: Still Relevant? <ul><li>Good for big CAP: </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>Not So Great for: </li></ul><ul><li>Consumer Internet </li></ul><ul><li>Small Business </li></ul><ul><li>Consulting </li></ul><ul><li>Games, Porn ;) </li></ul>
  11. 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>Lots of Users, $$$ </li></ul><ul><li>Outsourcing Innovation </li></ul><ul><li>Lots of M&A (but small) </li></ul><ul><li>Great for Angels & Entrepreneurs </li></ul><ul><li>Not so Great for (big) VCs </li></ul>* Mint acquired by Intuit in Sept 2009 for $170M
  12. Platforms 2.0 Search, Social, Mobile
  13. Web 2.0 : Good Times . <ul><li># Users, Bandwidth = Bigger . </li></ul><ul><li>Startup Costs = Lower . </li></ul><ul><li>Transaction $$$ = 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
  14. Platform Viability Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana
  15. 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 , Blackberry </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>
  16. 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>
  17. Startup Incubators Lots of Hot, Cool, Web 2.0! (+ lots of FAIL .)
  18. 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>
  19. Incubator 2.0: Education, Collaboration, Iteration <ul><li>Success based on: </li></ul><ul><ul><li>many small startup experiments </li></ul></ul><ul><ul><li>common platforms, problems & solutions </li></ul></ul><ul><ul><li>physical proximity, open/collaborative environment </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>
  20. 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>
  21. Startup Metrics & The Lean Startup Measure Shit, Iterate .
  22. “ What Metrics Should I Measure ?” Users, Pages, Clicks, Emails, $$$...? <ul><li>Q: Which of these is best? How do you know? </li></ul><ul><ul><li>1,000,000 one-time, unregistered unique visitors </li></ul></ul><ul><ul><li>500,000 visitors who view 2+ pages / stay 10+ sec </li></ul></ul><ul><ul><li>200,000 visitors who clicked on a link or button </li></ul></ul><ul><ul><li>20,000 registered users w/ email address </li></ul></ul><ul><ul><li>2,000 passionate fans who refer 5+ users / mo. </li></ul></ul><ul><ul><li>1,000 monthly subscribers @ $5/mo </li></ul></ul>the good stuff.
  23. Read Geoffrey Miller Sex + Evolution + Consumer Mktg = Awesome Sauce
  24. Other Great Shit. Psychology + Comics
  25. Discover Meaning What Do Users Care About Enough to F**k or Kill ? Kathy Sierra: “ Creating Passionate Users”
  26. The Lean Startup <ul><li>Progress ≠ Features; Measure Conversion </li></ul><ul><li>Talk to Customers ; Discover Problems </li></ul><ul><li>Focus on “ Product/Market Fit” (good solution) </li></ul><ul><li>Fast, Frequent Iteration (+ Feedback Loop ) </li></ul><ul><li>Keep it Simple & Actionable </li></ul>
  27. Discover Customers (Steve Blank,
  28. Iterate : Learn, Measure, Build. (Eric Ries, LEARN BUILD MEASURE IDEAS CODE DATA
  29. Product/Market Fit Before “Launch” (Sean Ellis, [email_address] Blog:
  30. Startup Metrics for Pirates <ul><li>A cquisition: users come to site from various channels </li></ul><ul><li>A ctivation: users enjoy 1 st visit: &quot; happy ” experience </li></ul><ul><li>R etention: users come back , visit site multiple times </li></ul><ul><li>R eferral: users like product enough to refer others </li></ul><ul><li>R evenue: users conduct some monetization behavior </li></ul>(note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video) AARRR !
  31. AARRR! : 5-Step Startup Metrics Model R evenue $$$ 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
  32. Q: What is My Business Model? <ul><li>One of the following: </li></ul><ul><ul><li>Drive Usage (= Activation, Retention) </li></ul></ul><ul><ul><li>2. Get Users (= Acquisition, Referral) </li></ul></ul><ul><ul><li>3. Make Money (= Revenue*) </li></ul></ul><ul><li>(Note: eventually need to turn Users/Usage -> Money) </li></ul>
  33. Lean Startup Challenges <ul><li>Startups have problems in 3 main areas: </li></ul><ul><ul><li>Management : Set Priorities, Define Key Metrics, Make Decisions . </li></ul></ul><ul><ul><li>Product : Build the “Right” Features. Measure, Iterate . </li></ul></ul><ul><ul><li>Marketing : Distribution, Distribution, Distribution . </li></ul></ul>
  34. 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>
  35. 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>
  36. Role: Marketing / Sales <ul><li>Q: What channels? Which users? Why? </li></ul><ul><li>A: High Volume (#), Low Cost ($), High Conv (%) </li></ul><ul><li>Design & Test Multiple Marketing Channels + Campaigns </li></ul><ul><li>Select & Focus on Best-Performing Channels & Themes </li></ul><ul><li>Optimize for conversion to target CTAs, not just site/landing page </li></ul><ul><li>Match/Drive channel cost to/below revenue potential </li></ul><ul><li>Low-Hanging Fruit: </li></ul><ul><ul><li>Blogs </li></ul></ul><ul><ul><li>SEO/SEM </li></ul></ul><ul><ul><li>Landing Pages </li></ul></ul><ul><ul><li>Automated Emails </li></ul></ul>
  37. M AARRR keting Plan <ul><li>Marketing Plan = Target Customer Acquisition Channels </li></ul><ul><ul><li>3 Important Factors = Volume (#), Cost ($), Conversion (%) </li></ul></ul><ul><ul><li>Measure conversion to target customer actions </li></ul></ul><ul><ul><li>Test audience segments, campaign themes, Call-To-Action (CTAs) </li></ul></ul><ul><li>[Gradually] Match Channel Costs => Revenue Potential </li></ul><ul><ul><li>Increase Vol. & Conversion, Decrease Cost, Optimize for Revenue Potential </li></ul></ul><ul><ul><li>Avg Txn Value (ATV), Ann Rev Per User (ARPU), Cust Lifetime Value (CLV) </li></ul></ul><ul><ul><li>Design channels that (eventually) cost <20-50% of target ATV, ARPU, CLV </li></ul></ul><ul><li>Consider Costs, Scarce Resource Tradeoffs </li></ul><ul><ul><li>Actual $ expenses </li></ul></ul><ul><ul><li>Marketing time & resources </li></ul></ul><ul><ul><li>Product/Engineering time & resources </li></ul></ul><ul><ul><li>Cashflow timing of expense vs. revenue, profit </li></ul></ul>
  38. 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>“ You probably can’t save your Ass and your Face at the same time… choose carefully .” – DMC
  39. Investor Metrics: “Super Angel” -> Lean VC Not “Spray & Pray”, but rather “ Quantitative, Incremental, Selective Follow-on ” Investing. (Product, Market, Revenue.)
  40. “ Lean Investor” Model <ul><li>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) . </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>
  41. Investment #1: Incubate (“Product”) <ul><li>Structure </li></ul><ul><ul><li>1-3 founders </li></ul></ul><ul><ul><li>$25K-$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>Prototype->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><li>Demonstrate Concept, Reduce Product Risk, Test Functional Use </li></ul><ul><li>Develop Metrics & Filter for Possible Future Investment </li></ul>
  42. Investment #2: Seed (“Market”) <ul><li>Structure </li></ul><ul><ul><li>2-5 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 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, Cust Acqstn Channels </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>
  43. Investment #3: Venture (“Revenue”) <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>Make Money , Get to Sustainability: </li></ul><ul><ul><li>Beta->Production, 12-18 months </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 Distribution Partners </li></ul></ul><ul><li>Prove/Expand Market, Operationalize Business </li></ul><ul><li>Future Milestones: Profitable/Sustainable, Exit Options </li></ul>
  44. Summary <ul><li>Venture Capital 2.0 = Fewer, Smaller Funds (<$100M) + More, Smaller Exits (<$100M) </li></ul><ul><li>Platforms 2.0 = Distribution + Monetization, not Tech </li></ul><ul><li>Incubators, Metrics = Many Small Experiments (most FAIL ). </li></ul><ul><ul><li>Measure Stuff. </li></ul></ul><ul><ul><li>Iterate, Iterate, Iterate. </li></ul></ul>