Startup 2.0: A Silicon Valley Story (Jan 2010)


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My talk for China Mobile Internet Exec Reception on Startup / Venture Capital trends in Silicon Valley (Jan 2010).

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Startup 2.0: A Silicon Valley Story (Jan 2010)

  1. Startup 2.0:A Silicon Valley StorySourcing, Selecting & Engineering Better Startups via Incubators, Metrics & Iterative Development<br />Dave McClure, Founders Fund<br />(twitter: @DaveMcClure)<br />China Mobile Internet Exec Reception<br />January2010<br />
  2. Angels & <br />Incubators<br />($0-10M)<br />“Seed” Funds <br />($10-50M)<br />“Small” VC Funds <br />($50-250M)<br />“Large” VC Funds <br />(&gt;$250M)<br />Silicon Valley Startup Funding Ecosystem<br />fbFund<br />REV<br />Y-Combinator<br />TechStars<br />FF Angel<br />SoftTech (Clavier)<br />Maples Investments<br />Felicis (Senkut)<br />SV Angel (Conway)<br />FF I<br />Union Square Ventures<br />First Round Capital<br />FF II<br />Benchmark<br />Sequoia<br />
  3. Topics<br />Venture Capital 1.0 = *Broken Model* (for Internet Startups)<br />M&A Trends: More, but Smaller Acquisitions, Very Few IPOs<br />Incubators: Many Experiments (most FAIL, a few winners)<br />Metrics: Define “Success”, Measure & Iterate (Fast + Feedback)<br />Platforms 2.0: Social, Mobile, Micro, Inbox, SEO<br />
  4. [Pardon The Blatant Commercial]<br />
  5. Dave McClure<br />Blogger, Startup Advisor<br />Internet Marketing, <br />Angel/VC Investor<br />2001-2009:<br /><ul><li>Startup Investor: 500 Hats LLC, Founders Fund
  6. Tech Marketing: PayPal, Simply Hired, Mint
  7. Advisor, Angel Investor: 40+ Startups
  8. Conf. Organizer:Web 2.0, O’Reilly, Startonomics
  9. Stanford Visiting Lecturer: Facebook, Startup Metrics</li></ul>80’s & 90’s:<br /><ul><li>Entrepreneur: Founder/CEO Aslan Computing (acq.)
  10. Developer: Windows Apps / SQL DB Admin
  11. User Groups: E-Commerce, Internet, Client-Server
  12. Engineer: Johns Hopkins ‘88, BS Eng / Applied Math</li></ul>GEEK, CODER, ENTREPRENEUR<br />
  13. Personal Investments (16 deals, 2004-2009, ~$25K avg)<br />
  14. Professional Investments (40 deals, Dec 2008 – Dec 2009, ~$75K avg)<br />fbFund Incubator<br />22 deals ($850K) <br />~$15-75K<br />FF Angel LLC<br />18 deals ($1.8M)<br />~$50-250K<br />
  15. Founders Fund (Selected Investments, 2005-2009, range $1M-20M)<br />
  16. Venture Capital 1.0 = Too Big To FAILWIN?(at least for *Internet* Startups)<br />
  17. Angels & <br />Incubators<br />($0-10M)<br />“Seed” Funds <br />($10-50M)<br />“Small” VC Funds <br />($50-250M)<br />“Large” VC Funds <br />(&gt;$250M)<br />Startup Funding Ecosystem<br />fbFund <br />REV<br />Y-Combinator<br />TechStars<br />FF Angel<br />SoftTech (Clavier)<br />Maples Investments<br />Felicis (Senkut)<br />SV Angel (Conway)<br />FF I<br />Union Square Ventures<br />First Round Capital<br />FF II<br />Benchmark<br />Sequoia<br />
  18. Venture Capital: Still Relevant?<br />Good 4 big CAPex:<br />Hardware<br />Enterprise SW<br />Clean Tech<br />BioScience<br />Wineries (?)<br />Not So Great 4:<br /><ul><li>Internet Startups
  19. Consulting Shops
  20. Lifestyle Biz
  21. Porn, Gambling</li></li></ul><li>More & Smaller Acquisitions<br />Big, Mature Internet Platform Co’s:<br />Google, MSFT, Yahoo, Ebay, Amazon, AOL, IAC, Facebook, NewsCorp, Apple, etc<br />Lots of Users, $$$<br />Outsourcing Innovation<br />Lots of M&A (but small)<br />Great for Angels & Entrepreneurs<br />… Not so Great for VCs<br />
  22. Startup Incubators Lots of Hot, Cool, Web 2.0!(+ lots of FAIL, too.)<br />
  23. Incubator 2.0 Model<br />Method: Invest in startups using incremental investment, iterative development. Start with lots of small experiments, filter out failure, and expand investment upon success.<br />Incubator: $0-100K (“Micro-Seed”)<br />Angel: $100-$1M (“Seed”)<br />VC: $1M-$5M (“Series A, B”)<br />
  24. Incubator 2.0: Fast, Cheap, FAIL<br />Incubators growing in popularity, acceptance<br />Supportive ecosystem for startups (angels, VCs)<br />Efficient use of investment capital ($0-100K)<br />High fail rate (60-80%) =&gt; large initial sample size<br />
  25. Incubator 2.0: Education, Collaboration<br />Emphasis on education, access to shared resources<br />Success based on common platforms, physical proximity, open & collaborative environment<br />Success based on fast fail, iteration & feedback<br />Incremental investment; high-risk, but high-reward<br />
  26. fbFund REV<br />fbFund REV: Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform, Facebook Connect.<br />25 startups (2 non-profits)<br />$850K total investment (~$35K each)<br />12-week mentorship program in Palo Alto, CA<br />~25 Advisors / Speakers (Entrepreneurs, Geeks, Investors)<br />
  27. fbFund REV<br />fbFund REV: Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform, Facebook Connect.<br />Education on Tech, Design, Marketing, Business topics <br />Demo Day with &gt;200 VC, Angel Investors<br />Target: ~7 seed round investments ($250K-$1M)<br />Success: ~8 startups funded &gt;$250K, ~5 @ break-even<br />
  28. Investment #1: Micro-Seed(“Incubator”)<br />Structure<br />1-3 founders<br />$25K-$100K investment<br />Incubator environment: multiple peers, mentors/advisors<br />Build Functional Prototype / “Minimum Viable Product” (MVP):<br />Concept-&gt;Alpha, ~3-6 months<br />Develop Minimal Critical Feature Set =&gt; Get to “It Works”<br />Instrument Basic Dashboard, Conversion Metrics<br />Test Cust. Adoption (10-1000 users) / Cust. Satisfaction (Scale: 1-10)<br />Demonstrate Concept, Reduce Product Risk, Test Functional Use<br />Develop Metrics & Filter for Follow-on Investment<br />
  29. Investment #2: Seed(“Angel”)<br />Structure<br />2-5 person team<br />$100K-$1M investment<br />Syndicate of Angel Investors / Small VC Funds<br />Improve Product, Expand Market, Test Revenue:<br />Alpha-&gt;Beta, ~6-12 months<br />Customer Sat ≥ 6 =&gt; Get to “Doesn’t Suck”<br />Setup A/B Testing Framework, Optimize Conversion<br />Test Marketing Campaigns, Customer Acquisition Channels <br />Prove Solution/Benefit, Assess Market Size<br />Test Channel Cost, Revenue Opportunity<br />Determine Org Structure, Key Hires<br />
  30. Investment #3: Series A(“Venture”)<br />Structure<br />5-10 person team<br />$1M-$5M investment<br />VC Investors<br />Make Money, Get to Sustainability:<br />Beta-&gt;Production, 12-18 months<br />Customer Sat ≥ 8 =&gt; “It Rocks, I’ll Tell My Friends”<br />MktgPlan =&gt; Predictable Channels / Campaigns + Budget<br />Scalability & Infrastructure, Customer Service & Operations<br />Connect with Distribution Partners<br />Prove/Expand Market, Operationalize Business<br />Future Milestones: Profitable/Sustainable, Exit Options<br />
  31. Startup Metrics & The Lean StartupMeasure Stuff. Iterate. Rinse & Repeat.<br />
  32. The Startup Metrics Religion<br />Progress ≠ Features (Less= More)<br />Focus on User Experience (& Distribution)<br />Measure Conversion; Compare 2+ Options<br />Fast, Frequent Iteration (+ Feedback Loop)<br />Keep it Simple & Actionable<br />
  33. Minimize TOTAL time through the loop<br />IDEAS<br />LEARN<br />BUILD<br />DATA<br />CODE<br />MEASURE<br />Source: Eric Ries, The Lean Startup<br />
  34. The Startup Pyramid(Sean Ellis,<br /><br />Blog:<br />
  35. AARRR!<br />Startup Metrics for Pirates<br />Acquisition:users come to site from various channels<br />Activation: users enjoy 1st visit: &quot;happy” experience<br />Retention: users come back, visit site multiple times<br />Referral:users like product enough to refer others<br />Revenue: users conduct some monetization behavior<br />(note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video)<br />
  36. SEO<br />Campaigns, Contests<br />SEM<br />PR<br />Biz Dev<br />Social Networks<br />Affiliates<br />Blogs<br />Acquisition<br />Apps & Widgets<br />Direct, Tel, TV<br />Referral<br />Email<br />Viral Loops<br />Domains<br />Activation<br />Homepage / Landing Page<br />Retention<br />Emails & widgets<br />Emails & Alerts<br />Product Features<br />Affiliates, Contests<br />Blogs, RSS, News Feeds<br />Biz Dev<br />Revenue $$$<br />Ads, Lead Gen, Subscriptions, ECommerce<br />System Events & Time-based Features<br />AARRR!: 5-Step Startup Metrics Model<br /><br />
  37. Startup Challenges<br />Startups have problems in 3 key areas:<br /><ul><li>Management: Setting Priorities, Defining Key Metrics, Creating Dashboard, Reporting Progress
  38. Product: Building the “Right” Features, Getting Product Out Quickly, Testing for User Conversion / Adoption
  39. Marketing: Accessing “Web 2.0” Channels (Search, Social, Viral, New Media), Cost-Efficient Distribution</li></li></ul><li>Role: Founder/CEO<br />Q: Which Metrics? Why?<br />A: Focus on Critical Few Actionable Metrics<br />(if you don’t use the metric to make a decision, it’s not actionable)<br />Hypothesize Customer Lifecycle<br />Target ~3-5 Conversion Events (tip: Less = More)<br />Test, Measure, Iterate to Improve<br />
  40. Role: Product / Engineering<br />Q: What Features to Build? Why? When are you “Done”?<br />A: Easy-to-Find, Fun/Useful, Unique Features that<br />Increase Conversion(stop iterating when increase decelerates)<br />Wireframes = Conversion Steps<br />Measure, A/B Test, Iterate FAST (daily/weekly)<br />Optimize for Conversion Improvement<br />80% on existing feature optimization<br />20% on new feature development<br />
  41. Role: Marketing / Sales<br />Q: What channels? Which users? Why?<br />A: High Volume (#), Low Cost ($), High Conv (%)<br />Design & Test Multiple Marketing Channels + Campaigns<br />Select & Focus on Best-Performing Channels & Themes<br />Optimize for conversion to target CTAs, not just site/landing page<br />Match/Drive channel cost to/below revenue potential<br />Low-Hanging Fruit: <br />Blogs<br />SEO/SEM<br />Landing Pages<br />Automated Emails<br />
  42. Platforms 2.0Social, Mobile,Comm, Inbox, Search<br />
  43. Web 2.0 = Good Business<br />1) Take Existing Good Business Ideas<br />2) Add [a little] Technology<br />Blogs, Twitter, Facebook Connect<br />Email & SEO<br />Social Networks & Friend/Follower lists<br />Online Payments<br />3) Increase Distribution, Lower Customer Acquisition Cost with Internet<br />PROFIT!<br />
  44. Platform Viability<br />Features<br />Successful Platforms have 3 Things:<br />1) Features<br />2) Users<br />3) Money<br />Users.<br />. Money<br />Profit<br />Growth<br />Nirvana<br />Profitable<br />Growth<br />
  45. Platforms: HOT or NOT?<br />Social: Facebook, Twitter, LinkedIn, MySpace?<br />Mobile: iPhone, Android?, Palm?<br />Comm: Twitter, IM/Chat, Skype, Meebo<br />Inbox: Gmail, YahooMail, Hotmail?, AOL?<br />Search: Google, Bing/Yahoo<br />Payments: Amazon (1-Click), eBay (PayPal), Apple (iTunes), Facebook?, Google?<br />Dev: Amazon (AWS), Google AppEngine, Ruby/Rails, Python/Django, etc<br />Gaming: Zynga, Playdom, Playfish, RockYou, Slide,<br />Other: SalesForce, Craigslist, Wikipedia, YouTube<br />
  46. Summary<br />VC 2.0 = Fewer, Smaller Funds (&lt;$100M)<br />Liquidity = More, Smaller Acquisitions (&lt;$100M)<br />Model = Singles (Ichiro), not Home Runs (Barry Bonds)<br />Diligence = Lots of Little Checks (+ Metrics + Time)<br />Incubators = Many Small Experiments (most FAIL), Education + Shared Resources, Incremental Investment<br />Startup Metrics = Define, Measure, Iterate<br />Platforms = Distribution + Monetization, not Technology<br />