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Startup 2.0: a Silicon Valley Story


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Slides from my talk "Startup 2.0: A Silicon Valley Story" for Echelon conf (Singapore, May 2010)

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Startup 2.0: a Silicon Valley Story

  1. Startup 2.0: A Silicon Valley Story Engineering Better Startups with Incubators, Metrics & Iterative Development Dave McClure ( @DaveMcClure ) Founders Fund / 500 Hats Echelon May 2010 (Singapore)
  2. Topics <ul><li>Venture Capital 1.0 = * Broken Model* (for Internet Startups) </li></ul><ul><li>M&A Trends : More & Smaller Acquisitions (Very Few IPOs) </li></ul><ul><li>Incubators : Many Experiments (most FAIL , a few winners) </li></ul><ul><li>Metrics : Define “Success”, Measure & Iterate (Fast + Feedback) </li></ul><ul><li>Platforms 2.0 : Search, Social, Mobile, Inbox, Media (Distribution) </li></ul>
  3. [Pardon The Blatant Commercial]
  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. Professional Investments (43 deals, 2008-2010, ~$3M) fbFund REV 22 incubator deals ($850K) FF Angel 21 seed deals ($2M)
  6. Personal Investments (26 deals, 2004-2010, ~$400K) LinkDex oneforty Networked Blogs MyGengo Votizen Postling EcoMom SiteJabber Graphicly WePay Plancast Recurly
  7. Venture Capital 1.0 = Too Big To FAIL WIN ? (at least for *Internet* Startups)
  8. Startup Investor Ecosystem True Ventures First Round Capital Benchmark Sequoia Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) “ Small” VC Funds ($50-250M) “ Large” VC Funds (>$250M) Y-Combinator TechStars SoftTech (Clavier) FloodGate (Maples) Felicis (Senkut) SV Angel (Conway)
  9. Venture Capital: Still Relevant? <ul><li>Good 4 big CAPex: </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>Not So Great 4: </li></ul><ul><li>Internet Startups </li></ul><ul><li>Consulting Shops </li></ul><ul><li>Lifestyle Biz </li></ul><ul><li>Porn, Gambling </li></ul>
  10. Web 2.0: Hell Yes , Good Times. <ul><li># Users, Bandwidth = Bigger . </li></ul><ul><li>Startup Costs = Lower . </li></ul><ul><li>Transaction $ Growing = Better . </li></ul><ul><li>Building Product => Cheaper, Faster, Measurable </li></ul><ul><li>Getting Customers => Easier, More Predictable </li></ul><ul><li>Product & Market Decisions Based on Measured User Behavior </li></ul>R.I.P. *BAD* TIMES
  11. 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, 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/IM : Gmail, Yahoo, MSFT, AOL </li></ul></ul></ul>
  12. 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><ul><li>etc </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>
  13. Startup Incubators Lots of Hot, Cool, Web 2.0! (+ lots of FAIL, too.)
  14. Startup 2.0: “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>
  15. Incubator 2.0: Fast, Cheap, FAIL <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 ($0-100K) </li></ul><ul><li>High fail rate (60-80%) => large initial sample size </li></ul>
  16. Incubator 2.0: Education, Collaboration <ul><li>Emphasis on education, access to shared resources </li></ul><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>
  17. 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 (+2 non-profits) </li></ul><ul><li>12-week prog + 25 Advisors / Spkrs on Tech, Design, Mktg, Business topics </li></ul><ul><li>Target: ~7 seed round investments ($250K-$1M) </li></ul><ul><li>Success: ~8 startups funded >$250K, ~6 @ break-even </li></ul>
  18. 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>
  19. 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>
  20. 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>
  21. Startup Metrics & The Lean Startup Measure Stuff. Iterate. Rinse & Repeat.
  22. Lean Startup Church of Metrics <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>
  23. Minimize TOTAL time through the loop LEARN BUILD MEASURE IDEAS CODE DATA Source: Eric Ries, The Lean Startup
  24. The Startup Pyramid (Sean Ellis, [email_address] Blog:
  25. 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 !
  26. 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
  27. Q: What’s My Business Model? <ul><li>Can be one of the following: </li></ul><ul><ul><li>2. Get Users (= Acquisition, Referral) </li></ul></ul><ul><ul><li>Drive Usage (= Activation, Retention) </li></ul></ul><ul><ul><li>3. Make Money (= Revenue*) </li></ul></ul><ul><ul><ul><li>* ideally profitable revenue </li></ul></ul></ul><ul><li>(note: eventually need to turn Users / Usage -> Money ) </li></ul>
  28. 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>
  29. 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>
  30. Just Gimme the GOOD Metrics. Users, Pages, Clicks, Emails, $$$...? <ul><li>Q: Which of these is best? How do you know? </li></ul><ul><ul><li>1,000,000 one-time, unregistered unique visitors </li></ul></ul><ul><ul><li>500,000 visitors who view 2+ pages / stay 10+ sec </li></ul></ul><ul><ul><li>200,000 visitors who clicked on a link or button </li></ul></ul><ul><ul><li>20,000 registered users w/ email address </li></ul></ul><ul><ul><li>2,000 passionate fans who refer 5+ users / mo. </li></ul></ul><ul><ul><li>1,000 monthly subscribers @ $5/mo </li></ul></ul>the good stuff.
  31. Optimize 4 Happiness (both User + Business) <ul><li>Define States of User + Business Value </li></ul><ul><li>Prioritize (Estimate) Relative Value of Each State </li></ul><ul><li>Move Users: Lower Value -> Higher Value </li></ul><ul><li>Optimize for User Happiness / Business $$$ </li></ul><ul><li>Achieve Low Cost + High Value @ Scale </li></ul>$$$
  32. 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>
  33. Discover Meaning What Do Users Care About Enough to F**k or Kill ? Kathy Sierra: “ Creating Passionate Users”
  34. Role: Marketing / Sales <ul><li>Q: What channels? Which users? Why? </li></ul><ul><li>A: High Volume (#), Low Cost ($), High Conv (%) </li></ul><ul><li>Design & Test Multiple Marketing Channels + Campaigns </li></ul><ul><li>Select & Focus on Best-Performing Channels & Themes </li></ul><ul><li>Optimize for conversion to target CTAs, not just site/landing page </li></ul><ul><li>Match/Drive channel cost to/below revenue potential </li></ul><ul><li>Low-Hanging Fruit: </li></ul><ul><ul><li>Blogs </li></ul></ul><ul><ul><li>SEO/SEM </li></ul></ul><ul><ul><li>Landing Pages </li></ul></ul><ul><ul><li>Automated Emails </li></ul></ul>
  35. Example Marketing Channels <ul><li>PR </li></ul><ul><li>Contest </li></ul><ul><li>Biz Dev </li></ul><ul><li>Direct Marketing </li></ul><ul><li>Radio / TV / Print </li></ul><ul><li>Dedicated Sales </li></ul><ul><li>Telemarketing </li></ul><ul><li>Email </li></ul><ul><li>SEO / SEM </li></ul><ul><li>Blogs / Bloggers </li></ul><ul><li>Viral / Referral </li></ul><ul><li>Affiliate / CPA </li></ul><ul><li>Widgets / Apps </li></ul><ul><li>LOLCats !!! </li></ul>
  36. M AARRR keting Plan <ul><li>Marketing Plan = Target Customer Acquisition Channels </li></ul><ul><ul><li>3 Important Factors = Volume (#), Cost ($), 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>
  37. 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 Fac e at the same time… so choose carefully .” – DMC
  38. Platforms 2.0 Search, Social, Mobile, Inbox, Media
  39. Web 2.0 = Good Business <ul><li>1) Take Existing Good Business Ideas </li></ul><ul><li>2) Add [a little] Technology </li></ul><ul><ul><li>Facebook (Connect), Twitter </li></ul></ul><ul><ul><li>SEO/SEM, Blogs, Email </li></ul></ul><ul><ul><li>E-Commerce & Payments </li></ul></ul><ul><li>3) Generate Revenue, Increase Distribution, Reduce Customer Acquisition Cost (see Platforms) </li></ul><ul><li>PROFIT! </li></ul>
  40. Platform Viability Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana
  41. Platforms: HOT or NOT ? <ul><li>Search : Google </li></ul><ul><li>Social : Facebook, Twitter, LinkedIn? </li></ul><ul><li>Mobile : iPhone/iPad, Android </li></ul><ul><li>Media : YouTube, Blogs </li></ul><ul><li>Inbox : Gmail, YahooMail, Hotmail?, AOL? </li></ul><ul><li>Other : Zynga, Skype, MySpace, Meebo, PayPal, AMZN </li></ul>
  42. Summary <ul><li>VC 2.0 = Fewer, Smaller Funds (<$100M) </li></ul><ul><li>Liquidity = More, Smaller Acquisitions (<$100M) </li></ul><ul><li>Model = Singles (Ichiro), not Home Runs (Barry Bonds) </li></ul><ul><li>Diligence = Lots of Little Checks (+ Metrics + Time) </li></ul><ul><li>Incubators = Many Small Experiments (most FAIL), Education + Shared Resources, Incremental Investment </li></ul><ul><li>Startup Metrics = Define, Measure, Iterate </li></ul><ul><li>Platforms = Distribution + Monetization, not Technology </li></ul>
  43. Links & Resources <ul><li>Additional References: </li></ul><ul><li>Influence: The Psychology of Persuasion Robert Cialdini (book) </li></ul><ul><li>The Mating Mind Geoffrey Miller (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><ul><li>Understanding Comics Scott McCloud (book) </li></ul>