Venture Capital 2.0 : The
[Global] Lean VC Dave McClure http://500startups.com ( @DaveMcClure ) Telegraph Start-Up 100 – March 2011 Re-Inventing Venture Capital Investing through Innovation, Incubation, & Iteration http://slideshare.net/dmc500hats

Changes, Oh. <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><ul><li>Venture Capital = Fewer, Smaller Funds (<$100M) </li></ul><ul><ul><li>Decline of Large Funds (> $250m), except for the HUGE ONES. </li></ul></ul><ul><ul><li>Birth of “ Super Angel” / “Micro-VC” seed funds ($10-100M) </li></ul></ul><ul><ul><li>Market Changes: Fewer IPOs (>$1B), More/Smaller Acq’stns (<$250M) </li></ul></ul>

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, Mint.com, 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>

500 Startups Seed Fund Mountain
View, CA – Founded 2010 <ul><li>Seed Fund & Startup Accelerator (10,000 sq ft) </li></ul><ul><li>Design , Distribution , Data </li></ul><ul><li>100+ 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>Moonfruit </li></ul></ul><ul><ul><li>GroupSpaces </li></ul></ul><ul><ul><li>Medialets </li></ul></ul><ul><ul><li>ChinaNetCloud </li></ul></ul>

Read Geoffrey Miller Sex +
Evolution + Consumer Mktg = Awesome Sauce

Other Great Shit. Psychology +
Comics

Platforms 2.0 Search, Social, Mobile

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

Platform Viability Successful Platforms have
3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana

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>

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>

Startup Incubators Lots of Hot,
Cool, Web 2.0! (+ lots of FAIL .)

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>

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>

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>

Venture Capital 2.0 (smaller, faster,
better) Venture Capital 1.0 “ Super” Angel (aka Micro-VC)

Silicon Valley Investor Ecosystem True
Ventures First Round Capital Benchmark Accel SoftTech (Clavier) Felicis (Senkut) SV Angel (Conway) White Bear (GRRR!!) Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) VC Funds ($50-250M) VC Funds (>$250M) Y-Combinator TechStars

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>

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>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>* Mint acquired by Intuit in Sept 2009 for $170M

Investor Metrics: “Super Angel” ->
Lean VC Not “ Spray & Pray ”, but rather “ Quantitative, Incremental, Selective Follow-on ” Investing. (Product, Market, Revenue.)

“ 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>

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>

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 Customers , Test Revenue: </li></ul><ul><ul><li>Alpha->Beta, ~6-12 months </li></ul></ul><ul><ul><li>Customer Sat ≥ 6 => Get to “ Sucks ( a Lot ) Less Than Competition ” </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>

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 (or Go Big) , 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>

Summary <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><ul><li>Venture Capital 2.0 = Fewer, Smaller Funds (<$100M) + More, Smaller Exits (<$100M) </li></ul>

Global Trends <ul><li>More Young ,
More Old ($$$) Users Online </li></ul><ul><li>More Bandwidth, More Video (= pr0n FTW !) </li></ul><ul><li>Growth of Global Languages (see MyGengo.com ) </li></ul><ul><ul><li>1B+ speakers: Mandarin , English </li></ul></ul><ul><ul><li>500M+ spkrs: Spanish , Hindi, Arabic , Portuguese </li></ul></ul><ul><li>Wealthy Chinese + Indian, Web + IRL Globetrotters ($$$B) </li></ul><ul><li>Smart Device Proliferation </li></ul><ul><ul><li>phone, tablet, TV, console, etc </li></ul></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, Google (Search, YouTube, Gmail, Android), Twitter, Zynga </li></ul></ul><ul><ul><li>Asia: Tencent /QQ, Taobao/ Alibaba /AliPay, Youku, MediaTek, Rakuten, DeNA </li></ul></ul>

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) </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 @ $20/mo = ~$250M/yr business </li></ul></ul><ul><li>Sell Something You Fucking Idiot. </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 Your Eyes, Let Go  ) </li></ul></ul><ul><li>Start Local, Hustle Global. </li></ul>

[ Don’t Pitch Me, Bro.
] Seriously : Don’t . Fuckin g. . Pitch M e . (and don’t email m e either, cuz i won’t read it)

Don’t Pitch Me, Bro. <ul><li>1
st : Read my stuff (blogs, decks, tweets). </li></ul><ul><li>2 nd : Get a referral from someone I trust. </li></ul><ul><ul><li>500 Mentors or 500 Founders </li></ul></ul><ul><ul><li>Other Subject Matter Experts </li></ul></ul><ul><ul><li>*Not* Your Mom. </li></ul></ul><ul><li>3 rd : Be Concise. Don’t Suck . </li></ul>Email

Questions? <ul><li>but make sure they’re
not fucking stupid . </li></ul><ul><li>or else i’ll heckle you like idiots. </li></ul><ul><li>mercilessly . </li></ul><ul><li>*ps – i can dance better than you too. </li></ul>