The Lean VC (Sapporo, May 2011)


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slides from my talk at Infinity Ventures Summit conference, Sapporo, Japan (May 2011)

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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.
  • The Lean VC (Sapporo, May 2011)

    1. Venture Capital 2.0 The Lean VC Dave McClure ( @DaveMcClure ) Sapporo, Japan – May 2011 Re-Inventing Venture Capital Investing through Innovation, Incubation, & Iteration
    2. Changes in Tech & VC <ul><li>Platforms = Distribution + Monetization ( not Technology) </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: Few IPOs (>$1B), More/Smaller Acq’stns (<$250M) </li></ul></ul><ul><li>Incubators, Metrics = Many Small Experiments (most FAIL ) </li></ul><ul><ul><li>Y-Combinator, TechStars, Betaworks </li></ul></ul><ul><ul><li>The “Lean Startup”, Design/UX, Distribution </li></ul></ul><ul><ul><li>500 Startups </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 : 150+ 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><li>Seed Fund & Startup Accelerator </li></ul><ul><ul><li>75 people / 25 companies @ 3x/yr </li></ul></ul><ul><ul><li>Silicon Valley HQ </li></ul></ul><ul><li>Total Portfolio: 135+ 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 (JPN) </li></ul></ul><ul><ul><li>Aqush (JPN) </li></ul></ul><ul><ul><li>Zozi </li></ul></ul><ul><ul><li>Erply (EU) </li></ul></ul><ul><ul><li>Medialets </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>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
    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 True Ventures First Round Capital Benchmark Accel SoftTech (Clavier) Felicis (Senkut) SV Angel (Conway) Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) VC Funds ($50-250M) VC Funds (>$250M) Y-Combinator TechStars
    13. 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>
    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. 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>
    19. Lean Startup, Lean VC Customers , Metrics, Iteration. Invest BEFORE Traction; Double Down AFTER .
    20. 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>
    21. Discover Customers (Steve Blank,
    22. Iterate : Learn, Measure, Build. (Eric Ries, LEARN BUILD MEASURE IDEAS CODE DATA
    23. 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 !
    24. 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
    25. 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>
    26. The Lean VC <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>
    27. 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>
    28. 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>
    29. 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>
    30. Going Local, Going Global web gets bigger -> world gets smaller
    31. 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>Wealthy Chinese + Indian, Web + IRL Globetrotters ($$$B) </li></ul><ul><li>Acceleration of Global Payment , E-Commerce </li></ul><ul><li>More Bandwidth, More Video, More Social, More Mobile </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, Gree </li></ul></ul>
    32. 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 @ $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 Your Eyes, Let Go  ) </li></ul></ul><ul><li>Start Local, Hustle Global. </li></ul>
    33. 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>