This document discusses the evolution of venture capital and startups, enabled by new technologies and business models. Specifically: 1. Lower costs and online platforms have lowered barriers to building products and acquiring customers. 2. Successful startups are using metrics and iterative development to quickly validate products and business models. 3. Incubators and accelerators are making many small bets to identify the few startups that succeed, through mentoring and collaborative environments. 4. Venture capital is also making many small bets through incremental funding, focusing on validating products, markets, and revenue before larger investments. 5. Global trends are creating new opportunities for startups to reach global audiences and expand internationally.

1. Silicon Valley 2.0
Lean Startup, Lean VC
Re-Inventing Venture Capital through
Innovation, Incubation, & Iteration
Dave McClure
http://500.co
(@DaveMcClure)
May 2012
http://slideshare.net/dmc500hats

2. Dave McClure
00’s & 10’s:
• Investor: Founders Fund, Facebook fbFund, 500 Startups
• Companies: Mint.com, SlideShare, Twilio, WildFire, SendGrid
• Marketing: PayPal, Simply Hired, Mint.com, O’Reilly Media
• Speaker: Lean Startup, Web 2.0, Stanford/Facebook
80’s & 90’s:
• Entrepreneur: Founder/CEO Aslan Computing (acq’d)
• Developer: Windows / SQL DB consultant (Intel, MSFT)
• Engineer: Johns Hopkins‘88, BS Eng / Applied Math

3. 500 Startups:
Internet Seed Fund & Startup Incubator
• Seed Fund & Startup Accelerator
– 300+ Companies
– 10-person team, 4 partners
– 10,000 sq ft, HQ in Silicon Valley
– 100+ Mentors in 10+ Countries
• Portfolio Companies
– Twilio (US)
– Wildfire (US)
– SendGrid (US)
– TaskRabbit (US)
– VivaReal (Brazil)
– MyGengo (Japan)
– Fashion.me (Brazil)

4. Changes in Tech Startups
• LESS Capital required to build product, get to market
– Dramatically reduced $$$ on servers, software, bandwidth
– Cheap access to online platforms for 100M+ consumers, smallbiz, etc
– A few big IPOs @ $1B+, but LOTS of small acquisitions (<$100M)
• MORE Customers via ONLINE platforms (100M+ users)
– Search (Google)
– Social (Facebook, Twitter, LinkedIn)
– Mobile (Apple, Android)
– Local (Groupon, Living Social, Yelp)
– Media (YouTube, Pinterest, Tumblr)
– Communications (Email, IM/Chat, Voice, SMS, etc)
• LOTS of little bets: Accelerators, Angels, Angel List
– Y Combinator, TechStars, 500 Startups
– Funding + Co-working + Mentoring -> Design, Data, Distribution
– “Fast Cheap Fail”, network effects, quantitative + iterative investments

5. Web 2.0 + Lean Startup
2. Startup Costs = Lower.
3. # Users, Bandwidth = Bigger.
4. Transaction $$$ = Better.
 Building Product => Cheaper, Faster, Better
 Getting Customers => Easier, More Measurable
Iterative Product & Marketing Decisions
based on Measured User Behavior

6. 500 Strategy: Lots of Little Bets
1. Start with large,
well-screened 30%
funnel of early- Fund
stage companies. Capital
2. After first 6-12 months, 70 %
identify best performers Fund
double-down on top 20% Capital
1. Build conservative model assuming
5-10% larger exits @ > $100M,
10-20% smaller exits @ <$100M
6

7. Tech Investor Ecosystem
Y-Combinator
Angels &
TechStars Incubators
($0-10M)
SV Angel (Conway)
SoftTech (Clavier)
“Micro-VC” Funds
Floodgate (Maples) ($10-100M)
Felicis (Senkut)
First Round Atomico
Smaller VC Funds
Union Square ($100-500M) Foundry Group
Andreessen-
Accel
Horowitz
Partners Larger VC Funds
(>$500M)
Sequoia
Greylock

8. Platforms 2.0
Search, Social, Mobile

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

10. Distribution Platforms
Customer Reach: 100M+
• Search: Google
• Social: Facebook, Twitter, Zynga, LinkedIn
• Mobile: Apple (iOS), Android
• Local: Groupon, LivingSocial, Yelp
• Media: Video (YouTube), Blogs (Tumblr), Photos (Pinterest)
• Comm: Email, IM/Chat, Skype, Phone/Voice

11. Web 2.0 Business Model:
KISS (“Keep It Simple, Stupid”)
• 1) Re-invent Web 1.0 Businesses
– Make a Website, a Widget, an App
– Sell Stuff (Transactions, Subscriptions, Affiliate)
• 2) add Web 2.0 Technology
– Search, Social, Mobile, Local, Media, Comm
– Google, Facebook/Twitter, Apple/Android
– Email, SMS, Ecommerce / Payments
• 3) Get Customers, Make Money
– Distribution, Distribution, Distribution
– (Customer Acq’stn Cost) vs. ($Rev. Per Customer)
– Low CapX + Profitable Web Businesses

12. More Acquirers (tech + non-tech);
More & Smaller Acquisitions
1. Mature Internet Platform Co’s:
– GOOG, MSFT, YHOO, EBAY, AOL, AMZN,
AAPL, INTU, ADBE, FB, TW, LNKD, GRPN
2. Non-Tech “BigCo” / Consumer Verticals
buying tech startups (for distribution)
• BigCo = Lots of Customers, $$$
• BigCo = Bureaucracy, Innovator Dilemma
• Outsource Innovation; Buy Talent / Products
• Acquiring LOTS (Small) Startups
• Great for Founders, Investors 
* Mint acquired by Intuit in
Sept 2009 for $170M

13. Lean Startup, Lean VC
Customers, Metrics, Iteration.
Invest BEFORE Traction;
Double Down AFTER.

14. The Lean Startup
• Progress ≠ Features; Measure Conversion
• Talk to Customers; Discover Problems
• Focus on “Product/Market Fit” (good solution)
• Fast, Frequent Iteration (+ Feedback Loop)
• Keep it Simple & Actionable

15. Startup Metrics for Pirates
• Acquisition: users come to site from various
channels
• Activation: users enjoy 1st visit: "happy” experience
• Retention: users come back, visit site multiple times
• Referral: users like product enough to refer others
• Revenue: users conduct some monetization behavior
AARRR!
(note: If you’re in a hurry, Google
“Startup Metrics” & watch 5m video)

16. AARRR!: 5-Step Startup Metrics Model
SEO Campaigns,
SEM PR Contests
Biz
Social
Networks Dev
Blogs Affiliates
Apps & Direct, Tel,
Widgets Email TV
ACQUISITION
Domains
Emails & Alerts
Blogs, RSS,
n
News Feeds
Retentio
Ads, Lead Gen, Biz Dev
System Events & Subscriptions,
Re v
Time-based Features
ECommerce
en u
Website.com
e $$
$

17. Startup Incubators & Metrics
Lots of Little Bets. Most FAIL.
(but a few succeed :)

18. Incubator 2.0: Fast, Cheap, FAIL
• Incubators = supportive startup ecosystem (+ angels, VCs)
• Efficient use of investment capital ($0-100K)
• High fail rate (60-80%) => large initial sample size

19. Incubator 2.0:
Education, Collaboration, Iteration
• Success based on:
– MANY, small experiments
– common platforms, customers, problems & solutions
– physical proximity, open/collaborative environment
– Domain-specific mentors & expertise
– fast fail, iteration, metrics & feedback loop
• Incremental investment; high-risk, but high-reward

20. fbFund REV
fbFund REV: Facebook “Social” Incubator: invest in startups, apps,
websites based on Facebook platform & Facebook Connect.
• 22 startups @ ~$35K each ($850K total)
• 3 month program: Technology, Design, Marketing, Business topics
• Success: 8 startups raised $500K –> 5 raised Series A -> 2 raised Series B
• Wildfire Interactive now 300+ people 

21. The Lean VC:
Lots of Little Bets, Incremental Investment
Method: Invest in lots of startups using incremental
investment, iterative development. Start with many
small experiments, filter out failures, and expand
investment in successes… (Rinse & Repeat).
• Incubator: $0-100K (“Build & Validate Product”)
• Seed: $100K-$1M (“Test & Grow Marketing Channels””)
• Venture: $1M-$10M (“Maximize Growth & Revenue”)

22. Investment Stage #1:
Product Validation + Customer Usage
• Structure
– 1-3 founders
– $25-$100K investment
– Incubator environment: multiple peers, mentors/advisors
• Test Functional Prototype / “Minimum Viable Product” (MVP):
– Prototype->Alpha, ~3-6 months
– Develop Minimal Critical Feature Set => Get to “It Works! Someone Uses It.”
– Improve Design & Usability, Setup Conversion Metrics
– Test Small-Scale Customer Adoption (10-1000 users)
• Demonstrate Concept, Reduce Product Risk, Test Functional Use
• Develop Metrics & Filter for Possible Future Investment

23. Investment Stage #2:
Market Validation + Revenue Testing
• Structure
– 2-10 person team
– $100K-$1M investment
– Syndicate of Angel Investors / Small VC Funds
• Improve Product, Expand Customers, Test Revenue:
– Alpha->Beta, ~6-12 months
– Scale Customer Adoption => “Many People Use It, & They Pay.”
– Test Marketing Campaigns, Customer Acquisition Channels + Cost
– Test Revenue Generation, Find Profitable Customer Segments
• Prove Solution/Benefit, Assess Market Size
• Test Channel Cost, Revenue Opportunity
• Determine Org Structure, Key Hires

24. Investment Stage #3:
Revenue Validation + Growth
• Structure
– 5-25 person team
– $1M-$10M investment
– Seed & Venture Investors
• Make Money (or Go Big), Get to Sustainability:
– Beta->Production, 12-24 months
– Revenue / Growth => “We Can Make (a lot of) Money!”
– Mktg Plan => Predictable Channels / Campaigns + Budget
– Scalability & Infrastructure, Customer Service & Operations
– Connect with Distribution Partners, Expand Growth
• Prove/Expand Market, Operationalize Business
• Future Milestones: Profitable/Sustainable, Exit Options

25. Going Local, Going Global
web gets bigger -> world gets smaller

26. Global Trends
• Growth of Global Languages (see MyGengo.com)
– 1B+ speakers: Mandarin, English
– 300-500M+ spkrs: Spanish, Arabic
• Smart Device Proliferation
– mobile, tablet, TV, console, etc
• More Young, More Old ($$$) Users Online
• More Bandwidth, More Video, More Social, More Mobile
• Wealthy Chinese + Indian, Web + IRL Globetrotters ($$$B)
• Acceleration of Global Payment, E-Commerce
• Dramatically Reduced Cost: Product Dev, Customer Acqstn
• Global Distribution Platforms
– US/EU: Apple, Facebook, AMZN, GOOG (Search, YouTube, Gmail, Android), Twitter
– Asia: Tencent/QQ, Taobao/Alibaba/AliPay, Yahoo-J, Softbank, Rakuten, DeNA, Gree