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The Lean VC, Global Edition (March 2011, London)

The document summarizes trends in venture capital investing, startups, and technology platforms. It notes that venture capital funds are becoming smaller with fewer large funds, and more "super angels" and micro-VC funds. Incubators and accelerators are focusing on running many small experiments to filter out failures through metrics and iteration. Exits are also becoming smaller with more acquisitions under $250 million. Platforms are distributing and monetizing, not just technology, with distribution through search, social media, and mobile dominant.

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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. Platforms = Distribution + Monetization (not Technology) Search (Google) Social (Facebook, Twitter, YouTube) Mobile (Apple, Android) Incubators & Metrics = Many Small Experiments (most FAIL ) Y-Combinator, TechStars, SeedCamp Betaworks, fbFund REV, AngelPad 500 Startups Venture Capital = Fewer, Smaller Funds (<$100M) Decline of Large Funds (> $250m), except for the HUGE ONES. Birth of “ Super Angel” / “Micro-VC” seed funds ($10-100M) Market Changes: Fewer IPOs (>$1B), More/Smaller Acq’stns (<$250M)
Dave McClure: Bio 2000-2010: Investor : 100+ Startups (Mint, SlideShare, Twilio, WildFire) Marketing : PayPal, Simply Hired, Mint.com, Founders Fund Community : Startup2Startup , GeeksOnaPlane , StartupVisa Speaker : Startup Metrics, Stanford Facebook class 80’s & 90’s: Entrepreneur : Founder/CEO Aslan Computing (acq.) Developer : Windows App Dev / SQL DB Admin Engineer : Johns Hopkins ‘88, BS Eng / Applied Math
500 Startups Seed Fund Mountain View, CA – Founded 2010 Seed Fund & Startup Accelerator (10,000 sq ft) Design , Distribution , Data 100+ Portfolio Companies Twilio Wildfire SendGrid MyGengo Erply Moonfruit GroupSpaces Medialets ChinaNetCloud
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 . # Users, Bandwidth = Bigger . Startup Costs = Lower . Transaction $$$ = Better . Building Product => Cheaper, Faster, Better Getting Customers => Easier, More Measurable Product & Marketing Decisions based on Measured User Behavior 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 Customer Reach: 100M+ Search : Google (SEO/SEM) Social : Facebook , Twitter , Zynga, LinkedIn Mobile : Apple (iPhone, iPad), Android , Blackberry Media : YouTube /Video, Blogs, Photos Inbox : Gmail , Yahoo, Microsoft
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 to People (Transactions, Subscriptions) 2) add Web 2.0 Tech nology Search , Social , Mobile Google , Facebook/Twitter , Apple/Android Email, SMS, Ecommerce / Payments 3) Get Customers , Make Money Distribution, Distribution, Distribution
Startup Incubators Lots of Hot, Cool, Web 2.0! (+ lots of FAIL .)
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
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
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 funded >$500K – Wildfire Interactive raised $4M
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? Good for big CAP: Hardware Enterprise SW Clean Tech BioScience Facebook, Zynga, Groupon Not So Great for: Consumer Internet Small Business Consulting Games, Porn ;)
More & Smaller Acquisitions Mature Internet Platform Co’s: GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, Fbook Lots of Users, $$$ Outsourcing Innovation Lots of M&A (but small) Founders own MORE % Will Sell for LESS $ Great for Angels & Entrepreneurs Not so Great for (big) VCs * 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 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) . Incubator : $0-100K (“ Build & Validate Product ”) Seed : $100K-$1M (“ Test & Grow Market ing Channels” ”) Venture : $1M-$10M (“ Maximize Growth & Revenue ”)
Investment #1: Incubate (“Product”) Structure 1-3 founders $25K-$100K investment Incubator environment: multiple peers, mentors/advisors Build Functional Prototype / “ Minimum Viable Product ” ( MVP ): Prototype->Alpha, ~3-6 months Develop Minimal Critical Feature Set => Get to “ It Works ” Instrument Basic Dashboard, Conversion Metrics Test Cust. Adoption (10-1000 users) / Cust. Satisfaction (Scale: 1-10) Demonstrate Concept, Reduce Product Risk, Test Functional Use Develop Metrics & Filter for Possible Future Investment
Investment #2: Seed (“Market”) Structure 2-5 person team $100K-$1M investment Syndicate of Angel Investors / Small VC Funds Improve Product, Expand Customers , Test Revenue: Alpha->Beta, ~6-12 months Customer Sat ≥ 6 => Get to “ Sucks ( a Lot ) Less Than Competition ” Setup A/B Testing Framework, Optimize Conversion Test Marketing Campaigns, Cust Acqstn Channels Prove Solution/Benefit, Assess Market Size Test Channel Cost, Revenue Opportunity Determine Org Structure, Key Hires
Investment #3: Venture (“Revenue”) Structure 5-10 person team $1M-$5M investment VC Investors Make Money (or Go Big) , Get to Sustainability: Beta->Production, 12-18 months Customer Sat ≥ 8 => “ It Rocks, I’ll Tell My Friends ” MktgPlan => Predictable Channels / Campaigns + Budget Scalability & Infrastructure, Customer Service & Operations Connect with Distribution Partners Prove/Expand Market, Operationalize Business Future Milestones: Profitable/Sustainable, Exit Options
Summary Platforms 2.0 = Distribution + Monetization, not Tech Incubators, Metrics = Many Small Experiments (most FAIL ). Measure Stuff. Iterate, Iterate, Iterate. Venture Capital 2.0 = Fewer, Smaller Funds (<$100M) + More, Smaller Exits (<$100M)
Global Trends More Young , More Old ($$$) Users Online More Bandwidth, More Video (= pr0n FTW !) Growth of Global Languages (see MyGengo.com ) 1B+ speakers: Mandarin , English 500M+ spkrs: Spanish , Hindi, Arabic , Portuguese Wealthy Chinese + Indian, Web + IRL Globetrotters ($$$B) Smart Device Proliferation phone, tablet, TV, console, etc Acceleration of Global Payment , E-Commerce Dramatically Reduced Cost: Product Dev, Customer Acqstn Global Distribution Platforms US/EU: Apple, Facebook, Google (Search, YouTube, Gmail, Android), Twitter, Zynga Asia: Tencent /QQ, Taobao/ Alibaba /AliPay, Youku, MediaTek, Rakuten, DeNA
Local Hacks Dominate your local/native market first Or, move so that your local market is bigger (China, US) Language + Visual Design Matters Read: Spent , Influence, Understanding Comics Niche 2 Win: Big Enough Markets + Great Customer 1M users @ $20/mo = ~$250M/yr business Sell Something You Fucking Idiot. Transactns, Subscriptns, Virtual Goods, LeadGen You Don’t Need to Be [in] Silicon Valley But, Silicon Valley Needs to BE IN YOU . ( Use The Force , Luke… Close Your Eyes, Let Go  ) Start Local, Hustle Global.
[ 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. 1 st : Read my stuff (blogs, decks, tweets). 2 nd : Get a referral from someone I trust. 500 Mentors or 500 Founders Other Subject Matter Experts *Not* Your Mom. 3 rd : Be Concise. Don’t Suck . Email
Questions? but make sure they’re not fucking stupid . or else i’ll heckle you like idiots. mercilessly . *ps – i can dance better than you too.