Silicon Valley 2.0 Lean Startup, Lean VC

Silicon Valley
2.0

Lean Startup, Lean VC


Dave McClure

http://500.co


(
@DaveMcClure
)

May 2012

http://slideshare.net/dmc500hats


Re
-
Inventing Venture Capital through

Innovation, Incubation, & Iteration

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
, AngelPad

–
Funding + Co
-
working + Mentoring
-
> Design, Data, Distribution

–
“
Fast Cheap Fail
”
, network effects, quantitative + iterative investments





Web 2.0 +
Lean Startup


1.
Startup Costs =
Lower
.

2.
# Users, Bandwidth =
Bigger
.

3.
Transaction $$$ =
Better
.





Building
Product

=> Cheaper, Faster, Better


Getting
Customers

=> Easier, More Measurable


Iterative Product & Marketing Decisions


based on
Measured User Behavior

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

500 Startups:

“
Super
-
Angel / Micro
-
VC” Fund

•
Seed Fund & Startup Accelerator

–
250+ Companies (Fund I, $29M)

–
9
-
person team, 4 partners

–
10,000 sq ft, HQ in Silicon Valley

–
100+ Mentors in 10+ Countries


•
Fund I Portfolio: 250

–
Twilio

(Union Square, Bessemer)

–
Wildfire

(Summit)

–
SendGrid

(Foundry, Bessemer)

–
TaskRabbit

(First Round)

–
MakerBot

(Foundry)

–
Viki

(Greylock, Andreessen)

–
Smule

(Bessemer, Granite)


70 %

Fund

Capital

6

Quantitative Investing
before

Traction

250+ companies @ $50K avg.
(1
st

check)

-

Assume high failure rate (up to 80%)


Double
-
Down
after

Traction

50+ ‘winners’ @ $100K
-
$1M

(2
nd
+ 3
rd

check)

-

-

Target 10+ exits @ $100M+




500 Strategy: Lots of Little Bets

1. Start with large,
well
-
screened
funnel of early
-
stage companies.

30%

Fund

Capital

2. After first 6
-
12 months,
identify best performers
double
-
down on top 20%

3.
Build conservative model assuming
5
-
10% larger exits @ > $100M, 10
-
20% smaller exits @ <$100M

Tech Investor Ecosystem



Angels &

Incubators

($0
-
10M)


“
Micro
-
VC
”

Funds

($10
-
100M)

Smaller VC Funds

($100
-
500M)

Larger VC Funds

(>$500M)

True Ventures

First Round

Andreessen
-

Horowitz

Accel

Partners

Y
-
Combinator

TechStars

SoftTech (Clavier)

Felicis (Senkut)

SV Angel (Conway)

Sequoia

Greylock

Union Square

Floodgate (Maples)

Foundry Group

Incubation

Seed

Series A

Series B

Series C+

Platforms 2.0

Search, Social, Mobile

Platform Viability

Users

.

.
Money

Features








Growth

Profit

Profitable

Growth

Nirvana

Successful Platforms

have 3 Things:

1)
Features

2)
Users

3)
Money

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





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 Tech
nology

–
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



More Acquirers
(
tech + non
-
tech
);


More & Smaller Acquisitions

1.
Mature Internet Platform Co
’
猺

–
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

Lean Startup, Lean VC


Customers
, Metrics, Iteration.


Invest
BEFORE
Traction;

Double Down
AFTER
.

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

Startup Metrics for Pirates

•
A
cquisition:

users come to site from various
channels

•
A
ctivation:

users enjoy 1
st

visit: "
happy
”

experience

•
R
etention:

users
come back
, visit site multiple times

•
R
eferral:

users like product enough to
refer others

•
R
evenue:

users conduct some
monetization

behavior

AARRR
!

(note: If you
’
re in a hurry, Google
“
Startup Metrics
”

& watch 5m video)

AARRR!
: 5
-
Step Startup Metrics Model










Website.com

Biz Dev

Ads, Lead Gen,
Subscriptions,
ECommerce

Homepage / Landing
Page

Product
Features

A
CQUISITION

SEO

SEM

Apps &
Widgets

Affiliates

Email

PR

Biz
Dev

Campaigns,
Contests

Direct, Tel,
TV

Social
Networks

Blogs

Domains

Emails & Alerts

System Events &
Time
-
based Features

Blogs, RSS,
News Feeds

Emails &
widgets

Affiliates,
Contests

Viral
Loops

Startup Incubators & Metrics

Lots of Little Bets. Most
FAIL
.

(but a few succeed :)

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 raised $500K
–
> 5 raised Series A
-
> 2 raised Series B

•
Wildfire Interactive now 300+ people



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
Market
ing Channels
”
”
)

•
Venture
: $1M
-
$10M (
“
Maximize Growth &
Revenue
”
)

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

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

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

Underpants
2.0

1.
Make a Good Product
: Activation & Retention

2.
Market the Product
: Acquisition & Referral

3.
Make Money
: Revenue & Profitability