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
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