Download - VC 2.0: The Lean Investor (Sept 2010)
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The Lean VC:a Silicon Valley 2.0 Story
Dave McClure, 500 Startups(@DaveMcClure) http://500startups.com
Capital Factory Demo Day – September 2010 – Austin, TX
Re-Inventing Venture Capital & Angel Investing through
Innovation, Incubation, & Iteration
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Changes, Oh.
• Venture Capital 2.0 = Fewer, Smaller Funds (<$100M)– Death of Large Funds– Birth of Super Angel Funds– M&A Market Changes
• Platforms = Distribution + Monetization (not Tech)– Search (Google)– Social (Facebook, Twitter)– Mobile (Apple, Android)
• Incubators & Metrics = Many Small Experiments (most FAIL)
– Y-Combinator, TechStars, SeedCamp– Betaworks, fbFund REV, Nitobi– 500 Startups
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[Pardon The Blatant Commercial]
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Dave McClure
2001-2010:• Startup Investor: 500 Hats LLC, Founders Fund• Tech Marketing: PayPal, Simply Hired, Mint• Advisor, Angel Investor: 70+ Startups• Conf. Organizer: Web 2.0, O’Reilly, Startonomics• Stanford Visiting Lecturer: Facebook, Startup Metrics
80’s & 90’s:• Entrepreneur: Founder/CEO Aslan Computing (acq.)• Developer: Windows Apps / SQL DB Admin• User Groups: E-Commerce, Internet, Client-Server• Engineer: Johns Hopkins ‘88, BS Eng / Applied Math
GEEK, CODER,
ENTREPRENEUR
Blogger, Startup AdvisorInternet Marketing, SuperAngel/Micro-VC
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500 Hats Investments (13 deals, 2004-2008, ~$300K)
2004-2008: 13 deals, avg $25Kresults: 1 exit @ $170M (9x), +3-7 future wins (i hope)
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Founders Fund Investments (43 deals, 2008-2010, ~$2.9M)
fbFund REV (Facebook Incubator)
22 deals ($850K) ~$15-75K
FF Angel LLC
21 deals ($2M)
~$50-250K
Results:8 Seed rounds @ $500K+, 3 small exits, 5 ramen-profitable)
Results:1 small exit @ 4x, 5 Series A $2M+, (expect 5+ more)
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500 Startups Investments (~40+ deals, 2010, ~$3.5M)
2010 YTD: 38+ deals, avg $100K
Wildfire Crave Tello AwayFind MyGengo
Recurly Mogotix EcoMom Zencoder Crocodoc
SayHired RevNetics AppBistro Foodspotting Medialets
Rapportive TransFS SiteJabber Estately FlowTown
OneForty Twilio Postling Plancast WePay
OtherInbox Viikii Zozi Graphicly NetworkedBlogs
What Up Texas! Hi Josh
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500 Startups LPMountain View, CA – Founded 2010
• Seed Fund & Incubator Program• Design, Distribution, Data (AARRR!)• 40+ Portfolio Companies ($50K-250K)
– Twilio– Wildfire– Sendgrid– MyGengo– Erply– Payvment– Zozi– OtherInbox
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Venture Capital 1.0 = Too Big To FAIL WIN?(at least for *Internet* Startups)
Venture Capitalist? Super Angel.
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Silicon ValleyInvestor Ecosystem
Angels & Incubators($0-10M)
“Seed” Funds ($10-50M)
“Small” VC Funds ($50-250M)
“Large” VC Funds (>$250M)
True VenturesFirst Round Capital
BenchmarkSequoia
Y-CombinatorTechStars
SoftTech (Clavier)FloodGate (Maples)
Felicis (Senkut)SV Angel (Conway)
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Venture Capital: Still Relevant?
Good 4 big CAPex:
• Hardware
• Enterprise SW
• Clean Tech
• BioScience
• Facebook, Zynga,
Groupon
Not So Great 4:
• Most Consumer / SMB Internet Startups
• Consulting Shops
• Lifestyle Biz
• Porn, Gambling
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More & Smaller Acquisitions
• Mature Internet Platform Co’s:– GOOG, MSFT, YHOO, EBAY, AOL,
AMZN, AAPL, INTU, ADBE, Fbook
• Lots of Users, $$$• Outsourcing Innovation
• Lots of M&A (but small)• Great for Angels & Entrepreneurs• Not so Great for (big) VCs
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Platforms 2.0Search, Social, Mobile
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Web 2.0: Good Times, G.
1. # Users, Bandwidth = Bigger.
2. Startup Costs = Lower.
3. Transaction$$$ = Better.
Building Product => Cheaper, Faster, Measurable Getting Customers => Easier, More Predictable
Product & Market Decisions based on
Measured User Behavior
R.I.P.
*BAD*TIMES
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Platform Viability
Users .Users . . Money
. Money
FeaturesFeatures
Growth Profit
ProfitableGrowth
Nirvana
Successful Platforms have 3 Things:1) Features2) Users3) Money
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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
• Email/IM: Gmail, Yahoo, Microsoft
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Web 2.0 Business Model: KISS
• 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 Technology– Search, Social, Mobile– Google, Facebook, Apple– Email, ECommerce
• 3) Get Customers, Make Money G– Distribution, Distribution, Distribution
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Startup Incubators Lots of Hot, Cool, Web 2.0!
(+ lots of FAIL.)
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Incubator 2.0: Fast, Cheap, FAIL• Incubators growing in popularity, acceptance
• Supportive ecosystem for startups (angels, VCs)
• Efficient use of investment capital ($0-100K)
• High fail rate (60-80%) => large initial sample size
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Incubator 2.0: Education, Collaboration, Iteration
• Focus on education & shared resources• Success based:
– many small startup experiments– common platforms, problems & solutions– physical proximity, open/collaborative environment– fast fail, iteration, metrics & feedback
• Incremental investment; high-risk, but high-reward
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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
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Startup Metrics: Lean Startup & Lean VC
Measure Stuff, Iterate.
(Rinse & Repeat.)
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“Just Gimme the GOOD Leads”Users, Pages, Clicks, Emails, $$$...?
Q: Which of these is best? How do you know?
• 1,000,000 one-time, unregistered unique visitors
• 500,000 visitors who view 2+ pages / stay 10+ sec
• 200,000 visitors who clicked on a link or button
• 20,000 registered users w/ email address
• 2,000 passionate fans who refer 5+ users / mo.
• 1,000 monthly subscribers @ $5/mo
the good stuff.
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Lean Startup Challenges
Startups have problems in 3 main areas:
• Management: Set Priorities, Define Key Metrics, Make Decisions.
• Product: Build the “Right” Features. Measure, Iterate.
• Marketing: Distribution, Distribution, Distribution.
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Role: Founder/CEO
Q: Which Metrics? Why?
A: Focus on Critical Few Actionable Metrics(
if you don’t use the metric to make a decision, it’s not actionable)
• Hypothesize Customer Lifecycle• Target ~3-5 Conversion Events (tip: Less = More)
• Test, Measure, Iterate to Improve
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Role: Product / Engineering
Q: What Features to Build? Why? When are you “Done”?
A: Easy-to-Find, Fun/Useful, Unique features that
Increase Conversion (stop iterating when increase decelerates)
• Wireframes = Conversion Steps
• Measure, A/B Test, Iterate FAST (daily/weekly)
• Optimize for Conversion Improvement
– 80% on existing feature optimization
– 20% on new feature development
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Role: Marketing / Sales
Q: What channels? Which users? Why?A: High Volume (#), Low Cost ($), High Conv (%)
• Design & Test Multiple Marketing Channels + Campaigns• Select & Focus on Best-Performing Channels & Themes• Optimize for conversion to target CTAs, not just site/landing page• Match/Drive channel cost to/below revenue potential
• Low-Hanging Fruit: – Blogs– SEO/SEM– Landing Pages– Automated Emails
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“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 Marketing Channels””)• Venture: $1M-$10M (“Maximize Growth & Revenue”)
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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
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Investment #2: Seed(“Market”)• Structure
– 2-5 person team– $100K-$1M investment– Syndicate of Angel Investors / Small VC Funds
• Improve Product, Expand Market, Test Revenue:– Alpha->Beta, ~6-12 months– Customer Sat ≥ 6 => Get to “Doesn’t Suck”– 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
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Investment #3: Venture(“Revenue”)
• Structure– 5-10 person team– $1M-$5M investment– VC Investors
• Make Money, 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
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Summary
• Venture Capital 2.0 = Fewer, Smaller Funds (<$100M) + More, Smaller Exits (<$100M)
• Platforms 2.0 = Distribution + Monetization, not Tech
• Incubators, Metrics = Many small Experiments (most FAIL).
– Measure Stuff.– Iterate, Iterate, Iterate.