silicon valley 2.0: the lean investor
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Slides from my presentation on venture capital innovation at Nov 2010 Nokia Growth Partners event: "Customer Driven Design & The Lean Startup"TRANSCRIPT
The Lean VC:a Silicon Valley 2.0 Story
Dave McClureFounding Partner, 500 Startups
(@DaveMcClure) http://500startups.com Nokia Growth Partners – Nov 2010, SF
Re-Inventing Venture Capital & Angel Investing throughInnovation, Incubation, & Iteration
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, AngelPad– 500 Startups
Dave McClure: Bio
2000-2010:• Investor: 100+ Startups (Mint, SlideShare, Twilio, WildFire)• Blogger: Ranked #7 on Top 10 VC blogs (2009)• Marketing: PayPal, Simply Hired, Mint, O’Reilly, Founders Fund• Community: Startup2Startup, GeeksOnaPlane, StartupVisa• Speaker: Startup Metrics for Pirates, 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 LPMountain View, CA – Founded 2010
• Seed Fund & Startup Accelerator Program• Design, Distribution, Data (AARRR!)• 50+ Portfolio Companies
– Twilio– Wildfire– SendGrid– MyGengo– Erply– Payvment– FlowTown– Medialets
500 Hats LLC(Personal Investments: 13 deals, 2004-2008, ~$300K)
Results: 1 exit @ $170M (9x), +3-6 future wins2 addtl exits @ $50M, $70M (advisory roles)
Bix (acq YHOO)
Jambool (acq GOOG)
Founders Fund (Incubator/Seed Program: 43 deals, 2008-2010, ~$3M)
Facebook fbFund
22 incubator deals ($850K)
FF Angel LLC
21 seed deals($2M)
Results:8 raised seed rd $500K+ 3 small exits
Results:6 raised Series A $2M+2 raised Series B $5-10M+1 early exit @ 4x
FanBridge
500 Startups LP Fund I(50+ investments @ ~$100K avg)
Wildfire Crave Tello AwayFind Indinero MyGengo
Revnetics Mogotix EcoMom Zencoder GazeHawk Crocodoc
SayHired Recurly AppBistro Foodspotting Gantto Medialets
Rapportive TransFS SiteJabber GinzaMetrics Estately FlowTown
OneForty Twilio Postling Plancast ElaCarte WePay
Zappli Format Baydin GroupSpaces Rapportive Apsalar
Bunndle Udemy Brainient ReadyForZero Graphicly StoryJumper
OtherInbox Viikii Zozi One True Fan FormativeLabs
NetworkedBlogs
Venture Capital 1.0 = Too Big To FAIL WIN?(at least for *Internet* Startups)
Venture Capitalist? Super Angel.
Silicon ValleyInvestor Ecosystem
Angels & Incubators($0-10M)
“Seed” Funds ($10-50M)
VC Funds ($50-250M)
VC Funds (>$250M)
True VenturesFirst Round Capital
Union SquareBlue Run
Y-Combinator
TechStars
SoftTech (Clavier)FloodGate (Maples)
Felicis (Senkut)SV Angel (Conway)
Venture Capital: Still Relevant?
Good 4 big CAPex:
• Hardware
• Enterprise SW
• Clean Tech
• BioScience
• Facebook, Zynga,
Groupon
Not So Great 4:
• Consumer / SMB Internet Startups ?
• Consulting Shops
• Lifestyle Biz
• Porn, Gambling
More & Smaller Acquisitions
• Mature Internet Platform Co’s:– GOOG, MSFT, YHOO, EBAY, AOL,
AMZN, AAPL, INTU, ADBE, Fbook
• Lots of Users, $$$• Outsourcing Innovation
• Lots of M&A (but small)• Great for Angels & Entrepreneurs• Not so Great for (big) VCs
Platforms 2.0Search, Social, Mobile
Web 2.0: Good Times.
1. # Users, Bandwidth = Bigger.
2. Startup Costs = Lower.
3. Transaction $$$ = 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
Users .Users . . Money
. Money
FeaturesFeatures
Growth Profit
ProfitableGrowth
Nirvana
Successful Platforms have 3 Things:1) Features2) Users3) Money
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
• 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/Twitter, Apple/Android– Email, ECommerce
• 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 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
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
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
Startup Metrics: Lean Startup -> Lean VC
Measure Stuff, Iterate.
(Rinse & Repeat.)
“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.
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.
“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”)
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 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
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
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.