Silicon Valley 2.0The Lean VC

Dave McClurehttp://500startups.com

(@DaveMcClure) Chicago – July 2011

http://slideshare.net/dmc500hats

Re-Inventing Venture Capital throughInnovation, Incubation, & Iteration

Changes in Tech & VC• Platforms = Distribution + Monetization (not Technology)

– Search (Google)– Social (Facebook, Twitter, LinkedIn, YouTube)– Mobile (Apple, Android)

• Venture Capital = Fewer, Smaller Funds (<$100M)– Decline of Large Funds (> $250m), except for HUGE ONES (>$1B).– Birth of “Super Angel” / “Micro-VC” seed funds (<$100M)– Market Changes: a Few Big IPOs (>$1B), Lots of Small Acquisitions (<$250M)

• Incubators, Metrics = Many Small Experiments (most FAIL)– Y-Combinator, TechStars, 500 Startups– The “Lean Startup”, Design/UX, Distribution– Lots of Little Bets; Incremental Investment

Read Geoffrey MillerSex + Evolution + Consumer Mktg = Awesome

Dave McClure

2000-2010:• Investor: 200+ Startups (Mint, SlideShare, Twilio, WildFire)• Marketing: PayPal, Simply Hired, Mint, Founders Fund• Community: Startup2Startup, GeeksOnaPlane, StartupVisa• Speaker: Lean 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 – “Super-Angel” FundMountain View, CA – Founded 2010

• Design, Distribution, Data• Seed Fund & Startup Accelerator

– 25 companies @ 3x/yr– Silicon Valley HQ

• Total Portfolio: 165+ Companies– Twilio– Wildfire– SendGrid– FeeFighters (Chi)– MyGengo (JPN)– BugHerd (AU)– Erply (EST)– MoonFruit (UK)– ChinaNetCloud (CH)

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 . . Money

Features

Growth Profit

ProfitableGrowth

Nirvana

Successful Platforms have 3 Things:1) Features2) Users3) Money

Distribution PlatformsCustomer Reach: 100M+

• Search: Google (SEO/SEM)

• Social: Facebook, Twitter, Zynga, LinkedIn

• Mobile: Apple (iPhone, iPad), Android

• 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 Technology– Search, Social, Mobile– 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

Venture Capital 2.0(smaller / bigger, faster, better?)

Venture Capital 1.0 “Super” Angel (aka Micro-VC)

Silicon ValleyInvestor Ecosystem

Angels & Incubators($0-10M)

“Seed” Funds ($10-50M)

VC Funds ($50-250M)

VC Funds (>$250M)

True VenturesFirst Round Capital

Founders FundAccel

Y-Combinator

TechStars

SoftTech (Clavier)Felicis (Senkut)

SV Angel (Conway)

Big VC: Still Necessary?Good 4 BIG CAPx:• Hardware• Enterprise SW• Clean Tech• BioScience• Facebook, Zynga, Groupon

May Not Be Needed 4:• Consumer Internet• Small Business• Consulting• (Pr0n, Gambling, etc…)

More & Smaller Acquisitions• Mature Internet Platform Co’s:

– GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, Fbook

• Non-Tech BigCo / Consumer Verticals buying tech startups (for distribution)

• Lots of Users, $$$• Outsourcing Innovation

* Mint acquired by Intuit in Sept 2009 for $170M

• Lots of M&A (but small)• Founders own MORE %• Will Sell for LESS $• Great for Angels & Entrepreneurs• Not so Great for (big) VCs

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 REVfbFund 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

Lean Startup, Lean VCCustomers, 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

One Step at a Time.

1. Make a Good Product: Activation & Retention2. Market the Product: Acquisition & Referral3. Make Money: Revenue & Profitability

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 Marketing 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-$5M 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

Going Local, Going Globalweb gets bigger -> world gets smaller

Global Trends• Growth of Global Languages (see MyGengo.com)

– 1B+ speakers: Mandarin, English– 500M+ spkrs: Spanish, Hindi, Arabic

• Smart Device Proliferation– mobile, tablet, TV, console, etc

• More Young, More Old ($$$) Users Online• More Bandwidth, More Video, More Social, More Mobile• Wealthy Chinese + Indian, Web + IRL Globetrotters ($$$B)• Acceleration of Global Payment, E-Commerce• Dramatically Reduced Cost: Product Dev, Customer Acqstn• Global Distribution Platforms

– US/EU: Apple, Facebook, AMZN, GOOG (Search, YouTube, Gmail, Android), Twitter– Asia: Tencent/QQ, Taobao/Alibaba/AliPay, Youku, MediaTek, Rakuten, DeNA, Gree

Local Hacks• Dominate your local/native market first

– Or, move so that your local market is bigger (China, US, India)

• Language + Visual Design Matters– Read: Spent, Influence, Understanding Comics

• Niche 2 Win: Big Enough Markets + Great Customer– 1M users @ $9/mo = ~$100M+/yr business

• Sell Something: Shoes, Clicks, Bits, Anything.– 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 )

Summary• Platforms 2.0 = Distribution + Monetization (not Tech)

– Customer Acquisition MUCH easier, MUCH faster– Monetization keeps getting BETTER– Capital Rqmts MUCH lower

• Incubators, Metrics = Lots of Small Bets / Experiments – Most Fail, a Few Succeed– Quantity Over (Perceived) Quality– Incremental Investment after Success

• Venture Capital 2.0 = – Fewer, Smaller Funds (<$100M)– More, Smaller Exits (<$100M)– Globalization, Specialization, Verticalization