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Startup 2.0:

A Silicon Valley StoryEngineering Better Startups

with Incubators, Metrics & Iterative Development

Dave McClure(@DaveMcClure)

Founders Fund / 500 Hats

Echelon May 2010 (Singapore)

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Topics

Venture Capital 1.0 = *Broken Model* (forInternet Startups)

M&A Trends: More & SmallerAcquisitions(Very Few IPOs)

Incubators: Many Experiments(most FAIL, afewwinners)

Metrics: Define Success, Measure & Iterate(Fast + Feedback)

Platforms 2.0: Search, Social, Mobile, Inbox, Media(Distribution)

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[Pardon The Blatant Commercial]

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Dave McClure

2001-2009:

Startup Investor: 500 Hats LLC, Founders Fund Tech Marketing: PayPal, Simply Hired, Mint

Advisor, Angel Investor: 40+ Startups

Conf. Organizer: Web 2.0, OReilly, Startonomics

Stanford Visiting Lecturer: Facebook, Startup Metrics

80s & 90s: 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

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Professional Investments(43 deals, 2008-2010, ~$3M)

fbFund REV22incubatordeals

($850K)

FF Angel21seeddeals

($2M)

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Personal Investments(26 deals, 2004-2010, ~$400K)

LinkDex

oneforty

Networked Blogs

MyGengo

Votizen

Postling

EcoMom SiteJabber

Graphicly

WePayPlancast

Recurly

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Venture Capital 1.0 =Too Big To FAIL WIN?

(at least for *Internet* Startups)

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Startup Investor Ecosystem

Angels &Incubators($0-10M)

Seed Funds($10-50M)

SmallVC Funds($50-250M)

LargeVC Funds(>$250M)

TrueVenturesFirst RoundCapital

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

Not So Great 4:

Internet Startups

Consulting Shops LifestyleBiz

Porn, Gambling

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Web 2.0: HellYes, Good Times.

1. # Users, Bandwidth = Bigger.

2. StartupCosts = Lower.

3. Transaction $Growing = Better.

Building Product =>Cheaper, Faster, Measurable

Getting Customers => Easier, More Predictable

Product & Market Decisions Basedon MeasuredUserBehavior

R.I.P.

*BAD*

TIMES

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Distribution Platforms

Customer Reach: 100M+

Search: Google(SEO/SEM)

Social: Facebook, Twitter, LinkedIn

Mobile: Apple(iPhone, iPad), Android

Media: YouTube/Video, Blogs, Photos

Inbox/IM: Gmail, Yahoo, MSFT, AOL

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More & Smaller Acquisitions

Mature Internet Platform Cos:

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

etc

LotsofUsers, $$$

Outsourcing Innovation

LotsofM&A (but small) Great forAngels & Entrepreneurs

Not soGreat for(big)VCs

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Startup IncubatorsLots of Hot, Cool, Web 2.0!

(+ lots of FAIL, too.)

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Startup 2.0:

Lean Investor ModelMethod: Invest in manystartupsusing incremental

investment, iterativedevelopment. Start withlotsofsmallexperiments, filterout failure, andexpand

investment upon success(Rinse & Repeat).

Incubator: $0-100K(Build & Validate Product )

Seed: $100K-$1M(Test & GrowMarketing Channels) Venture: $1M-$10M(Maximize Growth & Revenue)

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Incubator 2.0: Fast, Cheap, FAIL

Incubators growing in popularity, acceptance Supportiveecosystem forstartups(angels, VCs)

Efficient useofinvestment capital($0-100K)

High fail rate (60-80%) =>largeinitialsamplesize

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Incubator 2.0:Education, Collaboration

Emphasison education, access tosharedresources

Successbasedon common platforms, physicalproximity, open & collaborativeenvironment

Successbasedon fast fail, iteration & feedback

Incrementalinvestment; high-risk, but high-reward

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fbFund REV

fbFund REV: Facebook Social Incubator: invest in startups, apps,websitesbasedon Facebookplatform & FacebookConnect.

22startups@ ~$35Keach(+2 non-profits)

12-weekprog + 25 Advisors / Spkrson Tech, Design, Mktg, Business topics

Target: ~7 seedroundinvestments($250K-$1M)

Success: ~8startupsfunded>$250K, ~6 @break-even

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Investment #1: Incubate(Product)

Structure 1-3 founders

$25K-$100Kinvestment

Incubatorenvironment: multiplepeers, mentors/advisors

Build Functional Prototype / Minimum Viable Product(MVP): Prototype->Alpha, ~3-6 months

DevelopMinimalCritical Feature Set =>Get to It Works

Instrument BasicDashboard, Conversion Metrics

Test Cust. Adoption (10-1000users) / Cust. Satisfaction (Scale: 1-10)

DemonstrateConcept, Reduce Product Risk, Test Functional Use

DevelopMetrics & FilterforPossible Future Investment

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Investment #2: Seed(Market)

Structure

2-5person team

$100K-$1Minvestment

SyndicateofAngel Investors / SmallVC Funds

Improve Product, Expand Market, Test Revenue: Alpha->Beta, ~6-12 months CustomerSat 6 =>Get to Doesnt Suck

Setup A/BTesting Framework, OptimizeConversion

Test Marketing Campaigns, Cust Acqstn Channels

Prove Solution/Benefit, AssessMarket Size

Test ChannelCost, Revenue Opportunity

Determine Org Structure, Key Hires

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Investment #3: Venture(Revenue)

Structure 5-10person team

$1M-$5Minvestment

VC Investors

Make Money, Get to Sustainability: Beta->Production, 12-18 months

CustomerSat 8 => It Rocks, Ill Tell My Friends

MktgPlan => PredictableChannels / Campaigns + Budget

Scalability & Infrastructure, CustomerService & Operations

Connect withDistribution Partners

Prove/ExpandMarket, OperationalizeBusiness

FutureMilestones: Profitable/Sustainable, Exit Options

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Startup Metrics

& The Lean StartupMeasure Stuff. Iterate.

Rinse & Repeat.

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Lean Startup Church of Metrics

Progress Features(Less = More)

Focuson User Experience (& Distribution)

MeasureConversion; Compare2+ Options

Fast, Frequent Iteration (+ Feedback Loop)

Keepit Simple & Actionable

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Minimize TOTAL time through the loop

LEARN BUILD

MEASURE

IDEAS

CODEDATA

Source: Eric Ries,

The Lean Startup

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The Startup Pyramid(Sean Ellis, Startup-Marketing.com)

sean@12in6.com

Blog: startup-marketing.com

Growth

Transition to Growth

Product/Market Fit

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Startup Metrics for Pirates

Acquisition: userscome tositefrom variouschannels

Activation: usersenjoy1st

visit: "happyexperience Retention: userscomeback, visit site multiple times

Referral: userslikeproduct enough toreferothers

Revenue: usersconduct some monetization behavior

AARRR!

(note: If youre in a hurry, Google

Startup Metrics & watch 5m video)

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AARRR!: 5-Step Startup Metrics Model

Website.com