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slides from my talk at the Startup Conference (May 2012, Mountain View, CA)
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Silicon Valley 2.0Lean Startup, Lean VC
Dave McClurehttp://500.co (@DaveMcClure)
May 2012http://slideshare.net/dmc500hats
Re-Inventing Venture Capital throughInnovation, 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
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 (>$500M)
True VenturesFirst Round
Andreessen-HorowitzAccel
Partners
Y-Combinator
TechStars
SoftTech (Clavier)
Felicis (Senkut)
SV Angel (Conway)
SequoiaGreylock
Union Square
Floodgate (Maples)
Foundry Group
Platforms 2.0Search, Social, Mobile
Platform Viability
Users . . Money
Features
Growth Profit
ProfitableGrowth
Nirvana
Successful Platforms have 3 Things:1) Features2) Users3) Money
Distribution PlatformsCustomer Reach: 100M+
• Search: Google
• Social: Facebook, Twitter, Zynga, LinkedIn
• Mobile: Apple (iOS), Android
• Local: Groupon, LivingSocial, Yelp
• Media: Video (YouTube), Blogs (Tumblr), Photos (Pinterest)
• Comm: Email, IM/Chat, Skype, Phone/Voice
Web 2.0 Business Model: KISS (“Keep It Simple, Stupid”)
• 1) Re-invent Web 1.0 Businesses– Make a Website, a Widget, an App– Sell Stuff (Transactions, Subscriptions, Affiliate)
• 2) add Web 2.0 Technology– Search, Social, Mobile, Local, Media, Comm– Google, Facebook/Twitter, Apple/Android– Email, SMS, Ecommerce / Payments
• 3) Get Customers, Make Money– Distribution, Distribution, Distribution– (Customer Acq’stn Cost) vs. ($Rev. Per Customer)– Low CapX + Profitable Web Businesses
More Acquirers (tech + non-tech); More & Smaller Acquisitions
1. Mature Internet Platform Co’s:– 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, $$$• BigCo = Bureaucracy, Innovator Dilemma• Outsource Innovation; Buy Talent / Products• Acquiring LOTS (Small) Startups• Great for Founders, Investors
* Mint acquired by Intuit in Sept 2009 for $170M
Lean Startup, Lean VCCustomers, Metrics, Iteration.
Invest BEFORE Traction; Double Down AFTER.
The Lean Startup• Progress ≠ Features; Measure Conversion• Talk to Customers; Discover Problems• Focus on “Product/Market Fit” (good solution)• Fast, Frequent Iteration (+ Feedback Loop)• Keep it Simple & Actionable
Startup Metrics for Pirates
• Acquisition: users come to site from various channels• Activation: users enjoy 1st visit: "happy” experience• Retention: users come back, visit site multiple times• Referral: users like product enough to refer others• Revenue: users conduct some monetization behavior
AARRR!
(note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video)
AARRR!: 5-Step Startup Metrics Model
Website.com
Revenue $$$
Biz DevAds, Lead Gen,
Subscriptions, ECommerce
ACQUISITION
SEOSEM
Apps & Widgets
Affiliates
PR Biz Dev
Campaigns, Contests
Direct, Tel, TV
Social Networks
Blogs
Domains
Retention
Emails & Alerts
System Events & Time-based Features
Blogs, RSS, News Feeds
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 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 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-$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 2.01. Make a Good Product: Activation & Retention2. Market the Product: Acquisition & Referral3. Make Money: Revenue & Profitability
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