The Lean VC:a Silicon Valley 2.0 Story

Dave McClure, 500 Startups(@DaveMcClure) http://500startups.com

GROW conference - August 2010 – Vancouver, CA

Re-Inventing Venture Capital & Angel Investing throughInnovation, Incubation, & Iteration

Lean VC - Topics

• 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

[Pardon The Blatant Commercial]

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, 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

Professional Investments (Founders Fund: 43 deals, Q4/08-Q1/10, ~$3M)

fbFund REV22 incubator deals

($850K)

FF Angel21 seed deals

($2M)

Personal Investments(500 Hats: 26 deals, 2004-2010, ~$400K)

LinkDex

oneforty

Networked Blogs

MyGengo

Votizen

Postling

EcoMom SiteJabber

Graphicly

WePayPlancast

Recurly

500 Startups LPMountain View, CA – Founded 2010

• Seed Fund & Incubator Program• Design, Distribution, Metrics (AARRR!)• 30+ Portfolio Companies ($50K-250K)

– Twilio– Wildfire– Sendgrid– MyGengo– Erply– MyGengo– Payvment– Tello– …

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)

“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)

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

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, 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

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

• Email/IM: 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, Apple– Email, ECommerce

• 3) Get Customers, Make Money G– 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.)

Startup 2.0: “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.