Beating The Series A Crunch

+ Why Growth Hacking / Online Marketing Matters (a lot)

Dave McClurehttp://500.co (@DaveMcClure)

Intl Startup Festival 2013Montreal, July 2013

http://slideshare.net/dmc500hats

This Talk

• You’re a Geek (or traditional marketing flack)

• You SUCK at online marketing / growth hacking

• You spend WAY TOO MUCH TIME on product

• You can’t scale customer acquisition (profitably)

• You won’t get funding / Series A,B / break-even

Therefore: YOU WILL DIE.

• Want to Fix This? Listen Up.

Dave McClureFounding Partner & Chief Troublemaker, 500 Startups

00’s & 10’s:• VC: Founders Fund, Facebook fbFund, 500 Startups• Angel: Mashery, Mint.com, SlideShare, Twilio, WildFire, SendGrid• Marketing: PayPal, Simply Hired, Mint.com, oDesk, O’Reilly

80’s & 90’s:• Entrepreneur: Aslan Computing (acq’d by Servinet/Panurgy)• Developer: Windows / SQL DB consultant (Intel, MSFT)• Engineer: Johns Hopkins‘88, BS Eng / Applied Math

500 StartupsGlobal Seed Fund & Startup Accelerator

• What is 500?– ~$70M under management

– 26 people / 12 investing partners

– Locations: SV, NYC, MEX, BRZ, IND, CHN, SE Asia

– 1000+ Founders / 200+ Mentors

– 22 positive exits in <3 years

• 500+ Portfolio Co’s / 30+ Countries– Wildfire (acq GOOG, $350M)

– MakerBot (acq SSYS, $400M)

– Twilio

– SendGrid

– TaskRabbit

– Viki

– Smule

– AppStack

– 9GAG

– MediaLets

– PicCollage

500 Startups: Global Seed FundOver 100+ startups outside US, in 35+ countries

• Q4/12 added: Germany, Korea, Peru; + Russia, Turkey, Ghana in Q2/13• Priorities in 2012: Brazil, Mexico, India• Priorities In 2013: China, SE Asia, MENA, Eastern Europe

Changes in Tech Startups• LESS Capital required to build product, get to market

– Dramatically reduced $$$ on servers, software, bandwidth

– Crowdfunding, KickStarter, Angel List, Funders Club, etc

– Cheap access to online platforms for 100M+ consumers, smallbiz, etc

• MORE Customers via ONLINE platforms (100M+ users)– Search (Google)

– Social (Facebook, Twitter)

– Mobile (Apple, Android)

– Local (Yelp, Groupon, Living Social)

– Media (YouTube, Pinterest, Instagram, Tumblr)

– Comm (Email, IM/Chat, Voice, SMS, etc)

• LOTS of little bets: Accelerators, Angels, Angel List, Small Exits– Y Combinator, TechStars, 500 Startups

– Funding + Co-working + Mentoring -> Design, Data, Distribution

– “Fast, Cheap Fail”, network effects, quantitative + iterative investments

Daft Punk Lean Startup:Simpler, Faster, Cheaper, Smarter

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

Startup Investor Ecosystem

Angels & Incubators($0-10M)

“Micro-VC” Funds ($10-100M)

“Big” VC Funds ($100-500M)

“Mega” VC Funds (>$500M)

TrueFirst Round

AndreessenAtomico

Y-Combinator

TechStars

SoftTech (Clavier)

Felicis (Senkut)

SV Angel (Conway)

SequoiaGreylock

Union Square

Floodgate (Maples)

Foundry Group

Bootstrap, KickStarter, Crowdfunding

Lean Startup, Lean VCCustomers, Metrics, Iteration.

Invest BEFORE Traction; Double Down AFTER.

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”)

Build Product -> Get Customers

• Product = Activation / Retention

• Market(ing) = Acquisition / Referral

• Revenue = Monetization

…<collect underpants>

…

• Profit!

12

500 Strategy: “Lots of Little Bets”*

1) Make lots of little bets pre-traction, early-stage startups

2) after 6-12 months, identify top 20% performers and double-down higher $$$

3) conservative model assumes-5-10% large exits @20X ($50-100M+)-10-20% small exits @5X ($5-50M)

*See Peter Sims book: “Little Bets”

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

Beating The Series A “Crunch”

Customers

Distribution

Revenue

Got Crunched Yet?

Source: Bullpen Capital

Before & After 2 Dot-Com CrashesDaft Punk Startup: Simpler, Faster, Cheaper, Smarter

Before 2000

•Sun Servers

•Oracle DB

•Exodus Hosting

•12-24mo dev cycle

•6-18mo sales cycle

•<100M people online

•$1-2M seed round

•$3-5M Series A

•Sand Hill Road crawl

•Big, Fat, Dinosaur Startup

After 2008

•AWS, Google, PayPal, FB, TW

•Cloud + Open Source SW

•Lean Startup / Startup Wknd

•3-90d dev cycle

•SaaS / online sales

•>3B people online

•<$100K incub + <$1M seed

•$1-3M Series A

•Angel List global visibility

•Lean, Little, Cockroach Startup

Crunch Good? Crunch Bad?

• Series A bar higher: $1M revenue, 1M active users, 10M downloads, 100% YoY growth

• Lots of Incubation / Seed startups will “fail”• BUT: Fail Budget = $50-$500K, not $5M+• Many “failed” startups = ramen-profitable, small

acquisition, or MBA alternative (<$100K)• Series A/B VCs have lots to choose from• Overall, founders / market getting smarter• More focus on customers, problems, revenue• Many die, some survive (1-5x), a few thrive (20x+).

Online Customer Acquisition (aka “Marketing & Sales”)

Search (Google)

Social (Facebook, Twitter)

Mobile (Apple, Android)

Video (YouTube)

Messaging (Email, SMS, Chat, Voice)

Platforms 2.0Search, Social, Mobile,

Video, Messaging

Distribution PlatformsCustomer Reach: 100M-1B+

• Search: Google, Baidu, Yahoo/Bing, Yandex

• Social: Facebook, Twitter, LinkedIn, TenCent/QQ, WeChat

• Mobile: Apple (iOS), Android

• Media: Video (YouTube), Photos (Instagram, Pinterest), Blogs

• Comm: SMS, IM (WeChat, WhatsApp), Skype, Phone/Voice, etc

Minimum Viable Team:Hacker, Hipster, Hustler

• Hacker: engineers & developers

• Hipster: design & user experience (UX)

• Hustler: marketing & business, “growth hacker”

1.Build functional prototypes

2.Improve UX so people convert

3.Scale customer acquisition & distribution

Marketing Strategy(aka Growth Hacking Strategy)

• PR• Contests• Biz Dev• Direct Marketing• Radio / TV / Print• Telemarketing

• Email• SEO / SEM• Social (Paid, Organic)• Blogs / Bloggers• Mobile Apps• Affiliate / CPA

… how do you get customers & distribution?

lots of old, new channels & decisions:

3 Things That Matter / To Measure : 1. Volume

2. Cost

3. Conversion

Unit Economics for Customer Acquisition

• What does product cost to build/deliver?

• What do customers cost to acquire? – by channel? by campaign?

• What are customers worth?– 1st visit / transaction? In a year? Lifetime?

• When do expenses get incurred?

• When is revenue generated?

• Is customer acquisition break-even or better?– For which distribution channels / methods?– For what kind of campaigns?– Does the channel / campaign scale? – Do the #’s change?

• When does a customer become profitable?

• unit economics @ scale -> marketing strategy / campaigns

Marketing Strategy & Financial Modeling

• Volume, Cost, Conversion• Est. volume of available leads / customers• Est. cust acq costs by channel / campaign• Est. customer value / revenue generated• Build financial model for scalable, profitable growth• Hack, Tweak to scale up• Hack, Tweak to break-even

• If it’s not working: don’t scale up / keep testing• If it’s working: stop building / go raise $$$

Silicon Valley 2.0: Lots of Little Bets

aka “MoneyBall for Startups”

• VC Evolution: Physician, Scale Thyself (Aug 2012)• MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)

Angel* List: It Rocks.

• Startups & Investors• Activity & Metrics• Platform & APIs

• *ps – not just for Angels, or USA

Thanks • Questions / More Info?

– http://500.co (our company)– http://500hats.com (my blog)– https://angel.co/500startups (our fund)– Dave McClure, @DaveMcClure