The Lean VC:a Silicon Valley 2.0 Story

Dave McClureFounding Partner, 500 Startups

(@DaveMcClure) http://500startups.com Nokia Growth Partners – Nov 2010, SF

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

Changes, Oh.

• 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, AngelPad– 500 Startups

Dave McClure: Bio

2000-2010:• Investor: 100+ Startups (Mint, SlideShare, Twilio, WildFire)• Blogger: Ranked #7 on Top 10 VC blogs (2009)• Marketing: PayPal, Simply Hired, Mint, O’Reilly, Founders Fund• Community: Startup2Startup, GeeksOnaPlane, StartupVisa• Speaker: Startup Metrics for Pirates, 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 LPMountain View, CA – Founded 2010

• Seed Fund & Startup Accelerator Program• Design, Distribution, Data (AARRR!)• 50+ Portfolio Companies

– Twilio– Wildfire– SendGrid– MyGengo– Erply– Payvment– FlowTown– Medialets

500 Hats LLC(Personal Investments: 13 deals, 2004-2008, ~$300K)

Results: 1 exit @ $170M (9x), +3-6 future wins2 addtl exits @ $50M, $70M (advisory roles)

Bix (acq YHOO)

Jambool (acq GOOG)

Founders Fund (Incubator/Seed Program: 43 deals, 2008-2010, ~$3M)

Facebook fbFund

22 incubator deals ($850K)

FF Angel LLC

21 seed deals($2M)

Results:8 raised seed rd $500K+ 3 small exits

Results:6 raised Series A $2M+2 raised Series B $5-10M+1 early exit @ 4x

FanBridge

500 Startups LP Fund I(50+ investments @ ~$100K avg)

Wildfire Crave Tello AwayFind Indinero MyGengo

Revnetics Mogotix EcoMom Zencoder GazeHawk Crocodoc

SayHired Recurly AppBistro Foodspotting Gantto Medialets

Rapportive TransFS SiteJabber GinzaMetrics Estately FlowTown

OneForty Twilio Postling Plancast ElaCarte WePay

Zappli Format Baydin GroupSpaces Rapportive Apsalar

Bunndle Udemy Brainient ReadyForZero Graphicly StoryJumper

OtherInbox Viikii Zozi One True Fan FormativeLabs

NetworkedBlogs

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)

VC Funds ($50-250M)

VC Funds (>$250M)

True VenturesFirst Round Capital

Union SquareBlue Run

Y-Combinator

TechStars

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:

• 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.

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 .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

• Inbox: 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/Twitter, Apple/Android– Email, ECommerce

• 3) Get Customers, Make Money– 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.)

“Just Gimme the GOOD Leads”Users, Pages, Clicks, Emails, $$$...?

Q: Which of these is best? How do you know?

• 1,000,000 one-time, unregistered unique visitors

• 500,000 visitors who view 2+ pages / stay 10+ sec

• 200,000 visitors who clicked on a link or button

• 20,000 registered users w/ email address

• 2,000 passionate fans who refer 5+ users / mo.

• 1,000 monthly subscribers @ $5/mo

the good stuff.

Lean Startup Challenges

Startups have problems in 3 main areas:

• Management: Set Priorities, Define Key Metrics, Make Decisions.

• Product: Build the “Right” Features. Measure, Iterate.

• Marketing: Distribution, Distribution, Distribution.

“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.