vc 2.0: the lean investor (sept 2010)

The Lean VC:a Silicon Valley 2.0 Story

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

Capital Factory Demo Day – September 2010 – Austin, TX

Re-Inventing Venture Capital & Angel Investing through

Innovation, 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, Nitobi– 500 Startups

[Pardon The Blatant Commercial]

Dave McClure

2001-2010:• Startup Investor: 500 Hats LLC, Founders Fund• Tech Marketing: PayPal, Simply Hired, Mint• Advisor, Angel Investor: 70+ 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

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

2004-2008: 13 deals, avg $25Kresults: 1 exit @ $170M (9x), +3-7 future wins (i hope)

Founders Fund Investments (43 deals, 2008-2010, ~$2.9M)

fbFund REV (Facebook Incubator)

22 deals ($850K) ~$15-75K

FF Angel LLC

21 deals ($2M)

~$50-250K

Results:8 Seed rounds @ $500K+, 3 small exits, 5 ramen-profitable)

Results:1 small exit @ 4x, 5 Series A $2M+, (expect 5+ more)

500 Startups Investments (~40+ deals, 2010, ~$3.5M)

2010 YTD: 38+ deals, avg $100K

Wildfire Crave Tello AwayFind MyGengo

Recurly Mogotix EcoMom Zencoder Crocodoc

SayHired RevNetics AppBistro Foodspotting Medialets

Rapportive TransFS SiteJabber Estately FlowTown

OneForty Twilio Postling Plancast WePay

OtherInbox Viikii Zozi Graphicly NetworkedBlogs

What Up Texas! Hi Josh

500 Startups LPMountain View, CA – Founded 2010

• Seed Fund & Incubator Program• Design, Distribution, Data (AARRR!)• 40+ Portfolio Companies ($50K-250K)

– Twilio– Wildfire– Sendgrid– MyGengo– Erply– Payvment– Zozi– OtherInbox

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.)

“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.

Role: Founder/CEO

Q: Which Metrics? Why?

A: Focus on Critical Few Actionable Metrics(

if you don’t use the metric to make a decision, it’s not actionable)

• Hypothesize Customer Lifecycle• Target ~3-5 Conversion Events (tip: Less = More)

• Test, Measure, Iterate to Improve

Role: Product / Engineering

Q: What Features to Build? Why? When are you “Done”?

A: Easy-to-Find, Fun/Useful, Unique features that

Increase Conversion (stop iterating when increase decelerates)

• Wireframes = Conversion Steps

• Measure, A/B Test, Iterate FAST (daily/weekly)

• Optimize for Conversion Improvement

– 80% on existing feature optimization

– 20% on new feature development

Role: Marketing / Sales

Q: What channels? Which users? Why?A: High Volume (#), Low Cost ($), High Conv (%)

• Design & Test Multiple Marketing Channels + Campaigns• Select & Focus on Best-Performing Channels & Themes• Optimize for conversion to target CTAs, not just site/landing page• Match/Drive channel cost to/below revenue potential

• Low-Hanging Fruit: – Blogs– SEO/SEM– Landing Pages– Automated Emails

“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.