Venture Capital 2.0The Lean VC

Dave McClurehttp://500startups.com

(@DaveMcClure) Sapporo, Japan – May 2011

http://slideshare.net/dmc500hats

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

Changes in Tech & VC• Platforms = Distribution + Monetization (not Technology)

– Search (Google)– Social (Facebook, Twitter, LinkedIn, YouTube)– Mobile (Apple, Android)

• Venture Capital = Fewer, Smaller Funds (<$100M)– Decline of Large Funds (> $250m), except for HUGE ONES (>$1B).– Birth of “Super Angel” / “Micro-VC” seed funds (<$100M)– Market Changes: Few IPOs (>$1B), More/Smaller Acq’stns (<$250M)

• Incubators, Metrics = Many Small Experiments (most FAIL)

– Y-Combinator, TechStars, Betaworks– The “Lean Startup”, Design/UX, Distribution– 500 Startups

Read Geoffrey MillerSex + Evolution + Consumer Mktg = Awesome

Dave McClure

2000-2010:• Investor: 150+ Startups (Mint, SlideShare, Twilio, WildFire)• Marketing: PayPal, Simply Hired, Mint, Founders Fund• Community: Startup2Startup, GeeksOnaPlane, StartupVisa• Speaker: Lean Startup Metrics, 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 – “Super-Angel” FundMountain View, CA – Founded 2010

• Design, Distribution, Data• Seed Fund & Startup Accelerator

– 75 people / 25 companies @ 3x/yr

– Silicon Valley HQ

• Total Portfolio: 135+ Companies– Twilio

– Wildfire

– SendGrid

– MyGengo (JPN)

– Aqush (JPN)

– Zozi

– Erply (EU)

– Medialets

– ChinaNetCloud (CH)

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

• Media: YouTube (Video), Blogs, Photos

• Inbox: Gmail, Yahoo, Microsoft

Venture Capital 2.0(smaller / bigger, faster, better?)

Venture Capital 1.0 “Super” Angel (aka Micro-VC)

Silicon ValleyInvestor Ecosystem

Angels & Incubators($0-10M)

“Seed” Funds ($10-50M)

VC Funds ($50-250M)

VC Funds (>$250M)

True VenturesFirst Round Capital

BenchmarkAccel

Y-Combinator

TechStars

SoftTech (Clavier)

Felicis (Senkut)SV Angel (Conway)

More & Smaller Acquisitions• Mature Internet Platform Co’s:

– GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, Fbook

• Non-Tech BigCo / Consumer Verticals buying tech startups (for distribution)

• Lots of Users, $$$• Outsourcing Innovation

* Mint acquired by Intuit in Sept 2009 for $170M

• Lots of M&A (but small)• Founders own MORE %• Will Sell for LESS $• Great for Angels & Entrepreneurs• Not so Great for (big) VCs

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 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

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

One Step at a Time.

1. Make a Good Product: Activation & Retention

2. Market the Product: Acquisition & Referral

3. Make Money: Revenue & Profitability

The Lean VC

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”)

Summary• Platforms 2.0 = Distribution + Monetization (not Tech)

– Customer Acquisition MUCH easier, MUCH faster– Monetization keeps getting BETTER– Capital Rqmts MUCH lower

• Incubators, Metrics = Lots of Small Bets / Experiments

– Most Fail, a Few Succeed– Quantity Over (Perceived) Quality– Incremental Investment after Success

• Venture Capital 2.0 = – Fewer, Smaller Funds (<$100M)– More, Smaller Exits (<$100M)– Globalization, Specialization, Verticalization