silicon valley 2.0: the lean vc
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Silicon Valley 2.0The Lean VC
Dave McClurehttp://500startups.com
(@DaveMcClure) London – Sept 2011
http://slideshare.net/dmc500hats
Re-Inventing Venture Capital throughInnovation, Incubation, & Iteration
Changes in Tech & VC• Platforms = Distribution + Monetization (not Tech)
– 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: a Few Big IPOs (>$1B), Lots of Small Acquist’ns (<$250M)
• Incubators, Metrics = Many Small Experiments (most FAIL)
– Y-Combinator, SeedCamp, 500 Startups– The “Lean Startup”, Design/UX, Distribution– Lots of Little Bets; Incremental Investment
Read Geoffrey MillerSex + Evolution + Consumer Mktg = Awesome
Dave McClure
2000-2010:• Investor: 200+ 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”– 165+ Mentors in 10+ Countries
• Seed Fund + Startup Accelerator– 20-25 accelerator companies @ 3x/yr– 50-75 / yr seed investments
• Fund I: 175+ Companies– Twilio– Wildfire– SendGrid– Erply (EST)– MoonFruit (UK)– MyGengo (JPN)– BugHerd (AU)– ChinaNetCloud (CH)
Platforms 2.0Search, Social, Mobile
Web 2.0: Good Times.
1. # Users, Bandwidth = Bigger.
2. Startup Costs = Lower.
3. Monetization $$$ = Better.
Building Product => Cheaper, Faster, Better Getting Customers => Easier, More Measurable
Product & Marketing Decisions based on
Measured User Behavior
R.I.P.
*BAD*TIMES
Platform Viability
Users .Users . . Money
. Money
FeaturesFeatures
Growth Profit
ProfitableGrowth
Nirvana
Successful Platforms have 3 Things:1) Features2) Users3) Money
Distribution Platforms
Customer Reach: 100M+
• Search: Google (SEO/SEM)
• Social: Facebook, Twitter, Zynga, LinkedIn
• Mobile: Apple (iPhone, iPad), Android
• Media: YouTube (Video), Blogs, Photos
• Inbox: Gmail, Yahoo, Microsoft
Web 2.0 Business Model: KISS (“Keep It Simple, Stupid”)
• 1) Re-invent Web 1.0 Businesses– Make a Website, a Widget, an App– Sell Stuff to People (Transactions, Subscriptions)
• 2) add Web 2.0 Technology– Search, Social, Mobile– Google, Facebook/Twitter, Apple/Android– Email, SMS, Ecommerce / Payments
• 3) Get Customers, Make Money– Distribution, Distribution, Distribution– (Customer Acq’stn Cost) vs. ($Rev. Per Customer)– Low CapX + Profitable Web Businesses
Venture Capital 2.0(smaller / bigger, faster, better?)
Venture Capital 1.0 “Super” Angel (aka Micro-VC)
Silicon ValleyInvestor Ecosystem
Angels & Incubators($0-10M)
“Seed” Funds ($10-50M)
VC Funds ($50-250M)
VC Funds (>$250M)
Eden VenturesFirst Round Capital
Index VenturesAccel
Y-Combinator
SeedCamp
Passion Capital
ProFoundersSV Angel (Conway)
Big VC: Still Necessary?
Good 4 BIG CAPx:
• Hardware
• Enterprise SW
• Clean Tech
• BioScience
• Facebook, Zynga,
Groupon
May Not Be Needed 4:
• Consumer Internet
• Small Business
• Consulting• (Pr0n, Gambling, etc…)
More & Smaller Acquisitions• Mature Internet Platform Co’s:
– GOOG, MSFT, YHOO, EBAY, AOL, AMZN, AAPL, INTU, ADBE, Fbook
• Non-Tech BigCo / Consumer Verticals buying tech startups (for distribution)
• Lots of Users, $$$• 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
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
Discover Customers(Steve Blank, SteveBlank.com)
LEARN BUILD
MEASURE
IDEAS
CODEDATA
Iterate: Learn, Measure, Build.(Eric Ries, StartupLessonsLearned.com)
Startup Metrics for Pirates
• Acquisition: users come to site from various channels
• Activation: users enjoy 1st visit: "happy” experience• Retention: users come back, visit site multiple times• Referral: users like product enough to refer others• Revenue: users conduct some monetization behavior
AARRR!AARRR!
(note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video)
AARRR!: 5-Step Startup Metrics Model
Website.com
Revenue $
$$
Revenue $
$$
Biz DevBiz DevAds, Lead Gen, Subscriptions, ECommerce
Ads, Lead Gen, Subscriptions, ECommerce
ACQUISITIONACQUISITION
SEOSEOSEMSEM
Apps & WidgetsApps & Widgets
AffiliatesAffiliates
EmailEmail
PRPR Biz DevBiz Dev
Campaigns, Contests
Campaigns, Contests
Direct, Tel, TV
Direct, Tel, TV
Social Networks
Social Networks
BlogsBlogs
DomainsDomains
Retention
Emails & Alerts
Emails & Alerts
System Events & Time-based
Features
System Events & Time-based
Features
Blogs, RSS, News FeedsBlogs, RSS, News Feeds
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: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”)
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 => “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 (& 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-$5M 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
Going Local, Going Globalweb gets bigger -> world gets smaller
Global Trends• Growth of Global Languages (see MyGengo.com)
– 1B+ speakers: Mandarin, English
– 500M+ spkrs: Spanish, Hindi, Arabic
• Smart Device Proliferation– mobile, tablet, TV, console, etc
• More Young, More Old ($$$) Users Online• More Bandwidth, More Video, More Social, More Mobile• Wealthy Chinese + Indian, Web + IRL Globetrotters ($$$B)• Acceleration of Global Payment, E-Commerce• Dramatically Reduced Cost: Product Dev, Customer Acqstn• Global Distribution Platforms
– US/EU: Apple, Facebook, AMZN, GOOG (Search, YouTube, Gmail, Android), Twitter
– Asia: Tencent/QQ, Taobao/Alibaba/AliPay, Youku, MediaTek, Rakuten, DeNA, Gree
Local Hacks• Dominate your local/native market first
– Or, move so that your local market is bigger (China, US, India, Brazil)
• Language + Visual Design Matters– Read: Spent, Influence, Understanding Comics
• Niche 2 Win: Big Enough Markets + Great Customer– 1M users @ $9/mo = ~$100M+/yr business
• Sell Something: Shoes, Clicks, Bits, Anything.– Transactns, Subscriptns, Virtual Goods, LeadGen
• You Don’t Need to Be [in] Silicon Valley– But, Silicon Valley Needs to BE IN YOU.– (Use The Force Luke… Close Your Eyes, Let Go )
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
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