venture capital 2.0: the lean vc
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Venture Capital 2.0:The Lean VC
Dave McClure500 Startups(@DaveMcClure)
http://500startups.com SlideShare ZipCast, Feb 2011
Re-Inventing Venture Capital Investing throughInnovation, Incubation, & Iteration
Changes.
• Venture Capital = Fewer, Smaller Funds (<$100M)– Decline of Large Funds (> $250m)– Birth of “Super Angel” Funds ($10-100M)– Market Changes: Fewer IPOs (>$1B), More/Smaller Acq’stns (<$250M)
• Platforms = Distribution + Monetization (not Technology)– Search (Google)– Social (Facebook, Twitter, YouTube)– 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)• Marketing: PayPal, Simply Hired, Mint.com, Founders Fund• Community: Startup2Startup, GeeksOnaPlane, StartupVisa• Speaker: 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 Seed FundMountain View, CA – Founded 2010
• Seed Fund & Startup Accelerator• Design, Distribution, Data• 90+ Portfolio Companies
– Twilio– Wildfire– SendGrid– MyGengo– Erply– Payvment– FlowTown– Medialets– ChinaNetCloud
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(90+ investments @ ~$75K 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 2.0(smaller, 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)FloodGate (Maples)
Felicis (Senkut)SV Angel (Conway)
Venture Capital: Still Relevant?
Good for big CAP:
• Hardware
• Enterprise SW
• Clean Tech
• BioScience
• Facebook, Zynga,
Groupon
Not So Great for:
• Consumer Internet
• Small Business
• Consulting
• Games, Porn ;)
More & Smaller Acquisitions
• Mature Internet Platform Co’s:– GOOG, MSFT, YHOO, EBAY, AOL,
AMZN, AAPL, INTU, ADBE, Fbook
• Lots of Users, $$$• Outsourcing Innovation
• Lots of M&A (but small)• Great for Angels & Entrepreneurs• Not so Great for (big) VCs
* Mint acquired by Intuit in Sept 2009 for $170M
Platforms 2.0Search, Social, Mobile
Web 2.0: Good Times.
1. # Users, Bandwidth = Bigger.
2. Startup Costs = Lower.
3. Transaction $$$ = 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 (“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
Startup Incubators Lots of Hot, Cool, Web 2.0!
(+ lots of FAIL.)
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 startup experiments
– common platforms, problems & solutions
– physical proximity, open/collaborative environment
– 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
Startup Metrics & The Lean Startup
Measure Shit, Iterate.
“What Metrics Should I Measure?”Users, Pages, Clicks, Emails, $$$...?
Q: Which of these is best? How do you know?
• 1,000,000 one-time, unregistered unique visitors
• 500,000 visitors who view 2+ pages / stay 10+ sec
• 200,000 visitors who clicked on a link or button
• 20,000 registered users w/ email address
• 2,000 passionate fans who refer 5+ users / mo.
• 1,000 monthly subscribers @ $5/mo
the good stuff.
Read Geoffrey MillerSex + Evolution + Consumer Mktg = Awesome Sauce
Other Great Shit.Psychology + Comics
Discover MeaningWhat Do Users Care About Enough to F**k or Kill ?
Kathy Sierra:“CreatingPassionateUsers”
The Lean Startup
• Progress ≠ Features; Measure Conversion• Talk to Customers; Discover Problems• Focus on “Product/Market Fit” (good solution)• Fast, Frequent Iteration (+ Feedback Loop)• Keep it Simple & Actionable
Discover Customers(Steve Blank, SteveBlank.com)
LEARN BUILD
MEASURE
IDEAS
CODEDATA
Iterate: Learn, Measure, Build.(Eric Ries, StartupLessonsLearned.com)
Product/Market Fit Before “Launch”(Sean Ellis, Startup-Marketing.com)
[email protected]: startup-marketing.com
Startup Metrics for Pirates
• Acquisition: users come to site from various channels
• Activation: users enjoy 1st visit: "happy” experience• Retention: users come back, visit site multiple times• Referral: users like product enough to refer others• Revenue: users conduct some monetization behavior
AARRR!AARRR!
(note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video)
AARRR!: 5-Step Startup Metrics Model
Website.com
Revenue $
$$
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
Q: What is My Business Model?
One of the following:
1. Drive Usage (= Activation, Retention)
2. Get Users (= Acquisition, Referral)
3. Make Money (= Revenue*)
(Note: eventually need to turn Users/Usage -> Money)
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 ($), High Conv (%)
• Design & Test Multiple Marketing Channels + Campaigns• Select & Focus on Best-Performing Channels & Themes• Optimize for conversion to target CTAs, not just site/landing page• Match/Drive channel cost to/below revenue potential
• Low-Hanging Fruit: – Blogs– SEO/SEM– Landing Pages– Automated Emails
MAARRRketing Plan
Marketing Plan = Target Customer Acquisition Channels• 3 Important Factors = Volume (#), Cost ($), Conversion (%)• Measure conversion to target customer actions• Test audience segments, campaign themes, Call-To-Action (CTAs)
[Gradually] Match Channel Costs => Revenue Potential • Increase Vol. & Conversion, Decrease Cost, Optimize for Revenue Potential• Avg Txn Value (ATV), Ann Rev Per User (ARPU), Cust Lifetime Value (CLV)• Design channels that (eventually) cost <20-50% of target ATV, ARPU, CLV
Consider Costs, Scarce Resource Tradeoffs• Actual $ expenses• Marketing time & resources• Product/Engineering time & resources• Cashflow timing of expense vs. revenue, profit
One Step at a Time.
1. Make a Good Product: Activation & Retention
2. Market the Product: Acquisition & Referral
3. Make Money: Revenue & Profitability
“You probably can’t save your Ass and your Face at the same time… choose carefully.” – DMC
Investor Metrics: “Super Angel” -> Lean VC
Not “Spray & Pray”, but rather“Quantitative, Incremental, Selective Follow-on”
Investing.
(Product, Market, Revenue.)
“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.