This document discusses the evolution of venture capital and startups, enabled by new technologies and business models. Specifically:
1. Lower costs and online platforms have lowered barriers to building products and acquiring customers.
2. Successful startups are using metrics and iterative development to quickly validate products and business models.
3. Incubators and accelerators are making many small bets to identify the few startups that succeed, through mentoring and collaborative environments.
4. Venture capital is also making many small bets through incremental funding, focusing on validating products, markets, and revenue before larger investments.
5. Global trends are creating new opportunities for startups to reach global audiences and expand internationally.
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Silicon Valley 2.0: Lean Startup, Lean VC
1. Silicon Valley 2.0
Lean Startup, Lean VC
Re-Inventing Venture Capital through
Innovation, Incubation, & Iteration
Dave McClure
http://500.co
(@DaveMcClure)
May 2012
http://slideshare.net/dmc500hats
2. Dave McClure
00โs & 10โs:
โข Investor: Founders Fund, Facebook fbFund, 500 Startups
โข Companies: Mint.com, SlideShare, Twilio, WildFire, SendGrid
โข Marketing: PayPal, Simply Hired, Mint.com, OโReilly Media
โข Speaker: Lean Startup, Web 2.0, Stanford/Facebook
80โs & 90โs:
โข Entrepreneur: Founder/CEO Aslan Computing (acqโd)
โข Developer: Windows / SQL DB consultant (Intel, MSFT)
โข Engineer: Johns Hopkinsโ88, BS Eng / Applied Math
3. 500 Startups:
Internet Seed Fund & Startup Incubator
โข Seed Fund & Startup Accelerator
โ 300+ Companies
โ 10-person team, 4 partners
โ 10,000 sq ft, HQ in Silicon Valley
โ 100+ Mentors in 10+ Countries
โข Portfolio Companies
โ Twilio (US)
โ Wildfire (US)
โ SendGrid (US)
โ TaskRabbit (US)
โ VivaReal (Brazil)
โ MyGengo (Japan)
โ Fashion.me (Brazil)
4. Changes in Tech Startups
โข LESS Capital required to build product, get to market
โ Dramatically reduced $$$ on servers, software, bandwidth
โ Cheap access to online platforms for 100M+ consumers, smallbiz, etc
โ A few big IPOs @ $1B+, but LOTS of small acquisitions (<$100M)
โข MORE Customers via ONLINE platforms (100M+ users)
โ Search (Google)
โ Social (Facebook, Twitter, LinkedIn)
โ Mobile (Apple, Android)
โ Local (Groupon, Living Social, Yelp)
โ Media (YouTube, Pinterest, Tumblr)
โ Communications (Email, IM/Chat, Voice, SMS, etc)
โข LOTS of little bets: Accelerators, Angels, Angel List
โ Y Combinator, TechStars, 500 Startups
โ Funding + Co-working + Mentoring -> Design, Data, Distribution
โ โFast Cheap Failโ, network effects, quantitative + iterative investments
5. Web 2.0 + Lean Startup
2. Startup Costs = Lower.
3. # Users, Bandwidth = Bigger.
4. Transaction $$$ = Better.
๏ Building Product => Cheaper, Faster, Better
๏ Getting Customers => Easier, More Measurable
Iterative Product & Marketing Decisions
based on Measured User Behavior
6. 500 Strategy: Lots of Little Bets
1. Start with large,
well-screened 30%
funnel of early- Fund
stage companies. Capital
2. After first 6-12 months, 70 %
identify best performers Fund
double-down on top 20% Capital
1. Build conservative model assuming
5-10% larger exits @ > $100M,
10-20% smaller exits @ <$100M
6
10. Distribution Platforms
Customer Reach: 100M+
โข Search: Google
โข Social: Facebook, Twitter, Zynga, LinkedIn
โข Mobile: Apple (iOS), Android
โข Local: Groupon, LivingSocial, Yelp
โข Media: Video (YouTube), Blogs (Tumblr), Photos (Pinterest)
โข Comm: Email, IM/Chat, Skype, Phone/Voice
11. Web 2.0 Business Model:
KISS (โKeep It Simple, Stupidโ)
โข 1) Re-invent Web 1.0 Businesses
โ Make a Website, a Widget, an App
โ Sell Stuff (Transactions, Subscriptions, Affiliate)
โข 2) add Web 2.0 Technology
โ Search, Social, Mobile, Local, Media, Comm
โ Google, Facebook/Twitter, Apple/Android
โ Email, SMS, Ecommerce / Payments
โข 3) Get Customers, Make Money
โ Distribution, Distribution, Distribution
โ (Customer Acqโstn Cost) vs. ($Rev. Per Customer)
โ Low CapX + Profitable Web Businesses
12. More Acquirers (tech + non-tech);
More & Smaller Acquisitions
1. Mature Internet Platform Coโs:
โ GOOG, MSFT, YHOO, EBAY, AOL, AMZN,
AAPL, INTU, ADBE, FB, TW, LNKD, GRPN
2. Non-Tech โBigCoโ / Consumer Verticals
buying tech startups (for distribution)
โข BigCo = Lots of Customers, $$$
โข BigCo = Bureaucracy, Innovator Dilemma
โข Outsource Innovation; Buy Talent / Products
โข Acquiring LOTS (Small) Startups
โข Great for Founders, Investors ๏
* Mint acquired by Intuit in
Sept 2009 for $170M
13. Lean Startup, Lean VC
Customers, Metrics, Iteration.
Invest BEFORE Traction;
Double Down AFTER.
14. The Lean Startup
โข Progress โ Features; Measure Conversion
โข Talk to Customers; Discover Problems
โข Focus on โProduct/Market Fitโ (good solution)
โข Fast, Frequent Iteration (+ Feedback Loop)
โข Keep it Simple & Actionable
15. Startup Metrics for Pirates
โข Acquisition: users come to site from various
channels
โข Activation: users enjoy 1st visit: "happyโ experience
โข Retention: users come back, visit site multiple times
โข Referral: users like product enough to refer others
โข Revenue: users conduct some monetization behavior
AARRR!
(note: If youโre in a hurry, Google
โStartup Metricsโ & watch 5m video)
16. AARRR!: 5-Step Startup Metrics Model
SEO Campaigns,
SEM PR Contests
Biz
Social
Networks Dev
Blogs Affiliates
Apps & Direct, Tel,
Widgets Email TV
ACQUISITION
Domains
Emails & Alerts
Blogs, RSS,
n
News Feeds
Retentio
Ads, Lead Gen, Biz Dev
System Events & Subscriptions,
Re v
Time-based Features
ECommerce
en u
Website.com
e $$
$
17. Startup Incubators & Metrics
Lots of Little Bets. Most FAIL.
(but a few succeed :)
18. Incubator 2.0: Fast, Cheap, FAIL
โข Incubators = supportive startup ecosystem (+ angels, VCs)
โข Efficient use of investment capital ($0-100K)
โข High fail rate (60-80%) => large initial sample size
19. Incubator 2.0:
Education, Collaboration, Iteration
โข Success based on:
โ MANY, small experiments
โ common platforms, customers, problems & solutions
โ physical proximity, open/collaborative environment
โ Domain-specific mentors & expertise
โ fast fail, iteration, metrics & feedback loop
โข Incremental investment; high-risk, but high-reward
20. fbFund REV
fbFund REV: Facebook โSocialโ Incubator: invest in startups, apps,
websites based on Facebook platform & Facebook Connect.
โข 22 startups @ ~$35K each ($850K total)
โข 3 month program: Technology, Design, Marketing, Business topics
โข Success: 8 startups raised $500K โ> 5 raised Series A -> 2 raised Series B
โข Wildfire Interactive now 300+ people ๏
21. 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 successesโฆ (Rinse & Repeat).
โข Incubator: $0-100K (โBuild & Validate Productโ)
โข Seed: $100K-$1M (โTest & Grow Marketing Channelsโโ)
โข Venture: $1M-$10M (โMaximize Growth & Revenueโ)
22. Investment Stage #1:
Product Validation + Customer Usage
โข Structure
โ 1-3 founders
โ $25-$100K investment
โ Incubator environment: multiple peers, mentors/advisors
โข Test Functional Prototype / โMinimum Viable Productโ (MVP):
โ Prototype->Alpha, ~3-6 months
โ Develop Minimal Critical Feature Set => Get to โIt Works! Someone Uses It.โ
โ Improve Design & Usability, Setup Conversion Metrics
โ Test Small-Scale Customer Adoption (10-1000 users)
โข Demonstrate Concept, Reduce Product Risk, Test Functional Use
โข Develop Metrics & Filter for Possible Future Investment
23. Investment Stage #2:
Market Validation + Revenue Testing
โข Structure
โ 2-10 person team
โ $100K-$1M investment
โ Syndicate of Angel Investors / Small VC Funds
โข Improve Product, Expand Customers, Test Revenue:
โ Alpha->Beta, ~6-12 months
โ Scale Customer Adoption => โMany People Use It, & They Pay.โ
โ Test Marketing Campaigns, Customer Acquisition Channels + Cost
โ Test Revenue Generation, Find Profitable Customer Segments
โข Prove Solution/Benefit, Assess Market Size
โข Test Channel Cost, Revenue Opportunity
โข Determine Org Structure, Key Hires
24. Investment Stage #3:
Revenue Validation + Growth
โข Structure
โ 5-25 person team
โ $1M-$10M investment
โ Seed & Venture Investors
โข Make Money (or Go Big), Get to Sustainability:
โ Beta->Production, 12-24 months
โ Revenue / Growth => โWe Can Make (a lot of) Money!โ
โ Mktg Plan => Predictable Channels / Campaigns + Budget
โ Scalability & Infrastructure, Customer Service & Operations
โ Connect with Distribution Partners, Expand Growth
โข Prove/Expand Market, Operationalize Business
โข Future Milestones: Profitable/Sustainable, Exit Options
26. Global Trends
โข Growth of Global Languages (see MyGengo.com)
โ 1B+ speakers: Mandarin, English
โ 300-500M+ spkrs: Spanish, Arabic
โข Smart Device Proliferation
โ mobile, tablet, TV, console, etc
โข More Young, More Old ($$$) Users Online
โข More Bandwidth, More Video, More Social, More Mobile
โข Wealthy Chinese + Indian, Web + IRL Globetrotters ($$$B)
โข Acceleration of Global Payment, E-Commerce
โข Dramatically Reduced Cost: Product Dev, Customer Acqstn
โข Global Distribution Platforms
โ US/EU: Apple, Facebook, AMZN, GOOG (Search, YouTube, Gmail, Android), Twitter
โ Asia: Tencent/QQ, Taobao/Alibaba/AliPay, Yahoo-J, Softbank, Rakuten, DeNA, Gree