Venture Capital 2.0:The [Global] Lean VC

Dave McClurehttp://500startups.com

(@DaveMcClure)

Telegraph Start-Up 100 – March 2011

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

http://slideshare.net/dmc500hats

Changes, Oh.• 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

• Venture Capital = Fewer, Smaller Funds (<$100M)– Decline of Large Funds (> $250m), except for the HUGE ONES.– Birth of “Super Angel” / “Micro-VC” seed funds ($10-100M)– Market Changes: Fewer IPOs (>$1B), More/Smaller Acq’stns (<$250M)

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 (10,000 sq ft)• Design, Distribution, Data• 100+ Portfolio Companies

– Twilio– Wildfire– SendGrid– MyGengo– Erply– Moonfruit– GroupSpaces– Medialets– ChinaNetCloud

Read Geoffrey MillerSex + Evolution + Consumer Mktg = Awesome Sauce

Other Great Shit.Psychology + Comics

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 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

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)

Felicis (Senkut)SV Angel (Conway)

White Bear(GRRR!!)

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)• Founders own MORE %• Will Sell for LESS $• Great for Angels & Entrepreneurs• Not so Great for (big) VCs

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

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 Customers, Test Revenue:– Alpha->Beta, ~6-12 months– Customer Sat ≥ 6 => Get to “Sucks (a Lot) Less Than Competition”– 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 (or Go Big), 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• Platforms 2.0 = Distribution + Monetization, not Tech

• Incubators, Metrics = Many Small Experiments (most FAIL). – Measure Stuff.– Iterate, Iterate, Iterate.

• Venture Capital 2.0 = Fewer, Smaller Funds (<$100M) + More, Smaller Exits (<$100M)

Global Trends• More Young, More Old ($$$) Users Online• More Bandwidth, More Video (=pr0n FTW!)• Growth of Global Languages (see MyGengo.com)

– 1B+ speakers: Mandarin, English

– 500M+ spkrs: Spanish, Hindi, Arabic, Portuguese

• Wealthy Chinese + Indian, Web + IRL Globetrotters ($$$B)• Smart Device Proliferation

– phone, tablet, TV, console, etc

• Acceleration of Global Payment, E-Commerce• Dramatically Reduced Cost: Product Dev, Customer Acqstn• Global Distribution Platforms

– US/EU: Apple, Facebook, Google (Search, YouTube, Gmail, Android), Twitter, Zynga

– Asia: Tencent/QQ, Taobao/Alibaba/AliPay, Youku, MediaTek, Rakuten, DeNA

Local Hacks• Dominate your local/native market first

– Or, move so that your local market is bigger (China, US)

• Language + Visual Design Matters– Read: Spent, Influence, Understanding Comics

• Niche 2 Win: Big Enough Markets + Great Customer– 1M users @ $20/mo = ~$250M/yr business

• Sell Something You Fucking Idiot.– 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 )

• Start Local, Hustle Global.

[ Don’t Pitch Me, Bro. ]

Seriously: Don’t. Fucking..Pitch Me.(and don’t email me either, cuz i won’t read it)

Don’t Pitch Me, Bro.

• 1st: Read my stuff (blogs, decks, tweets).

• 2nd: Get a referral from someone I trust.– 500 Mentors or 500 Founders– Other Subject Matter Experts– *Not* Your Mom.

• 3rd: Be Concise. Don’t Suck.

Email

Questions?

• but make sure they’re not fucking stupid.

• or else i’ll heckle you like idiots.

• mercilessly.

*ps – i can dance better than you too.