Incubator 2.0: A Silicon Valley Success Story

Incubator 2.0:A Silicon Valley Story

Engineering Better High-Tech Startups with Incubators, Investment, & Iterative Development

Dave McClure (@DaveMcClure)Founders Fund & GeeksOnaPlane.com

Sept-Oct 2009

Startup Funding Ecosystem

Angels & Incubators($0-10M)

Seed Funds ($10-50M)

Small VC Funds ($50-250M)

Traditional VC Funds (>$250M)

Union Square VenturesFirst Round Capital

SoftTech (Jeff Clavier)SV Angel (Ron Conway)

BenchmarkSequoia

Y-CombinatorTechStars

FF Angel

FF II

fbFund REV(FF, Accel, Facebook)

FF I

[Pardon The Hype]

Dave McClure

2001-2009:• Startup Investor: 500 Hats LLC, Founders Fund• Tech Marketing: PayPal, Simply Hired, Mint• Advisor, Angel Investor: 40+ Startups• Conf. Organizer: Web 2.0, O’Reilly, Startonomics• Stanford Visiting Lecturer: Facebook, Startup Metrics

80’s & 90’s:• Entrepreneur: Founder/CEO Aslan Computing (acq.)• Developer: Windows Apps / SQL DB Admin• User Groups: E-Commerce, Internet, Client-Server• Engineer: Johns Hopkins ‘88, BS Eng / Applied MathGEEK, CODER,

ENTREPRENEUR

Blogger, Startup AdvisorInternet Marketing, Angel/VC Investor

Angel Investments(Personal, 2004-2008, 13 deals, avg $25K)

Angel Investments(via FF Angel, Q408-Q309, 30+ deals)

FF Angel – 12 deals @$50-250K fbFund REV – 22 deals @ ~$15-75K

Founders Fund (2005-2009)

Startup Incubators (lots of little deals… some of which work :)

Incubator: Hatching Startups

• Idealab (Bill Gross, 1996-2001)– Goto.com -> Yahoo Search Marketing– CitySearch, PayMyBills, Commission Junction, NetZero

• Y-Combinator (Paul Graham, 2005-pres.)– 9+ “vintages”, 100+ companies– Reddit, Scribd, Xobni, Omnisio, DropBox

• TechStars (CO), SeedCamp (UK), LaunchBox (DC)

• fbFund REV (Silicon Valley, 2008-2009)– Facebook, Founders Fund, Accel

Incubator 2.0• Incubators growing in popularity, acceptance• Supportive ecosystem for startups (angels, VCs)• Efficient use of investment capital ($25-100K)• High fail rate (60-80%) => large initial sample size

Incubator 2.0

• Success based on common platforms, physical proximity, open & collaborative environment

• Success based on fast fail, iteration & feedback• 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.

• 25 startups (2 non-profits)• $850K total investment (~$35K each)• 12-week mentorship program in Palo Alto, CA• ~25 Advisors / Speakers (Entrepreneurs, Geeks, Investors)

fbFund REV

fbFund REV: Facebook “Social” Incubator: invest in startups, apps, websites based on Facebook platform, Facebook Connect.

• Education on Tech, Design, Marketing, Business topics • Demo Day with >200 VC, Angel Investors• Target: ~7-10 seed round investments ($250K-$1M)• Success: ~5 startups already funded, ~5 @ break-even

Startup Funding

1, 2, 3: Incubator, Angel, VC.

Startup Funding Ecosystem

Angels & Incubators($0-10M)

Seed Funds ($10-50M)

Small VC Funds ($50-250M)

Traditional VC Funds (>$250M)

Union Square VenturesFirst Round Capital

BenchmarkSequoia

Y-CombinatorTechStars

FF II

FF I

FF Angel

fbFund REV

(FF, Accel, Facebook)

SoftTech (Clavier)Maples Investments

Felicis (Senkut)SV Angel (Conway)

I^3: Incremental Investment & Iteration

Method: Invest in startups using incremental investment, iterative development. Start with lots of small experiments, filter out failure, and expand investment upon success.

• Incubator: $0-100K (“Micro-Seed”)

• Angel: $100-$1M (“Seed”)

• VC: $1M-$5M (“Series A, B”)

Investment #1: Micro-Seed(“Incubator”)

• Structure– 1-3 founders– $25-100K investment– Incubator environment: multiple peers, mentors/advisors

• Build Functional Prototype / “Minimum Viable Product” (MVP):– Concept->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)– Connect with Advisors & Mentors, Angels/VCs

• Demonstrate Concept, Reduce Product Risk, Test Functional Use• Develop Metrics & Filter for Follow-on Investment

Investment #2: Seed(“Angel”)

• Structure– 2-5 person team– $100-$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, Customer Acquisition Channels – Connect with Advisors, Investors, Key Hires

• Prove Solution/Benefit, Assess Market Size• Test Channel Cost, Revenue Opportunity• Determine Org Structure, Key Hires

Investment #3: Series A(“Venture”)

• Structure– 5-10 person team– $1M-$5M investment– VC Investors

• Scale Business, Get to Sustainability:– Beta->Production, 12-18 months– Rigorous A/B Testing, Optimize Conversion– Customer Sat ≥ 8 => “It Rocks, I’ll Tell My Friends”– MktgPlan => Predictable Channels / Campaigns + Budget– Scalability & Infrastructure, Customer Service & Operations– Connect with Marketing / Distribution Partners

• Prove/Expand Market, Operationalize Business

• Future Milestones: Profitable/Sustainable, Exit Options

Startup Metrics

Create. Measure. Iterate.

Startup Metrics: Lean & Mean

• Progress ≠ Features (Less = More)• Focus on User Experience (& Distribution)• Measure Conversion; Compare 2+ Options• Fast, Frequent Iteration (+ Feedback Loop)• Keep it Simple & Actionable

Startup Metrics for Pirates: AARRR!• Acquisition: What channels do customers come from?• Activation: Do they have “happy” 1st experience?• Retention: Will they come back?• Referral: Do they tell other people?• Revenue: How to make money?

Silicon Valley Innovation = Entrepreneurs + Technology + Immigrants

Immigration as Critical to American Economic

Leadership as Technology Innovation

Q: Where are the Startups?

Source: TechCrunch.com

A: Where Legal Immigrants Reside.

Source: TechCrunch.com

A: Where Legal Immigrants Reside.

Source: TechCrunch.com

Summary

• 1) Incubators are capital efficient method for stimulating tech innovation, job creation

• 2) Metrics & Iteration, Feedback loop key to startup process and success

• 3) Immigration = Critical to Entrepreneurship as Technology Innovation & Capital