Startup 2.0: From Silicon Valley to Hong Kong

Startup 2.0:A Silicon Valley Story

Sourcing, Selecting & Engineering Better Startups via Incubators, Metrics & Iterative Development

Dave McClure, Founders Fund(twitter: @DaveMcClure)

Hong Kong Cyberport VC ForumNovember 2009

Silicon Valley Startup Funding Ecosystem

Angels & Incubators($0-10M)

“Seed” Funds ($10-50M)

“Small” VC Funds ($50-250M)

“Large” VC Funds (>$250M)

Union Square VenturesFirst Round Capital

BenchmarkSequoia

Y-CombinatorTechStars

FF II

FF I

FF Angel

fbFundREV

SoftTech (Clavier)Maples InvestmentsFelicis (Senkut)SV Angel (Conway)

Topics• Venture Capital 1.0 = *Broken Model* (for Internet Startups)• M&A Trends: More, but Smaller Acquisitions, Very Few IPOs• Incubators: Many Experiments (most FAIL, a few winners)• Metrics: Define “Success”, Measure & Iterate (Fast + Feedback)• Platforms 2.0: Social, Mobile, Micro, Inbox, SEO

[Pardon The Blatant Commercial]

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

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

Professional Investments (37 deals, Dec 2008 - Nov 2009, ~$75K avg)

fbFund Incubator22 deals ($850K)

~$15-75K

FF Angel LLC15 deals ($1.5M)

~$50-250K

Founders Fund (Selected Investments, 2005-2009, range $1M-20M)

Venture Capital 1.0 = Too Big To FAIL WIN?(at least for *Internet* Startups)

Startup Funding Ecosystem

Angels & Incubators($0-10M)

“Seed” Funds ($10-50M)

“Small” VC Funds ($50-250M)

“Large” VC Funds (>$250M)

Union Square VenturesFirst Round Capital

BenchmarkSequoia

Y-CombinatorTechStars

FF II

FF I

FF Angel

fbFund REV

SoftTech (Clavier)Maples InvestmentsFelicis (Senkut)SV Angel (Conway)

Venture Capital: Still Relevant?

Good 4 big CAPex:• Hardware• Enterprise SW• Clean Tech• BioScience• Wineries (?)

Not So Great 4:• Internet Startups• Consulting Shops• Lifestyle Biz• Porn, Gambling

More & Smaller Acquisitions• Big, Mature Internet Platform

Co’s:– Google, MSFT, Yahoo, Ebay,

Amazon, AOL, IAC, Facebook, NewsCorp, Apple, etc

• Lots of Users, $$$• Outsourcing Innovation• Lots of M&A (but small)• Great for Angels &

Entrepreneurs• … Not so Great for VCs

Startup Incubators Lots of Hot, Cool, Web 2.0!

(+ lots of FAIL, too.)

Incubator 2.0 Model

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”)

Incubator 2.0: Fast, Cheap, FAIL• Incubators growing in popularity, acceptance• Supportive ecosystem for startups (angels, VCs)• Efficient use of investment capital ($0-100K)• High fail rate (60-80%) => large initial sample size

Incubator 2.0: Education, Collaboration

• Emphasis on education, access to shared resources• 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 REVfbFund 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 REVfbFund 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: ~6 startups already funded, ~5 @ break-even

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 & The Lean Startup

Measure Stuff. Iterate. Rinse & Repeat.

The Startup Metrics Religion

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

Minimize TOTAL time through the loop

LEARN BUILD

MEASURE

IDEAS

CODEDATA

Source: Eric Ries, The Lean Startup

The Startup Pyramid(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!

(note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video)

AARRR!: 5-Step Startup Metrics Model

Website.com

Revenue $$$

Biz DevAds, Lead Gen, Subscriptions, ECommerce

Acquisition

SEOSEM

Apps & Widgets

Affiliates

Email

PR Biz Dev

Campaigns, Contests

Direct, Tel, TV

Social Networks

Blogs

Domains

Retention

Emails & Alerts

System Events & Time-based

Features

Blogs, RSS, News Feeds

Startup ChallengesStartups have problems in 3 key areas:

• Management: Setting Priorities, Defining Key Metrics, Creating Dashboard, Reporting Progress

• Product: Building the “Right” Features, Getting Product Out Quickly, Testing for User Conversion / Adoption

• Marketing: Accessing “Web 2.0” Channels (Search, Social, Viral, New Media), Cost-Efficient Distribution

Role: Founder/CEOQ: 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 / EngineeringQ: 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

Platforms 2.0Social, Mobile, Micro, Inbox, SEO

Web 2.0 = Good Business

• 1) Take Existing Good Business Ideas• 2) Add [a little] Technology

– Blogs, Twitter, Facebook Connect– Email & SEO– Social Networks & Friend/Follower lists– Online Payments

• 3) Increase Distribution, Lower Customer Acquisition Cost with Internet

• PROFIT!

Platform Viability

Users . . Money

Features

Growth Profit

ProfitableGrowth

Nirvana

Successful Platforms have 3 Things:1) Features2) Users3) Money

Platforms: HOT or NOT?• Social: Facebook, Twitter, LinkedIn, MySpace?• Mobile: iPhone, Android?, Palm?, • Micro: Twitter, IM/Chat• Inbox: Gmail, YahooMail, Hotmail?, AOL?• SEO: Google (Search), Yahoo?, Bing?

• Social Networks: Facebook, MySpace, LinkedIn, Twitter, Orkut, hi5, Friendster• Email & IM: Yahoo, MSFT, Google, AOL, Skype• Mobile: iPhone, Palm, Android, Blackberry, etc• Gaming: Zynga, RockYou, Slide, Playfish, SGN• E-Commerce: Amazon (1-Click), eBay (PayPal), Apple (iTunes), Facebook?• Dev: Amazon (AWS), Google AppEngine, Ruby/Rails, Python/Django, etc• Other: SalesForce, Craigslist, Wikipedia, YouTube

Summary• VC 2.0 = Fewer, Smaller Funds (<$100M)• Liquidity = More, Smaller Acquisitions (<$100M)• Model = Singles (Ichiro), not Home Runs (Barry Bonds)• Diligence = Lots of Little Checks (+ Metrics + Time)• Incubators = Many Small Experiments (most FAIL),

Education + Shared Resources, Incremental Investment• Startup Metrics = Define, Measure, Iterate• Platforms = Distribution + Monetization, not Technology