US Startup Investment Market (Startonomics Tokyo, June 2009)

Startonomics / Tokyo - June 9, 2009

Dave McClure, Founders FundJoyce Kim, Soompi & Fortis General Counsel

David Troy, Baltimore AngelsRyan Pipkin, AngelSoft

US Startup Investment Market

Startup Investment Trends• Venture Capital Turmoil: “R.I.P. Good Times”

– Not so bad for startups (valuation), however..– Pretty bad for VCs (fundraising) if poor returns

• Slowdown Later Stage Deals, Reduced Valuations• Legal Trends and Changes?• Growth -> Monetization, Revenue -> Profitability• Growth of Seed Funds, Incubators

– Y-Combinator, TechStars, fbFund REV

• Startonomics / Startup Metrics / Lean Startup

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Dave McClure

2001-2008:• Startup Investor: 500 Hats LLC, Founders Fund• Tech Marketing: PayPal, Simply Hired, Mint• Advisor, Angel Investor: 20+ 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 Math

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Personal Investments (2004-2008)

Professional Investments (2009)

FF Angel LLC• Twilio• 1000 Markets• UserVoice• Bit.ly• DailyBurn

Changing Focus

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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 (Clavier)Maples Investments

BenchmarkSequoia

Y-CombinatorTechStars

FF Angel

FF II

fbFund REV

FF I

Angelsoft.net Data Metrics

Angelsoft represents over 80% of the Organized Angel Networks in the

United States

From Q4 ‘08 - Q1 ‘09

• Growth by 17.83% in # of companies actively looking for angel capital

• Decline by 35% in total $ investment amount

• Decline by 23.42% in valuations

From Q4 ‘08 - Q1 ‘09

• Decreased by 50% in time it took to make an investment

• Increase by 31.19% in average amount of money entrepreneurs are seeking

• Increase by 86% in average investment amount per deal that closed

Legal Trends

• Convertible Notes / Caps• Priced Rounds• Terms are very pro-investor• Valuations are down• Tip – ask your attorney how to control costs.

Investment Stages

• Micro-Seed: $0-$100K –> Prototype• Seed: $100K-$1M –> Market Development• Series A: $1-5M+ –> Revenue / Profitability• Series B: $2-20M+ -> Profitability / ?

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Example #1: Micro-Seed(“Prototype / Incubate”)

• 1-2 person startup• Founder / Angel Investors

– => $25-100K @ $500K-2M pre-money valuation– FF&F: Friends, Family, & Fools– Credit Cards, 2nd Mortgage, Customer-Financed, etc

• Examples: Y-Combinator, TechStars, fbFund REV• Goal: Build Functional Prototype

– Concept->Alpha, ≤ 3-6 mo’s– Develop Minimal Critical Feature Set => Get to “It Works”– Instrument Basic Dashboard, Conversion Metrics– Setup Build/Release/Test Cycle– Test Cust. Adoption (10-1000 users) / Cust. Satisfaction (Scale: 1-10)– Connect with Advisors & Mentors, Angels/VCs

• Demonstrate Concept, Reduce Product Risk, Vet Team• Develop Metrics & Filter for Follow-on Investment

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Example #2: Seed(“Angel / Syndicate”)

• 2-5 person startup• Angel Investor / Syndicate

– => $100K-$1M @ $1-3M pre-money valuation

• Examples: First Round, True Ventures, Union Square, FF Angel• Goal: Develop/Expand Prototype -> Functional, Growing Beta

– Alpha->Beta, ≤ 3-6 mo’s– Test Cust. Sat ≥ 6 / 10 => Get to “Doesn’t Suck”– Setup A/B Testing Framework, Optimize Conversion– Test Mktg Campaigns, Cust. Acq. Channels: Volume, Cost– IF/WHEN Cust. Sat ≥ 8 (“It’s Good!”), THEN Grow User Base– Connect with Advisors, Series A Investors, Key Hires– Test/Develop Revenue Model

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

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Example #3: Series A(“Venture”)

• 3-10 person team; bring in key CXO/VP roles• Large Seed / Small Series A

– => $500K-$5M @ $2-20M pre

• Examples: Founders Fund, Sequoia Capital, Benchmark Capital• Goal: Market Expansion:

– Beta->Production, ≤ 6-12 mo’s– Rigorous A/B Testing, Optimize Conversion– Get Cust. Sat ≥ 8 / 10 => “It Rocks, I’ll Tell My Friends”– Marketing Plan => Predictable Channels / Campaigns + Budget– Vet Scalability & Infrastructure, Customer Service & Ops– IF/WHEN Predictable, Scalable Growth THEN Step On Gas– Connect with Marketing / Distribution Partners– Revenue / Profit focus

• Prove/Expand Market, Operationalize Business• Future Milestones: Expansion, Sustainable, Exit Options

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Startup Metrics• 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?

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STARTonomics 2008 Conference300+ Startup Entrepreneurs & Investors

Startup Metrics Education for Product, Marketing, Tech

• Startup Metrics• Product Development• Scalability• Game Mechanics• Design 101• Activation & Retention• Marketing

• SEO• Social Media• Viral Marketing• Social Platforms• Revenue Optimization• Customer Service• Funding & Financing

Links & Resources• FoundersFund.com, follow @DaveMcClure• Fortis General Counsel, follow @JoyceKim• AngelSoft.net, follow @ripkin• follow @BaltimoreAngels, @DaveTroy

• Yokum Taku, StartupCompanyLawyer.com• Eric Ries, Startup Lessons Learned• Dave McClure, Startup Metrics for Pirates• Finance4Founders.com• Startonomics SF (2008)