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Startup 2.0: A Silicon Valley Story (Oct 2009)

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My presentation on Startups, Incubators, Angel Investors, & Venture Capital to the Canada National Angel Investors conference (Oct 2009).
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Startup 2.0: A Silicon Valley Story Engineering Better High-Tech Startups via Incubators, Angel Investment, & Iterative Development Dave McClure (twitter: @DaveMcClure ) Canada National Angel Summit, October 2009
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Page 1: Startup 2.0: A Silicon Valley Story (Oct 2009)

Startup 2.0:A Silicon Valley Story

Engineering Better High-Tech Startups viaIncubators, Angel Investment, & Iterative Development

Dave McClure (twitter: @DaveMcClure)

Canada National Angel Summit, October 2009

Page 2: Startup 2.0: A Silicon Valley Story (Oct 2009)

Topics• Venture Capital = Broken [for Internet Startups]• Mint.com, M&A Trends: more, smaller acquisitions• Incubators: Lots of FAIL, Metrics, UX & Distribution• Web 2.0: 80% Boring Biz + 20% New Tech = WIN!• Platforms 2.0: Social, Mobile, Micro, Inbox, SEO

• StartupVisa.com: Importing Immigrants & Innovation

Page 3: Startup 2.0: A Silicon Valley Story (Oct 2009)

[Please Excuse The Commercial]

Page 4: Startup 2.0: A Silicon Valley Story (Oct 2009)

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, Itty-Bitty Angel/VC

Page 5: Startup 2.0: A Silicon Valley Story (Oct 2009)

Angel Investments (Personal, 13 deals, 2004-2008)

Page 6: Startup 2.0: A Silicon Valley Story (Oct 2009)

Professional Investments (2009)

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

Page 7: Startup 2.0: A Silicon Valley Story (Oct 2009)

Founders Fund (2005-2009)

Page 8: Startup 2.0: A Silicon Valley Story (Oct 2009)

Venture Capital = BROKEN?(at least for *Internet* Startups)

Page 9: Startup 2.0: A Silicon Valley Story (Oct 2009)

Startup 2.0 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 InvestmentsFelicis (Senkut)SV Angel (Conway)

Page 10: Startup 2.0: A Silicon Valley Story (Oct 2009)

Venture Capital: Still Relevant?

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

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

Page 11: Startup 2.0: A Silicon Valley Story (Oct 2009)

Mint.com: FAIL or WIN?(um… definitely WIN.)

Page 12: Startup 2.0: A Silicon Valley Story (Oct 2009)

Mint.com, Jason Fried, & “Flipping Is Good” post

Page 13: Startup 2.0: A Silicon Valley Story (Oct 2009)

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

Page 14: Startup 2.0: A Silicon Valley Story (Oct 2009)

Startup Incubators (Hot, Cool, Web 2.0… and lots o’ FAIL.)

Page 15: Startup 2.0: A Silicon Valley Story (Oct 2009)

The Startup 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”)

Page 16: Startup 2.0: A Silicon Valley Story (Oct 2009)

Startup 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

Page 17: Startup 2.0: A Silicon Valley Story (Oct 2009)

Startup 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

Page 18: Startup 2.0: A Silicon Valley Story (Oct 2009)

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)

Page 19: Startup 2.0: A Silicon Valley Story (Oct 2009)

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: ~5 startups already funded, ~5 @ break-even

Page 20: Startup 2.0: A Silicon Valley Story (Oct 2009)

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

Page 21: Startup 2.0: A Silicon Valley Story (Oct 2009)

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

Page 22: Startup 2.0: A Silicon Valley Story (Oct 2009)

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

Page 23: Startup 2.0: A Silicon Valley Story (Oct 2009)

Startup Metrics / The Lean StartupMeasure Stuff. Iterate.

Page 24: Startup 2.0: A Silicon Valley Story (Oct 2009)

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

Page 25: Startup 2.0: A Silicon Valley Story (Oct 2009)

Minimize TOTAL time through the loop

LEARN BUILD

MEASURE

IDEAS

CODEDATA

Source: Eric Ries, The Lean Startup

Page 26: Startup 2.0: A Silicon Valley Story (Oct 2009)

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)

Page 27: Startup 2.0: A Silicon Valley Story (Oct 2009)

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

Page 28: Startup 2.0: A Silicon Valley Story (Oct 2009)

The Startup Pyramid(Sean Ellis, Startup-Marketing.com)

[email protected]: startup-marketing.com

Page 29: Startup 2.0: A Silicon Valley Story (Oct 2009)

Startup Challenges

Startups have problems in 3 key areas:

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

Page 30: Startup 2.0: A Silicon Valley Story (Oct 2009)

Startup Challenges

Startups 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

Page 31: Startup 2.0: A Silicon Valley Story (Oct 2009)

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

Page 32: Startup 2.0: A Silicon Valley Story (Oct 2009)

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

Page 33: Startup 2.0: A Silicon Valley Story (Oct 2009)

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

Page 34: Startup 2.0: A Silicon Valley Story (Oct 2009)

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

Page 35: Startup 2.0: A Silicon Valley Story (Oct 2009)

Investment 2.0: Boring Biz + Tech = WinA little Web 2.0 goes a long way

Page 36: Startup 2.0: A Silicon Valley Story (Oct 2009)

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!

Page 37: Startup 2.0: A Silicon Valley Story (Oct 2009)

Platforms 2.0Social, Mobile, Micro, Inbox, SEO

Page 38: Startup 2.0: A Silicon Valley Story (Oct 2009)

Platform Viability

Users . . Money

Features

Growth Profit

ProfitableGrowth

Nirvana

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

Page 39: Startup 2.0: A Silicon Valley Story (Oct 2009)

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

Page 40: Startup 2.0: A Silicon Valley Story (Oct 2009)

StartupVisa.comImmigration & Innovation


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