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Startup 2.0: From Silicon Valley to Hong Kong

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Dave McClure
Dave McClure

The document discusses the evolution of startup funding and metrics. It notes that venture capital funds are getting smaller while acquisitions are more numerous but smaller. Incubators are running many small experiments, with most failing but some succeeding, and providing education and resources. The document emphasizes measuring startup metrics like activation, retention, and revenue to test ideas quickly through iteration and improve the product.

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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 Forum November 2009
Silicon Valley Startup Funding Ecosystem Union Square Ventures First Round Capital Benchmark Sequoia FF II FF I Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) “ Small” VC Funds ($50-250M) “ Large” VC Funds (>$250M) Y-Combinator TechStars FF Angel fbFund REV SoftTech (Clavier) Maples Investments Felicis (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 Math GEEK, CODER, ENTREPRENEUR Blogger, Startup Advisor Internet Marketing, Angel/VC Investor
Personal Investments (13 deals, 2004-2008, ~$25K avg)
Professional Investments (37 deals, Dec 2008 - Nov 2009, ~$75K avg) fbFund Incubator 22 deals ($850K) ~$15-75K FF Angel LLC 15 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 Union Square Ventures First Round Capital Benchmark Sequoia FF II FF I Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) “ Small” VC Funds ($50-250M) “ Large” VC Funds (>$250M) Y-Combinator TechStars FF Angel fbFund REV SoftTech (Clavier) Maples Investments Felicis (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 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: ~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 CODE DATA Source: Eric Ries, The Lean Startup
The Startup Pyramid (Sean Ellis, Startup-Marketing.com) [email_address] Blog: startup-marketing.com
Startup Metrics for Pirates A cquisition: users come to site from various channels A ctivation: users enjoy 1 st visit: " happy ” experience R etention: users come back , visit site multiple times R eferral: users like product enough to refer others R evenue: users conduct some monetization behavior (note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video) AARRR !
AARRR!: 5-Step Startup Metrics Model Website.com R evenue $$$ Biz Dev Ads, Lead Gen, Subscriptions, ECommerce A cquisition SEO SEM Apps & Widgets Affiliates Email PR Biz Dev Campaigns, Contests Direct, Tel, TV Social Networks Blogs Domains R etention Emails & Alerts System Events & Time-based Features Blogs, RSS, News Feeds
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 Marketing : Accessing “Web 2.0” Channels (Search, Social, Viral, New Media), Cost-Efficient Distribution
Role: Founder/CEO Q: 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 / Engineering Q: 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 2.0 Social, 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 Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana
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

More Related Content

Startup 2.0: From Silicon Valley to Hong Kong

  • 1. 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 Forum November 2009
  • 2. Silicon Valley Startup Funding Ecosystem Union Square Ventures First Round Capital Benchmark Sequoia FF II FF I Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) “ Small” VC Funds ($50-250M) “ Large” VC Funds (>$250M) Y-Combinator TechStars FF Angel fbFund REV SoftTech (Clavier) Maples Investments Felicis (Senkut) SV Angel (Conway)
  • 3. 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
  • 4. [Pardon The Blatant Commercial]
  • 5. 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 Math GEEK, CODER, ENTREPRENEUR Blogger, Startup Advisor Internet Marketing, Angel/VC Investor
  • 6. Personal Investments (13 deals, 2004-2008, ~$25K avg)
  • 7. Professional Investments (37 deals, Dec 2008 - Nov 2009, ~$75K avg) fbFund Incubator 22 deals ($850K) ~$15-75K FF Angel LLC 15 deals ($1.5M) ~$50-250K
  • 8. Founders Fund (Selected Investments, 2005-2009, range $1M-20M)
  • 9. Venture Capital 1.0 = Too Big To FAIL WIN ? (at least for *Internet* Startups)
  • 10. Startup Funding Ecosystem Union Square Ventures First Round Capital Benchmark Sequoia FF II FF I Angels & Incubators ($0-10M) “ Seed” Funds ($10-50M) “ Small” VC Funds ($50-250M) “ Large” VC Funds (>$250M) Y-Combinator TechStars FF Angel fbFund REV SoftTech (Clavier) Maples Investments Felicis (Senkut) SV Angel (Conway)
  • 11. 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
  • 12. 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
  • 13. Startup Incubators Lots of Hot, Cool, Web 2.0! (+ lots of FAIL, too.)
  • 14. 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”)
  • 15. 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
  • 16. 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
  • 17. 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)
  • 18. 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: ~6 startups already funded, ~5 @ break-even
  • 19. 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
  • 20. 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
  • 21. 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
  • 22. Startup Metrics & The Lean Startup Measure Stuff. Iterate. Rinse & Repeat.
  • 23. 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
  • 24. Minimize TOTAL time through the loop LEARN BUILD MEASURE IDEAS CODE DATA Source: Eric Ries, The Lean Startup
  • 25. The Startup Pyramid (Sean Ellis, Startup-Marketing.com) [email_address] Blog: startup-marketing.com
  • 26. Startup Metrics for Pirates A cquisition: users come to site from various channels A ctivation: users enjoy 1 st visit: &quot; happy ” experience R etention: users come back , visit site multiple times R eferral: users like product enough to refer others R evenue: users conduct some monetization behavior (note: If you’re in a hurry, Google “Startup Metrics” & watch 5m video) AARRR !
  • 27. AARRR!: 5-Step Startup Metrics Model Website.com R evenue $$$ Biz Dev Ads, Lead Gen, Subscriptions, ECommerce A cquisition SEO SEM Apps & Widgets Affiliates Email PR Biz Dev Campaigns, Contests Direct, Tel, TV Social Networks Blogs Domains R etention Emails & Alerts System Events & Time-based Features Blogs, RSS, News Feeds
  • 28. 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 Marketing : Accessing “Web 2.0” Channels (Search, Social, Viral, New Media), Cost-Efficient Distribution
  • 29. Role: Founder/CEO Q: 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
  • 30. Role: Product / Engineering Q: 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
  • 31. 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
  • 32. Platforms 2.0 Social, Mobile, Micro, Inbox, SEO
  • 33. 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!
  • 34. Platform Viability Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users . . Money Features Growth Profit Profitable Growth Nirvana
  • 35. 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
  • 36. 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

Editor's Notes

  1. BUILT TO LEARN This is the core feedback loop that powers startups. Their goal is not to optimize the time it takes to do any one of these steps. There are many specific practices that can power lean startups, and we’ll cover a few in this presentation. But more important than any specific practice is this core idea: startups should be built to learn.