Startup funding is shifting away from large venture capital funds towards smaller funds and incubators. Incubators conduct many small, low-cost experiments with startups, with most expected to fail, but providing education and resources. The document recommends an iterative approach to startups focused on measuring key metrics to test assumptions and drive fast iteration, rather than focusing on features or technology. Acquisitions are also trending smaller, making incremental growth through metrics and testing more important.

1. Startup 2.0:A Silicon Valley StorySourcing, Selecting & Engineering Better Startups via Incubators, Metrics & Iterative Development Dave McClure, Founders Fund (twitter: @DaveMcClure) China Mobile Internet Exec Reception January2010

2. Angels & Incubators ($0-10M) “Seed” Funds ($10-50M) “Small” VC Funds ($50-250M) “Large” VC Funds (>$250M) Silicon Valley Startup Funding Ecosystem fbFund REV Y-Combinator TechStars FF Angel SoftTech (Clavier) Maples Investments Felicis (Senkut) SV Angel (Conway) FF I Union Square Ventures First Round Capital FF II Benchmark Sequoia

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]

6. Tech Marketing: PayPal, Simply Hired, Mint

7. Advisor, Angel Investor: 40+ Startups

8. Conf. Organizer:Web 2.0, O’Reilly, Startonomics

10. Developer: Windows Apps / SQL DB Admin

11. User Groups: E-Commerce, Internet, Client-Server

12. Engineer: Johns Hopkins ‘88, BS Eng / Applied MathGEEK, CODER, ENTREPRENEUR

13. Personal Investments (16 deals, 2004-2009, ~$25K avg)

14. Professional Investments (40 deals, Dec 2008 – Dec 2009, ~$75K avg) fbFund Incubator 22 deals ($850K) ~$15-75K FF Angel LLC 18 deals ($1.8M) ~$50-250K

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

16. Venture Capital 1.0 = Too Big To FAILWIN?(at least for *Internet* Startups)

17. Angels & Incubators ($0-10M) “Seed” Funds ($10-50M) “Small” VC Funds ($50-250M) “Large” VC Funds (>$250M) Startup Funding Ecosystem fbFund REV Y-Combinator TechStars FF Angel SoftTech (Clavier) Maples Investments Felicis (Senkut) SV Angel (Conway) FF I Union Square Ventures First Round Capital FF II Benchmark Sequoia

19. Consulting Shops

20. Lifestyle Biz

22. Startup Incubators Lots of Hot, Cool, Web 2.0!(+ lots of FAIL, too.)

23. 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”)

24. 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

25. 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

26. 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)

27. 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 seed round investments ($250K-$1M) Success: ~8 startups funded >$250K, ~5 @ break-even

28. Investment #1: Micro-Seed(“Incubator”) Structure 1-3 founders $25K-$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) Demonstrate Concept, Reduce Product Risk, Test Functional Use Develop Metrics & Filter for Follow-on Investment

29. Investment #2: Seed(“Angel”) Structure 2-5 person team $100K-$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 Prove Solution/Benefit, Assess Market Size Test Channel Cost, Revenue Opportunity Determine Org Structure, Key Hires

30. Investment #3: Series A(“Venture”) Structure 5-10 person team $1M-$5M investment VC Investors Make Money, Get to Sustainability: Beta->Production, 12-18 months Customer Sat ≥ 8 => “It Rocks, I’ll Tell My Friends” MktgPlan => Predictable Channels / Campaigns + Budget Scalability & Infrastructure, Customer Service & Operations Connect with Distribution Partners Prove/Expand Market, Operationalize Business Future Milestones: Profitable/Sustainable, Exit Options

31. Startup Metrics & The Lean StartupMeasure Stuff. Iterate. Rinse & Repeat.

32. 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

33. Minimize TOTAL time through the loop IDEAS LEARN BUILD DATA CODE MEASURE Source: Eric Ries, The Lean Startup

34. The Startup Pyramid(Sean Ellis, Startup-Marketing.com) sean@12in6.com Blog: startup-marketing.com

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

36. SEO Campaigns, Contests SEM PR Biz Dev Social Networks Affiliates Blogs Acquisition Apps & Widgets Direct, Tel, TV Referral Email Viral Loops Domains Activation Homepage / Landing Page Retention Emails & widgets Emails & Alerts Product Features Affiliates, Contests Blogs, RSS, News Feeds Biz Dev Revenue $$$ Ads, Lead Gen, Subscriptions, ECommerce System Events & Time-based Features AARRR!: 5-Step Startup Metrics Model Website.com

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

40. 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

41. 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

42. Platforms 2.0Social, Mobile,Comm, Inbox, Search

43. 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!

44. Platform Viability Features Successful Platforms have 3 Things: 1) Features 2) Users 3) Money Users. . Money Profit Growth Nirvana Profitable Growth

45. Platforms: HOT or NOT? Social: Facebook, Twitter, LinkedIn, MySpace? Mobile: iPhone, Android?, Palm? Comm: Twitter, IM/Chat, Skype, Meebo Inbox: Gmail, YahooMail, Hotmail?, AOL? Search: Google, Bing/Yahoo Payments: Amazon (1-Click), eBay (PayPal), Apple (iTunes), Facebook?, Google? Dev: Amazon (AWS), Google AppEngine, Ruby/Rails, Python/Django, etc Gaming: Zynga, Playdom, Playfish, RockYou, Slide, Other: SalesForce, Craigslist, Wikipedia, YouTube

46. 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