Beating The Series A Crunch (thru clean living & growth hacking :)

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Information about Beating The Series A Crunch (thru clean living & growth hacking :)

Published on July 11, 2013

Author: dmc500hats



slides from my talk at the International Startup Festival (Montreal, July 2013)

Beating The Series A Crunch + Why Growth Hacking / Online Marketing Matters (a lot) Dave McClure (@DaveMcClure) Intl Startup Festival 2013 Montreal, July 2013

This Talk • You’re a Geek (or traditional marketing flack) • You SUCK at online marketing / growth hacking • You spend WAY TOO MUCH TIME on product • You can’t scale customer acquisition (profitably) • You won’t get funding / Series A,B / break-even Therefore: YOU WILL DIE. • Want to Fix This? Listen Up.

Dave McClure Founding Partner & Chief Troublemaker, 500 Startups 00’s & 10’s: • VC: Founders Fund, Facebook fbFund, 500 Startups • Angel: Mashery,, SlideShare, Twilio, WildFire, SendGrid • Marketing: PayPal, Simply Hired,, oDesk, O’Reilly 80’s & 90’s: • Entrepreneur: Aslan Computing (acq’d by Servinet/Panurgy) • Developer: Windows / SQL DB consultant (Intel, MSFT) • Engineer: Johns Hopkins‘88, BS Eng / Applied Math

500 Startups Global Seed Fund & Startup Accelerator • What is 500? – ~$70M under management – 26 people / 12 investing partners – Locations: SV, NYC, MEX, BRZ, IND, CHN, SE Asia – 1000+ Founders / 200+ Mentors – 22 positive exits in <3 years • 500+ Portfolio Co’s / 30+ Countries – Wildfire (acq GOOG, $350M) – MakerBot (acq SSYS, $400M) – Twilio – SendGrid – TaskRabbit – Viki – Smule – AppStack – 9GAG – MediaLets – PicCollage

500 Startups: Global Seed Fund Over 100+ startups outside US, in 35+ countries • Q4/12 added: Germany, Korea, Peru; + Russia, Turkey, Ghana in Q2/13 • Priorities in 2012: Brazil, Mexico, India • Priorities In 2013: China, SE Asia, MENA, Eastern Europe

Changes in Tech Startups • LESS Capital required to build product, get to market – Dramatically reduced $$$ on servers, software, bandwidth – Crowdfunding, KickStarter, Angel List, Funders Club, etc – Cheap access to online platforms for 100M+ consumers, smallbiz, etc • MORE Customers via ONLINE platforms (100M+ users) – Search (Google) – Social (Facebook, Twitter) – Mobile (Apple, Android) – Local (Yelp, Groupon, Living Social) – Media (YouTube, Pinterest, Instagram, Tumblr) – Comm (Email, IM/Chat, Voice, SMS, etc) • LOTS of little bets: Accelerators, Angels, Angel List, Small Exits – Y Combinator, TechStars, 500 Startups – Funding + Co-working + Mentoring -> Design, Data, Distribution – “Fast, Cheap Fail”, network effects, quantitative + iterative investments

Daft Punk Lean Startup: Simpler, Faster, Cheaper, Smarter 1. Startup Costs = Lower. 2. # Users, Bandwidth = Bigger. 3. Transaction $$$ = Better.  Building Product => Cheaper, Faster, Better  Getting Customers => Easier, More Measurable Iterative Product & Marketing Decisions based on Measured User Behavior

Startup Investor Ecosystem Angels & Incubators ($0-10M) “Micro-VC” Funds ($10-100M) “Big” VC Funds ($100-500M) “Mega” VC Funds (>$500M) TrueFirst Round AndreessenAtomico Y-Combinator TechStars SoftTech (Clavier) Felicis (Senkut) SV Angel (Conway) SequoiaGreylock Union Square Floodgate (Maples) Foundry Group Bootstrap, KickStarter, Crowdfunding

Lean Startup, Lean VC Customers, Metrics, Iteration. Invest BEFORE Traction; Double Down AFTER.

The Lean VC: Lots of Little Bets, Incremental Investment Method: Invest in lots of startups using incremental investment, iterative development. Start with many small experiments, filter out failures, and expand investment in successes… (Rinse & Repeat). • Incubator: $0-100K (“Build & Validate Product”) • Seed: $100K-$1M (“Test & Grow Marketing Channels””) • Venture: $1M-$10M (“Maximize Growth & Revenue”)

Build Product -> Get Customers • Product = Activation / Retention • Market(ing) = Acquisition / Referral • Revenue = Monetization … <collect underpants> … • Profit!

12 500 Strategy: “Lots of Little Bets”* 1) Make lots of little bets pre-traction, early-stage startups 2) after 6-12 months, identify top 20% performers and double-down higher $$$ 3) conservative model assumes -5-10% large exits @20X ($50-100M+) -10-20% small exits @5X ($5-50M) *See Peter Sims book: “Little Bets”

Investment Stage #1: Product Validation + Customer Usage • Structure – 1-3 founders – $25-$100K investment – Incubator environment: multiple peers, mentors/advisors • Test Functional Prototype / “Minimum Viable Product” (MVP): – Prototype->Alpha, ~3-6 months – Develop Minimal Critical Feature Set => Get to “It Works! Someone Uses It.” – Improve Design & Usability, Setup Conversion Metrics – Test Small-Scale Customer Adoption (10-1000 users) • Demonstrate Concept, Reduce Product Risk, Test Functional Use • Develop Metrics & Filter for Possible Future Investment

Investment Stage #2: Market Validation + Revenue Testing • Structure – 2-10 person team – $100K-$1M investment – Syndicate of Angel Investors / Small VC Funds • Improve Product, Expand Customers, Test Revenue: – Alpha->Beta, ~6-12 months – Scale Customer Adoption => “Many People Use It, & They Pay.” – Test Marketing Campaigns, Customer Acquisition Channels + Cost – Test Revenue Generation, Find Profitable Customer Segments • Prove Solution/Benefit, Assess Market Size • Test Channel Cost, Revenue Opportunity • Determine Org Structure, Key Hires

Investment Stage #3: Revenue Validation + Growth • Structure – 5-25 person team – $1M-$10M investment – Seed & Venture Investors • Make Money (or Go Big), Get to Sustainability: – Beta->Production, 12-24 months – Revenue / Growth => “We Can Make (a lot of) Money!” – Mktg Plan => Predictable Channels / Campaigns + Budget – Scalability & Infrastructure, Customer Service & Operations – Connect with Distribution Partners, Expand Growth • Prove/Expand Market, Operationalize Business • Future Milestones: Profitable/Sustainable, Exit Options

Beating The Series A “Crunch” Customers Distribution Revenue

Got Crunched Yet? Source: Bullpen Capital

Before & After 2 Dot-Com Crashes Daft Punk Startup: Simpler, Faster, Cheaper, Smarter Before 2000 •Sun Servers •Oracle DB •Exodus Hosting •12-24mo dev cycle •6-18mo sales cycle •<100M people online •$1-2M seed round •$3-5M Series A •Sand Hill Road crawl •Big, Fat, Dinosaur Startup After 2008 •AWS, Google, PayPal, FB, TW •Cloud + Open Source SW •Lean Startup / Startup Wknd •3-90d dev cycle •SaaS / online sales •>3B people online •<$100K incub + <$1M seed •$1-3M Series A •Angel List global visibility •Lean, Little, Cockroach Startup

Crunch Good? Crunch Bad? • Series A bar higher: $1M revenue, 1M active users, 10M downloads, 100% YoY growth • Lots of Incubation / Seed startups will “fail” • BUT: Fail Budget = $50-$500K, not $5M+ • Many “failed” startups = ramen-profitable, small acquisition, or MBA alternative (<$100K) • Series A/B VCs have lots to choose from • Overall, founders / market getting smarter • More focus on customers, problems, revenue • Many die, some survive (1-5x), a few thrive (20x+).

Online Customer Acquisition (aka “Marketing & Sales”) Search (Google) Social (Facebook, Twitter) Mobile (Apple, Android) Video (YouTube) Messaging (Email, SMS, Chat, Voice)

Platforms 2.0 Search, Social, Mobile, Video, Messaging

Distribution Platforms Customer Reach: 100M-1B+ • Search: Google, Baidu, Yahoo/Bing, Yandex • Social: Facebook, Twitter, LinkedIn, TenCent/QQ, WeChat • Mobile: Apple (iOS), Android • Media: Video (YouTube), Photos (Instagram, Pinterest), Blogs • Comm: SMS, IM (WeChat, WhatsApp), Skype, Phone/Voice, etc

Minimum Viable Team: Hacker, Hipster, Hustler • Hacker: engineers & developers • Hipster: design & user experience (UX) • Hustler: marketing & business, “growth hacker” 1.Build functional prototypes 2.Improve UX so people convert 3.Scale customer acquisition & distribution

Marketing Strategy (aka Growth Hacking Strategy) • PR • Contests • Biz Dev • Direct Marketing • Radio / TV / Print • Telemarketing • Email • SEO / SEM • Social (Paid, Organic) • Blogs / Bloggers • Mobile Apps • Affiliate / CPA … how do you get customers & distribution? lots of old, new channels & decisions: 3 Things That Matter / To Measure : 1. Volume 2. Cost 3. Conversion

Unit Economics for Customer Acquisition • What does product cost to build/deliver? • What do customers cost to acquire? – by channel? by campaign? • What are customers worth? – 1st visit / transaction? In a year? Lifetime? • When do expenses get incurred? • When is revenue generated? • Is customer acquisition break-even or better? – For which distribution channels / methods? – For what kind of campaigns? – Does the channel / campaign scale? – Do the #’s change? • When does a customer become profitable? • unit economics @ scale -> marketing strategy / campaigns

Marketing Strategy & Financial Modeling • Volume, Cost, Conversion • Est. volume of available leads / customers • Est. cust acq costs by channel / campaign • Est. customer value / revenue generated • Build financial model for scalable, profitable growth • Hack, Tweak to scale up • Hack, Tweak to break-even • If it’s not working: don’t scale up / keep testing • If it’s working: stop building / go raise $$$ 

Silicon Valley 2.0: Lots of Little Bets aka “MoneyBall for Startups” • VC Evolution: Physician, Scale Thyself (Aug 2012) • MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)

Angel* List: It Rocks. • Startups & Investors • Activity & Metrics • Platform & APIs • *ps – not just for Angels, or USA

Thanks  • Questions / More Info? – (our company) – (my blog) – (our fund) – Dave McClure, @DaveMcClure

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