Dave Mc Clure is famous investor in Sillicon Valley. He is the founder of 500 startups and calls himself Chief Troublemaker. He is one of a kind in the The Valley.
Dave gave his vision on during a presentation during #MENAsummit in Bahrain. I am quiet agreeing with his vision and it fits in my vision of many startup projects and it to combine with my vision that (acquiring) startups will be the future way of product (or better customer-) development.
Below a review on the presentation of Dave and my vision how to use it.
Changes in Tech Startups
LESS Capital required to build product, get to market
- Dramatically reduced cost for servers, software, bandwidth
- Funding Platforms: KickStarter, Angel List, Funders Club, etc
- Access to online platforms for 100M-1B+ consumers, smallbiz, etc
MORE Customers via ONLINE platforms (100M+ users)
- Search (Google)
- Social (Facebook, Twitter)
- Mobile (Apple, Android)
- Media (YouTube, Pinterest, Instagram, Tumblr)
- Comm (Email, WeChat/WhatsApp/Line/Kakao, Voice, SMS, etc)
LOTS of little bets: Accelerators, Angels, Angel List, Small Exits
- Y Combinator, TechStars, 500 Startups
- Capital + Co-working + Mentoring -> Design, Data, Distribution
- “Fast, Cheap Fail”, network effects, quantitative + iterative investments
Lean Startup: Simpler, Faster, Cheaper, Smarter
- Startup Costs = Lower.
- # Users, Bandwidth = Bigger.
- Transaction $$$ = Better.
- Building Product => Cheaper, Faster, Better
- Getting Customers => Easier, More Measurable
Iterative Product & Marketing Decisions based on Measured User Behavior
Search, Social, Mobile, Video, Messaging
My feedback: Dave describes that it’s much easier and cheaper to create a startup:
- Easier to build a product
- More customers via platforms (he means easier to reach customers via platforms)
- Better and easier process (Lean Startup)
- So less capital
But lots of little bets (watched from investors)
In practice it means that there will be much more startups as the threshold is much lower. The result is that the competition is getting bigger so the chance of failure is bigger. So as an investor it is advised to do a lot of small bets.
But what is in it for the startup?
Will the startup be a number in the casino?
The Lean VC:
- Lots of Little Bets, Incremental Investment
- Method: Make little bets in lots of startups using
- incremental investment, iterative development.
- Start with many small experiments, filter out failures,
- and expand investment in successes.
From an investor perspective it will look as follows:
- Incubator: $0-100K (“Build & Validate Product”)
- Seed: $100K-$1M (“Test & Grow Marketing Channels””)
- Venture: $1M-$10M (“Maximize Growth & Revenue”)
The stages of a startup Dave Mc Clure defined from an investor perspective but besides the mentioned investments you can see it also from the startup perspective:
Investment Stage #1:
Product Validation + Customer Usage
- 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
- 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
- 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
Dave defined the education needed for the entrepreneur and for the investor.
- Functional Prototypes
- Lean Startup
- Software Engineering / Design & UX
- Online Marketing / Unit Economics
- Monetization & Payments
- Customer Service + Support
- Fundraising & Pitch
- Startups are NOT Real Estate
- Most Startups Fail / Power Law Returns
- Portfolio Approach (10-20+ investments)
- Legal Structure, Financial Structure
- Syndication + Co-Investment
- Access to Downstream Capital
- Exits & Liquidity
But how to use this vision the way that entrepreneurs will not be a number in the casino?
At first we have to distinguish 2 types of startups:
- The bootstrappers who don’t need a salary to live from, from an investor (in this case entrepreneur is living from sales, savings, loans, income family or other resources that don’t require to give away equity). This founders don’t need financial help they just go for it..
- The founders that only can or want to start after an “investor” takes care for their salary or at least costs of living in exchange of equity.
The last group are more “entrepreneurs in residence” often not realizing that they are number in the investor’s lottery.
My vision is make entrepreneurs more aware of their fait. It is learning process based on failures. So it would be more fair to the entrepreneur to give him the possibility to take more bets too. Or at least have a second bet when first startup fails.
On the other side it is more fair to make the expected result lower so the chance on failure is smaller.
As mentioned earlier in this post, I believe that for corporates the only way to survive is buying (early stage) startups.
So how to combine this in a vision?
(So for the non bootstrappers)
Create an environment where wanna be entrepreneurs can work as an employee with “options” in his own startup. The purpose of the startup will be to find a company to hookup the entrepreneurial team so they will be the intrapreneur.
It includes stages 1 and 2 as defined by Dave and will take 6 till 36 months to sell the startup.