A framework for how to approach and analyze tech startups in a world that is full of them

1. What to expect from
investing in startups
(and what to do about it)
1

2. This world is full of shiny objects.
2

3. These shiny objects were
created with wizardry.
3

4. These shiny objects were NOT
created with wizardry.
4

5. These shiny objects were NOT
created with wizardry.
5

6. We hope to provide some
coaching on what goes
on behind the curtain. 6

7. First: Let’s put shiny
objects in context
7

8. Shiny objects are more powerful
than they’ve ever been before.
8

9. Shiny objects are more powerful
than they’ve ever been before.
Millions Online
2,000 • Always On
• Higher Speed
• Payment Ready
• Socially Linked
100
2001 2011 Source: Marc Suster, GRP Partners

10. Shiny objects are also cheaper to
make than they have ever been.
10

11. Shiny objects are also cheaper to
make than they have ever been.
$5m
“It is now usually cheaper to just try something than to sit
around and try to figure out whether to try something.”
– Joi Ito
Open source
Cloud
Developers Start
Companies
$500k
$50k $5k
2000 2005 2009 2011 11
Source: Marc Suster, GRP Partners

12. Knight is putting big
bets on shiny objects. 12

13. BUT, most shiny objects
crash and burn.
13

14. BUT, most shiny objects
crash and burn.
• 70-90% of startups fail within 3-5 years.
•Even professional venture capitalists have a hard time.
Avg Returns by Asset Class as of 3Q 2010*
1 Year 3 Year 5 Year 10 Year 15 Year
US Private Equity 17.70% 1.30% 9.10% 8.10% 12.10%
US Venture Capital 8.20% -2.10% 4.20% -4.60% 36.90%
DJIA 14.10% -5.40% 3.10% 2.50% 7.90%
•Top tier early stage venture capitalists look for 30% of the companies they invest in to
do well (5-10X capital invested), 30% to break even and the balance to return less
than 1/3 of capital invested**.
• Bad VCs have a success rate of less than 10%
*Source: Cambridge Associates
** Source: Union Square Ventures, Fred Wilson Blog
14

15. 70-90% failure rate, means you
need shiny object roadmap.
15

16. 70-90% failure rate, means you
need shiny object roadmap.
Best way to avoid failure is to:
-Plan for it, and
-Don’t take unnecessary risks.
16

17. In order to plan/avoid risks
here, ask 3 key questions.
17

18. In order to plan/avoid risks
here, ask 3 key questions.
• Problem?
• Solution?
• Why will solution work?
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19. What Is The Problem?
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20. What Is The Problem?
• Be sure to include:
• Whose problem is it?
• How big is it?
• How painful is it?
• How much is solving it worth?
• How do you know it’s a real problem?
• (Hint: This information should be coming from potential or actual customers)

21. What is the Solution?
21

22. Solutions have multiple parts.
22

23. Solution Part 1: Value
We will fix the problem like this.
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24. Solution Part 1: Value
We will fix the problem like this:
Understand Value Hypothesis:
How will the product or service deliver value to
customers once they are using it?
Sample Hypotheses:
+ Lower customer cost/time
+ Better experience (increase willingness to pay)
+ Improve supply chain for customers (B2B)
+ Increase volume for customers (B2B, B2C)
Source: Value Hypothesis concepts comes from Eric Ries, The Lean Startup 24

25. Solutions Part 2: Growth
People will find out about us like this.
25

26. Solutions Part 2: Growth
People will find out about us like this:
Understand Growth Hypothesis:
How new customers will discover product or service
Sample Hypotheses:
+ People will tell their friends (viral)
+ Via advertisement (paid)
+ Marketed directly to enterprise customers (sales)
+ Established partners will distribute product.
Source: Value, Growth Hypothesis concepts come from Eric Ries, The Lean Startup 26

27. Problem/Solution Fit
Problem: People are less socially conscious consumers than they want to be.
Hypotheses:
-People would be more socially conscious consumers if they got recognition from their
friends for making socially conscious purchases.
-If there were a social network for people who cared about causes to share what they
were buying, people would (1) get value from it and (2) get their friends to join
-Linking credit card purchases to user accounts automates this process.
-Friends would encourage each other to consume more responsibly.
Test: Early focus groups prove unwilling to share credit card data.
Pivot: Build social site around gift card purchases not credit card access.

28. Why should you believe it will work?
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29. Why should you believe it will work?
Pre-Minimum Viable Product: After Minimum Viable Product:
•Do customers recognize that Traction vs. $/Spent in terms of:
they have the problem? (market) •Engagement (Value)
•If there was a solution would •Conversion/Activation (Value)
they use it? (market) •Retention (Value)
•Would they use a product built •Churn (Value)
by this team? (Team) •User Growth (Growth)
•Can team build the solution •Marketing Effectiveness
they are proposing? (Team) (Growth)
•Are they capable of iterating? •Payment (Value)
(Team) •Customer Lifetime Value (Value)
•Will they be able to market the •Cost of User Acquisition
solution? (Team) (Growth)

30. What is Minimum Viable Product?
MVP= F(Customer, Problem, Time or $$$)
• Primarily, MVP is a way to test your value hypothesis
• Focus on CUSTOMER
– Qualitative Discovery, Quantitative Validation
• Get to know habits, problems, desires (FUN MATTERS)
– what causes pain? what causes pleasure?
• Define 1-5 TESTABLE Conversion Metrics of Value
– Attention/Usage (session time, clicks)
– Customer Data (email, connect, profile)
- Revenue (direct or indirect)
- Retention (visits over time, cohort behavior)
- Referral (users evangelize to other users)
• Note: Paid Solutions drive FOCUS (& pay rent)
SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011

31. Lean Startup = (Platonic) method of
learning by anticipating (initial) failure
1. Accept that startups initially don’t know much.
2. Test assumptions via continuous customer interaction
(before and after building something).
3. When you get significant agreement on problem, build MVP.
4. Stay lean.
“A startup is an
organization formed to
search for a repeatable
and scalable business
model.”
-Steve Blank.

32. Expect to Solve Challenges through
Testing & Iteration (like Aristotle).
Today Launch
Current Funding Horizon
Alpha 1st Iteration 2nd Iteration etc
Current Funding Horizon

33. These questions should help you
make an informed recommendation.
• Many times informed recommendation = NO
• Saying no is good, it will allow you to
process a lot more shiny objects …
• And a chance to add value through feedback

34. You should say no when:
• Wrong Problem (should be identified):
– One we are not interested in solving
– One that does not really exist
• Solution is already out there
• No evidence that target customers view problem as real
• Performance risk is too high (should be identified):
– No Problem/Solution fit
– Team unlikely to deliver/learn
– Not enough traction
• Wrong Solution/Approach (may be identified):
– Do not believe in value/growth hypothesis
*Using and sharing results of this framework can make a “no” more useful for prospective grantees

35. Outcomes (from Best to Worst)
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36. Outcomes (from Best to Worst)
1) Success
2) Failure (allows for pivot)
3) ??? Not Sure
Be sure you know what success & failure look like!
This is more difficult in a nonprofit context.

37. Key Takeaways:
37

38. Key Takeaways:
1. Risk analysis can be used to parse investments that
are more likely to learn/succeed
2. For early stage investments, focus on Problem & Team
(since initial proposed solution will likely not work)
• One way to de-risk early stage investments is to invest
after MVP has been developed
• Cost of Tech is so cheap that most teams should be
able to develop MVP without outside funding.
• Once MVP has developed, can analyze performance
as well as potential