What to expect from running a startup (data from Lean Startup and Startup Genome)

1. What to expect from
running a startup
(and what to do about it)
1

2. Successful startups are
created with Wizardry.
2

3. Successful startups are NOT
created with Wizardry.
3

4. Successful startups are NOT
created with Wizardry.
. 4

5. Startup Theory Part 1: Value
We will fix the problem like this.
5

6. Startup Theory Part 1: Value
We will fix the problem like this:
Understand Your Value Hypothesis:
How will the product or service deliver value to
people once they are using it?
Sample Hypotheses:
+ Lower 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 6

7. Startup Theory Part 2: Growth
People will find out about us like this.
7

8. Startup Theory Part 2: Growth
People will find out about us like this:
Understand Growth Hypothesis:
How new users 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 8

9. Lean Startup = Startup Science
(NOTE: still A LOT of art left)
• Business plans are wrong, all startups are built on
untested flawed assumptions (risks).
• 70-90% of startups fail
• Key risk is scaling too quickly
• i.e. spending too much time/money based on
assumptions instead of knowledge
• Think about productivity not in terms of how much stuff
you are building, but how much stuff you are learning.
• Make sure you are learning as quickly as possible.

10. Successful startups go through phases
Many startups say they are
here…
…but are actually here
1. Discovery 2. Validation 3. Efficiency 4. Scale
(avg 5-7 months) (avg 3-5 months) (avg 5-6 months) (avg 7-9 months)
Riskiest time to spend $ Best time to spend $
Trick is: Know where you’re at!

11. Discovery Phase (T+ 5-7 months)
Purpose: Key Graduation Milestone:
Validate whether startup is solving a -Customer Validation of Problem
meaningful problem and whether -Complete Minimum Viable Product
anybody would hypothetically be
interested in their solution Key Stats (Avg):
# of employees: 1
Events: # of $ raised: $200k
• Founding team formed Monthly User Growth: 6%
• Many customer interviews conducted
• Minimum viable product
• Team joins accelerator
• Friends and family round
• Mentors & advisors
Source: Startup Genome Project

12. What is Minimum Viable Product (MVP)?
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

13. Validation Phase (T+ 8-12 months)
Purpose: Key Milestone:
Get early validation that people are -Product market fit
interested in product through
exchange of $ or attention. Key Stats (Avg at end of Phase):
# of employees: 4
Events: # of $ raised: $800k
• Core features refined Monthly User Growth: 21%
• Initial user growth
• Metrics & analytics
implementation
• Seed funding
• 1st key hires
• 1st paying customers
• Product/Market Fit
Source: Startup Genome Project

14. Boil down assumptions to 5-7 key
Metrics that you can measure
Seven metrics that matter:
1. Acquisition: (rate of gaining new users)
2. Engagement: (how deeply are you engaging users)
3. Virality: (new customers coming from existing customers)
4. Monetization: (% of total users participating in the business)
5. Churn: (loss of existing users)
6. Lifetime customer value (projected monetization returns by class of customers)
7. Program Productive (Yield on promotional activities, both paid and viral)
Source: Escape Velocity, Geoffrey Moore (2011)

15. Look for Product/Market Fit
PMF = F(Customer, Solution, Alternatives*)
• Product / Market Fit occurs when value hypothesis is validated:
– Customers like your stuff better than other options
– Not static, Not optimal – just Local Max 4 F(customers, solution, time)
– make sure you’re moving in optimal direction 2 local max
• Q: what competitive solutions are available?
– … that your customers know about?
– how are you diff/same?
– in ways that people care about? (will pay for)
• KILL a FEATURE regularly (or rotate 1% tests)
– Q: what is MOST $ cust pay 4 LEAST func MVP relative 2 BEST alt?
• NICHE 2 WIN: RE-define cust + DIFFerentiated features
SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011

16. Efficiency Phase (T+ 13-18 months)
Purpose: Refine business model Key Milestone:
and improve efficiency of -Conversion Funnel Optimization
customer acquisition process to -Growth Theory Validated
avoid scaling with a leaky
bucket. Key Stats (Avg at end of Phase):
# of employees: 4
Events: # of $ raised: $900k
• Value proposition refined Monthly User Growth: 29%
• UX Overhauled
• Conversion Funnel Optimized
• Viral growth achieved
• Repeatable sales process &/or
customer acquisition channel
Source: Startup Genome Project

17. Develop a marketing strategy based on
what customers are doing
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
SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011

18. Conversion Funnel vs. Cohort Analysis

19. Scale Phase (T +20-27 months)
Key Milestone:
Purpose: Step on the gas! Drive -Next round of financing
growth aggressively. -Real Revenue (Breakeven?)
Key Stats (Avg during Phase):
Events: # of employees: 17
• Large Investment Round # of $ raised: $3M
• Massive Customer Acquisition Monthly User Growth: 43%
• Back End Scalability
Improvements
• 1st Executive Hires
• Process Implementation
• Establish Departments
Source: Startup Genome Project

20. Key risks to scaling too early
Source: Startup Genome Project

21. Key takeaways
1. (Tech) startups go through phases
2. Understanding what phase a Startup is at is key to being able to
evaluate the startup
3. The more intentionally (and leanly) startups learn, the faster they are
likely to progress towards scale
4. Being able to identify correctly what phase an organization is at, should
impact the way KF invests.