Dave McClure, founding partner at 500 Startups, needs no introduction. The opinionated VC is a regular speaker at tech conferences around the world, has a widely-read and influential blog, and is doubling down on portfolio companies in Asia. Dave started out as a programmer, then changed gears to entrepreneurship, and afterwards headed marketing for PayPal. Today his VC firm and startup incubator, located in Silicon Valley, boasts US$200 million of assets under management, with it’s most successful exit MakerBot sold for US$402 million to Stratasys. It’s certainly been a whirlwind 25-year journey for the self-confessed, "internet marketing nerd."
Speaking last week during a fireside chat at Tech in Asia Tokyo 2015, Dave outlined why he chose to start a new adventure as a venture capitalist. "There was a different type of investor we wanted to see out there. Founders need services other than money," he explained. "We are startup zero. We want to be a global firm and are trying to build that for the past few years."
Dave spoke candidly about how the VC ecosystem isn’t much different from tech startups themselves. He said many VC firms also fail and admitted that 500 Startups, "had its moments." Furthermore, getting a fund off the ground is the most difficult bit. The size of 500 Startups’ first fund was US$29 million, but getting investors to, "write the first cheque," is always the hardest, he said. "There’s a lot of hustle […] it’s tough to get people to invest in a first time VC because there’s not much traction to speak of," he noted.
Even now, after several years of operations and three main funds under management, it hasn’t got any easier, said Dave. "We do things differently from other VCs and it’s difficult to explain that to investors."
But, how exactly is 500 Startups different from other VC firms? According to Dave, the primary differentiator is the sheer number of investments they make. So far the firm has participated in 1,200 funding rounds, and crossed the 1,000 barrier earlier this year. One of their KPIs is the number of startups in their portfolio list. "We want to make money, make returns for our investors. Everyone’s hunting for unicorns, but those don’t happen very often," he said. "Even [VC firm] Sequoia doesn’t find it more than 5 to 6 percent of the time."
For Dave, the commonly-held view of a 'good VC' is to make one or two decisions per year, have 30 to 40 portfolio companies, and to help steer the direction of the startup by getting a seat on the board. But that’s not a, "very reliable structure," and, "the equivalent of gambling," he said. "We take a different approach of investing in several hundred companies as that’s a more predictable way of [achieving] success."
The decision to focus on scale was also an early differentiator. "VC as an industry is all about scaling up, but VC firms themselves haven’t taken it to heart. We started off with five people on the team and now we’re 85. We have a consistent style [of investing], focusing on startups with a functional product, early traction, and clear growth strategy," he said.
Why did 500 Startups look outside the US?
Dave, who says his firm is the most active international VC in the US, explained that they had intentions of investing internationally from the very beginning. "There weren’t many people in Silicon Valley investing abroad. This was an opportunity for us," he stressed. "There was lots of innovation in Silicon Valley, but more growth in other parts of the world."
He explained a core element of 500 Startup’s strategy is to rely on their team on the ground. These consist of local speakers and natives of the country. Combined, all partners speak 20 different languages which helps them identify possible winners at an early stage.
I would say having fun and being silly are both core values [of our firm]. We actually think that if we’re going to do the work we have to do then we have to have fun. Certain investors and certain people don’t feel that’s the proper approach. That’s not our game, we’re not trying to impress anyone. We’d rather impress people with what we do than with the clothes we wear.
Dave took pains to elaborate on how his firm gives more credence to the strength of the founding team than the market viability of the idea. "We’re the anti-Rocket Internet in this sense," he told Tech in Asia. One of the examples was of a startup in their portfolio who had lost US$50,000 late last year due to a faulty supplier based out of Shenzhen. The firm had to make a decision whether to prop up the company with more cash or let it flounder. Dave says he went with his gut and backed the founder, helping him recover from the loss. Today, it’s one of their best performing companies.
But not all decisions are based on gut instincts. "Embracing failure doesn’t mean we celebrate failure. We see it as a necessary step to succeed, but we can’t help everyone who falls on the wayside. It’s best for the group and the fund to concentrate sometimes on the people who are winning," he explained.
There’s a clear vision for the future. Dave revealed 500 Startups has become nearly 20 times bigger in five years and they’re looking to invest in, "500 to 600 companies per year," from now on. In the next three to four years they could have 100 partners making investment decisions, which could reach, "tens of thousands per year." The idea to do VC funding at scale looks to be clearly embedded in the firm’s strategy. "Any city with a population above 1 million has an opportunity for tech investment. A person who has the potential to create a 100 people business and make US$10 million per year is entrepreneurial. One percent of global population has this potential. The market is ridiculously large," he explained.
Dave is clearly a believer in the power of entrepreneurship to solve problems. He pointed to the challenges currently engulfing Japan, such as the aging population and after-effects of the Tsunami. He outlined how entrepreneurship is an opportunity to, "integrate them." However, he was also quick to affirm that the business ethos in the East Asian country needs to change to properly harness this potential. "Giving permission to people to fail publicly, visibly and transparently is important for entrepreneurship to thrive. That requires cultural change."
This post first appeared on Tech in Asia.