you are listening to the 20 minute VC with your host Harry Stabbings at H Stabbings on Snapchat now stays guest.
I really have wanted to have on the show for a very long time,
so I'm very excited to welcome Dave McClure to the show's day.
Now Dave really needs no introduction.
But for those of you that have been living under a rock,
Davis,
the founding partner of 500 startups who've made over 1500 investments in the lights of Twilio send Grid Intercom on Maker,
bought just to name a few on prior to 500.
Dave was on the Investment Team Founder's Fund.
He also led the Facebook fund incubator on Was head of marketing at PayPal pre I p O.
But before we meet the man himself,
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And I'm thrilled to welcome Dave McClure,
a founding partner at 500 stars UPS.
You have now arrived at your destination,
Dave.
Absolutely fantastic to have you on the 20 minute VC state having met the other day.
It really is such a pleasure to have you on the show.
Thank you for joining me.
Stay.
Thanks for having me.
It's like to be here now.
I'd love to start with a brief synopsis on you and how you came to found 500.
Yeah.
Summarize your life in 2 to 3 minutes,
uh, trying to take up the rest of the show. I graduated from Johns Hopkins in Baltimore in 88. I think came out to California in 89. Was, ah, suffer developer program here for a few years. That kind of turned into my first startup. Eventually I did some consulting. Grew into a small company. I guess we started consulting in 92. Did some work with Microsoft and intel on a few others from 94 to 98 grew that to about 20 people or so I kind of screwed up everything I could, possibly about running a small business. But we still managed to get a very small exit out of that this around 2001 I guess. Kind of during or after the first dot com blow up. I got a job working a PayPal and was there through the through the I. P. O and through the sale to eBay and then a few years after that, until around 2004 and met a lot of really amazing people there, some of whom created some recognizable names in the Internet.
We're gonna get onto that lazy don't wash,
started doing Angel investing as I was leaving PayPal and 2004 kind of doing that part time recreational,
I guess,
but invested in about,
I guess about 13 companies over the next four years put about 300,000 maybe total and got a few wins out of that.
I guess mint dot com mastery and slide share.
We're kind of the bigger,
bigger stories.
Those were all 100 million plus exits,
and I guess I figured OK,
maybe I might be able to develop the career in venture capital.
So I started working on that,
I guess.
Two dozen eight.
Uh,
you know,
the market blew up again,
so that wasn't the best time to be raising a fun end up working for Founder's Fund with Peter Thiel and Sean Parker for about a year and 1/2.
Man,
it's a little bit of capital for Founder's Fund while I was running kind of an in house Angel program and also took over Iran,
the Facebook fund for 2009 summer on.
Then Christine and I got 500 startups off the ground in 2010 and it's kind of been crazy story ever since then,
I guess,
grew the company for about five people to now over 100.
That is 25 years in three minutes and 30 seconds. Well done, Dave. Brilliant. But you mentioned some of the companies you backed, and I've got a question. I crowdsourced some questions here special into crowds with some questions. So one from Matt Lerner destroyed Joe Joe five hundred's London office on he asked you, you back. The likes of that many twilio send grid lift. What were you thinking when you saw those deals? Did you know how that turnout in any sense, over others on where they hoped as themselves? His rounds?
I guess the three that I invested in while I was still kind of,
ah,
doing amateur angel investing,
mastering all slights here in men's,
I think,
with both slide share and mastery,
I don't think either of them looked like a slam dunk win,
I guess,
with mint dot com,
there was,
you know,
probably an expectation that this could be a really big story.
And Aaron Patzer,
who was the founder of CEO,
was a pretty impressive founder.
Even even the first time that I met him,
he was,
you know,
had a product that was pretty compelling and was very confident entrepreneur.
So I don't I don't know.
I mean,
I still feel like most of the time when we when I invested companies or when we 500 investing cos it's very,
very early and it's hard to predict what's going to happen in the future.
What? It was it with a hot rounds, obviously fantastic Cos now you imagine that being incredibly competitive rounds with a whole rounds in the early days?
Uh,
no.
No slide share and mastery certainly were not like super competitive rounds,
although,
you know,
strong team and capable founders mid dot com,
I guess,
was probably a little bit competitive.
Certainly by the time the a round happened,
I put about 25 k into the air around.
But I'd already been,
you know,
helping the company here in there a little bit.
So,
you know,
maybe mental calm was kind of the hot round,
But But certainly,
you know,
when I invested when we invested in lift out of F B Fund,
I guess it was called Zim right at the time.
And when we invested in Creditkarma and Twilio,
they were not really that competitive rounds.
Even though,
you know,
the founders were compelling most of the time they were.
You know,
that particular time of time 8 2009 10 was actually a pretty tough period of time for people to raise capital.
You mentioned that some obvious incredible companies with high high valuations, so moving from the investments to the investment strategy, Does your investment approach require unicorn axes to have a good return. We saw the Tweet Storm last week between you and Michael, that symbol on it. So I'm sorry for starting that one. I feel that I don't think you're sorry, would not want to lash out, but let's go with that. Does it require unicorn as it is to have a good return?
Ah,
well,
it certainly helps.
Ah,
I don't think it's required necessarily.
So in my angel investment portfolio,
I made about 13 investments.
I didn't some advise your work for a few other companies,
but let's say it's maybe 15 companies.
There were no unicorns in that group of companies,
but I had three what we would call centers or 100 million plus sort of exits on a relative basis.
All those companies were probably between a 10 to 20 x return on investment.
And so,
you know,
three out of 13 or three out of 15 is probably hit rate.
That's maybe higher than I would normally expect.
But let's say that somewhere around,
you know,
maybe a 20% sort of hit rate on winners,
you know?
So I I basically made about a $1,000,000 maybe a little bit more than that on 300,000 and so a three X return,
or slightly more than a three x return.
The investment period return period,
maybe was around seven or eight years.
I don't know if that's typical,
but in that case,
you know I made a decent return.
At least measure deny our basis.
That's probably around 20% return,
plus or minus,
but I didn't have any unicorn.
Now,
when we invest,
we do expect to find unicorns,
but we do a lot larger portfolio size.
Our expectations are that we'll find those unicorns,
or at least,
let's say,
50 to 100 X return profile companies,
probably not more than 2% of the time.
If we find,
you know,
unicorn only 2% of the time,
we're having 1% of the time.
Our portfolio size needs to be a minimum of 50 to 100 to really have a shot at that.
And I would argue,
actually,
we are aiming for more than one unicorn were probably aiming for like 3 to 5,
and then our port father side starts to become necessarily more like 203 100 or even 500 startups in order to have predictability around
that outcome. And in terms of the ownership state, the E taking these companies when you have such large portfolio is what does that look like? Does it allow you with the increase fun sightseeing sort of 300 K fund? Now with 500 it's a much bigger fund. Does that small ownership still carry over to big Venture
returns?
Well,
I think it does work for us.
The typical ownership that we hold in most of our seed round investments is probably between 1 to 5%.
Maybe a little bit higher in some of the international geography is where evaluations are lower for accelerator.
It might start in around 5 to 7% depending on when we invested.
But most of those investments we're probably never gonna be higher than 10%.
And a lot of cases they might be,
you know,
only around 5% or smaller.
But the point that I was making with Michael is that ownership really isn't the math that we used to kind of think about how we invest.
We really think more in terms of number of investments and the likely probability distribution of finding large outcomes and then potentially we think about,
you know,
reserving capital for following on our winners.
But still our second check.
You know,
investments are probably not going to be a CZ great and outcome as our first check,
you know?
So when we think about investment,
we really think about,
you know,
about 2% of our portfolio doing 50 X or better,
and hopefully about 5% of our portfolio doing 20 extra better on then we might have another 10 to 20%.
That gets us some positive return.
So that's probably going to give us a base criteria based outline of maybe 2 to 3 X in performance.
And if we're smart about the follow on investments and the timing of our investments goes,
well,
then we could probably steer that north of three X and maybe up to a fever and four or five x
harmony peace, he said about following investments that because I'm injury to hear how you ensure you can invest the amount that you want to in follow on rounds. Obviously they're very competitive. Sometimes you get pushed out by the larger players. Well, you ensure that you get into those rounds
Well,
we can't and we don't always know that we get into those rounds a lot of the time.
We have to,
you know,
work hard to have a good relationship with the founder.
You know,
sometimes we can,
you know,
get that relationship contractually.
Bye.
You know,
signing the investment agreement,
asking for follow on investment rights.
We usually do that so that we can invest in at least one follow on round,
um,
with our accelerator cos we have a kind of fixed structure that we invest into,
and we ask for a 500 K option to invest in the follow on round where we don't exceed 20% around.
So,
you know,
typically,
if someone's raising a Siri's A,
that might be,
you know,
$235 million we would liketo be able to invest up to 500 K.
But we're not usually the lead in that scenario.
But most of times,
you know,
listen,
as we get some ability to follow on,
but you're correct,
we don't always and again,
that's why we have a very large portfolio.
Strategy is we want,
you know,
get that to happen.
In at least enough scenarios,
where we can deploy follow on capital into our winners
when you don't get into them, Why do you think that is? Do you think that's the big boys pushing you out? Do you think that's founders? What are the reasons you think I'd leave that to rectify them Going forward? I know you're not gonna be happy with that.
Yeah,
that's definitely happened.
Sometimes it's larger investors who want to take as much of the next round as they possibly can.
Sometimes we don't always have those rights contractually.
Sometimes we may not always have capital available,
or we may choose not to put in money in those rounds.
But more often than not,
it's usually because there's demand for the round and it's over subscribed.
And you know,
the participants in the round or trying to jockey for their position.
I think that doesn't happen as much as you know.
Maybe people might be concerned about.
It does happen.
The funny thing is,
sometimes it happens in rounds that air hot that don't end up really being that valuable,
and a lot of times it doesn't happen in rounds where it's not that hot,
but later it becomes valuable.
So I don't really think that there's as much correlation with,
Hey,
this sea drowned or this a round is really hot and later that becomes uber.
You know that does happen every once in a while.
But I would say if I look back on a lot of the deals that ended up becoming really big for us,
you know,
Twilio and Creditkarma in particular and maybe a few others.
They weren't hot when we invested our went that they weren't so hot when we invested that we couldn't get into the round or we could get into a follow around.
So yes,
it happens.
But I don't know that that's a huge concern.
Obviously,
we don't like it when that happens.
Sometimes Founders,
you know,
we may not have a perfect relationship with founders,
and they may or may not always be looking out for our interests all the time.
I mean,
hopefully,
if we're doing a good job in being,
ah,
investment partner with the founders,
they do,
you know,
hopefully look out for our interests in follow on rounds.
But you know,
I don't always expect that and we have to earn that right
when you when you do follow on. How do you avoid the common problem of structure like yours of the negative signaling that can occur in the wider market? Do you think
about how we think about it a little bit? It does again matter, but I think people tend to overthink this. I think that the signaling issue, whether it happens for us or even other downstream investors, you know well, first of all, I would say signaling is an issue when the lead investor in a prior round doesn't follow on in the next round substantially enough. And that's more likely case for an institutional lead investor who's playing a seat, or Siri's a role where they're on the board or they were the biggest investor in the previous round. That's really not a typical role for us to play. You could argue that may be coming out of our accelerator. We might have that situation, but that's not quite the same and we're usually not the lead investor in seed or serious a rounds, but it does happen. My perspective on this is typically that if the founder or other investors are more worried about my investment decision, than the baseline performance of the company. There's already likely some kind of problem there. You know, I would have to say that the most important thing in making a decision to invest in companies the company's performance if the founders were worried about you know whether I'm going to follow on or not extra investors are worried about whether I'm going to follow on or not. It's probably because there's not strong metrics or performance or other concerns that are going on.
You mentioned the Exonerated that obviously 500 startups Big accelerated program. I'm chatting to a VC friend of mine the other day, and he stated, the accelerations have big issues with verse of action, with regards to the best entrepreneurs not going through them. Does Apple that pervade into your thoughts much? I
think that's kind of bullshit.
I mean,
that really depends a lot on the program.
When things were first getting started with accelerators,
maybe that's the case,
and I think if you if you have very,
very accomplished entrepreneurs,
perhaps those have already had exits before or raise venture capital before,
you know,
I think they have the option to certainly raise directly from B C's.
But,
um,
I don't think you see that criticism at least of the more established accelerator programs.
There's some people who say,
Hey,
I don't need that I've already got a network I've already got.
The resource is I need for help with customer acquisition and distribution or with other areas.
But I think you've also seen very successful companies come back and do an accelerator program or founders who had,
you know,
exits come back and do an excellent program a second time.
And I certainly think for first time entrepreneurs the network is really,
really important.
So you know people who get into either,
you know,
500 or white Combinator or techstars or another top program,
you know,
probably the network and the alumni and the connections.
And the help is worth.
You know,
the relatively small amount of delusion on usually that's,
you know,
made better through the valuation,
the increase or bump that you're likely to get.
If not,
you know,
all the other connection.
I mean,
there are people who have that criticism that's fine.
They don't have to go through an accelerator program,
but I think most people who would get into a Top 20 college or MBA program.
Certainly,
if you get into the top three programs,
there's a lot of value in there that goes beyond just valuation
in cash. You said about the top three programs that I do have to ask what you made of Sam Altman's post when he said about my CIA obviously taking entrepreneurs who they wouldn't take them if they've been to other is in Q bases reseller races. What did you make of that? You must have read that and call, Huh? That's interesting sound.
Yeah,
well,
I did read that,
and actually,
I responded in a blood post with what I thought.
I don't like Sam said that exactly.
I think what he said was people who have gone through a prior accelerator program probably have a higher bar for their performance on DDE that Y C will have some higher level of expectation if they've been accelerated unquote before.
I think I generally grew the underlying premise that Sam was trying to make.
It was more his conclusion and recommendations afterwards that I disagreed with pretty vehemently.
I think his response generally was,
if you don't get into icy just hang out,
wait and keep trying and eventually you might get into.
I see.
And that's better than doing any other accelerator program.
He didn't exactly say that either,
but I think that was is implied statement.
I think that's kind of laughable and actually probably really poor advice for intruders.
Usually,
I think Sam and Y C in general is amazing program,
and they offer lots of benefits and vice.
In this particular case,
I think they were being a little bit more selfishly directed about their advice to entrepreneurs.
Do you have a problem with entrepreneurs who have been two other SL races
before?
No.
And in fact,
I was gonna mention,
you know,
we've been investors through our seed investment program in a bunch of Y c company's over 100.
I think we're actually one of the top three or four investors NYC companies over the years on dhe.
Same thing with techstars.
I think we've done at least 40 or 50 of the text arms companies as well,
so we don't we do compete at one level,
but we also invest in there in there,
cos I would say you know,
probably 1/3 of our overall portfolio has gone through our own program.
So maybe 500 out of the 1500 companies,
probably another 500 went through some other programs.
So whether that's why see your tech stars or angel patter,
seed camp or whatever.
We've invested in plenty of other companies that have gone through both major globally recognised programs here the U.
S.
As well as other programs around the world on actually frequently for us.
We find companies that come from other programs around the world that may do those programs before they come to the U.
S.
And do ours,
or why sea or someone
else. And final question before we dive in quick fire I want to ask about We mentioned the papal team earlier, often named PayPal Mafia, one of most amazing teams ever assembled clearly. But did you guys have any idea at the time? Would make short, merry group that you were on What was it like working with these guys in
the beginning? Well, I hesitate to put myself in that group because I have not created a $1,000,000,000 company, at least not yet. Well, maybe we'll see. I think you know I had the really good fortune to work a little bit of time with some of those folks. Initially, when I started a papal, Dave Sachs was my boss. He went on Thio run yammer, which got acquired by Microsoft for about a 1,000,000,000 bucks. I got the chance to work pretty closely with Steve Chan and Chatterley Amjad Carib, who are all the founders of YouTube. They were really great people, like, you know, I didn't realized they were going to create the world's largest video plan for, but they were great to wear.
Quiz. How do you think you grew working with people like this? Well,
I think,
you know,
getting Thio work with and,
um,
probably watch the progress of a lot of those folks.
I think Peter and Max and Reid Hoffman and a bunch of others obviously had lots and lots of success.
But the lessons that we probably learned that paper how we're probably learned in the trenches with a lot of other people on the team,
um and those were,
you know,
howto build product and how to do marketing kind of how to deal with tough situations when,
you know,
maybe fraudsters air trying Thio steal money from you or other large companies like eBay or Visa card associations are competing with you.
And I think,
you know,
there was just a lot of really thoughtful and smart people there that,
you know,
we had to move quickly.
Otherwise,
you know,
we get our asses kicked.
One of the things I do think is interesting that people don't always understand is,
you know,
paper out.
Maybe didn't have his a very easy road when it was getting started.
If you compare maybe a couple of companies like Microsoft,
Yahoo or Google,
those three probably all discovered their business models relatively early and then really had dominating performances.
If you look at a few others,
maybe like Amazon or Facebook and Papal,
they had really strong growth.
But they had some challenges and really getting the business a lot of work out or a lot of tougher situations.
And I think people that maybe came out of some of those environments were used thio stress and used thio having to respond to the market by changing their product or their marketing in order to,
you know,
stay alive.
So for whatever reason,
papal became an interesting place where a lot of people dealt with stress from multiple sources and obviously a lot of really smart people.
But it was,
you know,
a terrific place to meet,
you know,
very,
very thoughtful and experienced and strong founders.
And,
you know,
the alumni have obviously gone on to create a bunch of,
you know,
very recognizable company names.
Sure. I want to finish with the quick fire round s O. I say short statement, and you give me your immediate thoughts. 60 seconds or less. How does that sound all right? Do you think the world has enough feces and enough VC money? Fuck, No. Right, Right. Okay. No, no VC money or no, no faeces. Do you wanna hike on
both? I think, you know, definitely not in a B C capital. And we should be clear about that. That's, you know, in Beijing and in Silicon Valley, there is a lot of money in most other places around the world. There isn't.
Why would you most like to take your money?
I think you know there's a bunch of geography is where we feel like there's not enough feces or none of capital. Right now, Southeast Asia and India are probably our two biggest priorities. But if I look at Latin America, the Arab speaking Middle East and Africa, those three places also, you know, have huge potential, but not enough capital right
now. And then you focus a lot on diversity of 500. Which other VC does diversity? Well, I
think probably Social Capital Palihapitiya has made that a pretty big focus. I think Mitch and free to Go Pour at Comport Capital. They're not always considered a VC, but they certainly do both for profit and nonprofit investments and social impact investing. I think they're probably the leaders off a lot of that. There's obviously individuals who I think have made it a priority, who come from different either ethnic backgrounds or other maybe underrepresented sort of groups that are doing great jobs
on. Then I want a favorite book, em, Oi, I'll
give You Three Guns, Germs and Steel by Jared Diamond's The Mystery of Capital. One other is called Spence, by Jeffrey Miller. Sorry, The Mystery of Capitals by Hernando DeSoto. That's not the explorer but the economic minister, Peru, in the late eighties. But the mystery of Capital is probably an under promoted book that's not really common on a lot of people's lists. I think that's just amazing for thinking about Capital Formacion spent is an amazing book that you know, talks really about behavioral psychology and impact of, you know, ah, lot of different things on behavior, particularly sex. But
sorry, just added that from this day. Yeah, on. But what about the biggest deal you missed
out on? Clearly, Uber was the deal that I totally fucked up. Travis gave me the opportunity to invest in June of 2010
Doesn't keep you
awake. Oh, every day, every week you think about that. The reality is I didn't invest multiple times, not just in the seed round. So it's probably my mistake multiple times
over, and then your favorite block. Tony's letter. One of the must reads fi.
There's a bunch that I like out there.
I definitely,
you know,
good friends with Mark Sister.
Read his stuff all the time.
He's probably one of the more thoughtful people out there.
Brad Feld and Fred Wilson have been sort of mentors and our small investors in our fund,
and they've kind of been huge influences.
I think Brad certainly has written tremendous amounts online way in the past.
Novel doesn't write quite as much as he used to and,
you know,
really,
Navy and the Ball did a lot of work with venture hacks that I thought was very helpful.
But that was probably more like 5 to 10 years ago,
before they did a journalist.
There's a lot of other,
you know,
great folks out there.
I think you know one thing is maybe not to worship other blood's too much and think about writing yourself.
I think there's a lot of folks who probably,
you know,
could start their own blog's and,
you know,
get a voice heard.
I think it's really important to not just lean on,
you know,
everybody else doing that work,
but even for your younger folks who are getting into the industry to write down their thoughts,
Charles Hudson,
I think,
is actually
done a great job, actually got a pretty
newsletter. Yep, that's true. And some people like Jason Calacanis to your writing in kind of newsletter formats as well on
then, let's finish today on your most recent investment and why you said yes there's public.
Well,
let me just talk about one that it's memorable for me.
That was fairly recent.
Uh,
did it early this year.
There's,
ah,
company that went through the Y Combinator program called Hometown.
I guess the public facing name is called Mark or they do custom high end shoes to founder out of Pakistan that moved to the U.
S.
And they're doing over a $1,000,000 in revenue.
They're profitable already.
Part of the team is still back in Pakistan,
and they produce some of the best,
you know,
high end sort of leather goods shoes.
They compete with kind of Gucci and others shoes that cost over 1000 or $2000 although there's only cost around two or $300.
Really resourceful founder and really smart team and was our first investments in a Pakistani company thought necessary?
Vaccinated founder,
But a Pakistani company,
um just really impressed with what they're doing.
Really great product.
Really great service.
Well, Dave, it's been such a pleasure having you on the show say thank you so much for joining me on delivery for welcoming you back on in the future.
Thanks a lot, Anytime Michael and wants to go spar online. We should do that.
I love that from Dave on.
If you have not seen the great debate on Twitter between Dave and Michael Kim at San Donna,
then that really is a must check out on died like,
say,
a huge thank you today for giving up his time State to be on the show.
It was a 7 a.m. on a Saturday morning to you for him.
So really,
I'm very grateful.
If you'd like to stay upstate with the show,
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