500 Startups’ Dave McClure: ‘Make little bets on lots of smart people’

9 Jun 2016

500 Startups' Dave McClure says that if countries like Ireland want to supercharge their start-up ecosystem, they should create lots of small venture funds

Silicon Valley venture capitalist Dave McClure from 500 Startups, an early investor in Intercom, has revealed how nations like Ireland can supercharge their start-up ecosystem.

In Dublin this week to attend the Angel Summit at Google’s Foundry, McClure isn’t your typical Silicon Valley venture capitalist. Sauntering around the stage in black t-shirt, jeans and a pair of flip-flops, he drops witty pearls of wisdom. “The only difference between Silicon Valley the TV show and Silicon Valley the ecosystem is that on the TV show people are actually having sex.”

He is disarmingly honest: “I call this talk ‘Farming Unicorns’, which is bulls**t because most start-ups don’t become unicorns, but it is a better title than ‘Investing in sh**ty little start-ups’.

But he later qualifies this: “You can make money investing in start-ups, even if they don’t become unicorns.”

‘A lot of people today glorify entrepreneurship as though you can work for yourself and one day be rich. But the reality is that you work for everybody – your customers, your employees, your investors’

And McClure should know – at least three companies that 500 Startups has backed have reached the coveted unicorn status of being valued at more than $1bn (Credit Karma, Twilio and Grab) while many others have had massive exits. Wildfire was acquired by Google for $350m, MakerBot was acquired by SSYS for $400m and Sunrise was acquired by Microsoft for $100m.

500 Startups is a $250m VC fund and start-up accelerator that employs 125 people in 20 countries. It has so far invested in over 1,500 start-ups.

500 Startups was an early investor in Intercom, the company founded in San Francisco by four Irishmen: Des Traynor, Ciaran Lee, Eoghan McCabe and David Barrett, and which recently announced 100 new jobs in Dublin after raising $50m in investment from top-tier Silicon Valley investors, including Slack CEO Stewart Butterfield.

Yea, though I walk through the Valley of Silicon

McClure has spent more than 25 years in Silicon Valley, rising through what he calls “progressive levels of incompetence”, from being a coder to working at marketing at PayPal. After cashing in his shares from PayPal and buying a house for his mother on the east coast, McClure had the princely sum of $300,000 left and decided to invest this in start-ups.

“The main story about 500 Startups is that we make a lot of little bets on lots of little companies. Because I have ADD I wanted to design a job for myself and didn’t want to say ‘no’ as much as the average venture capitalist.”

500 Startups itself started small and McClure made the mistake of investing half of his $300,000 in two start-ups. He quickly changed tack. “I decided to put the rest into 13 companies. I got fairly lucky, three of those companies ended up with exits at over $100m, including Mint.com, Slideshare and Mashery.”

I ask McClure about 500 Startups’ international expansion, which has seen the company open offices in Korea, the UK, Thailand, Vietnam, Germany, Israel and Japan. Does he see the organisation setting up in Ireland? “It is possible, we have some folks in London but we don’t have a specific fund there. Eventually, our goal is to be in over 200 cities around the world over the next five-to-10 years.”

Arriving at the point of being a venture capitalist, even a renowned one at that, seems to McClure to be a natural progression. “I was coding 20 years ago and it was a natural progression of trying to understand how start-ups work, part of that is coding and building products, part of it is marketing and sales, part of it is being an entrepreneur and part of it is investing. For me, it is about figuring out how all the pieces work.”

I mention to McClure that I met his colleague Marvin Liao in San Francisco last September and he made the point that 500 Startups doesn’t invest in ‘PowerPoint start-ups’. “Most of the time that’s true, but once in a while one gets through, but that is pretty rare for us.

“Starting a business is a pain in the ass. It’s kind of a thankless job. A lot of people today glorify entrepreneurship as though you can work for yourself and one day be rich. But the reality is that you work for everybody – your customers, your employees, your investors. A lot of the first few years are lonely, long hours and most of the time you fail. I try to encourage people not to be entrepreneurs unless they can’t be anything else. It is much easier to work for somebody else than it is to work for yourself. But for some of us, there are not really any more choices.”

I bring up Intercom and ask him if many Irish start-ups cross his radar. “We’ve had a few. I don’t know if any of them have achieved the same level of success as Intercom but certainly we’ve had other European companies from Portugal and Turkey that have had parallel successes. All three companies are $100m-plus, have raised tons of venture capital and are doing great. They all sorta started in Silicon Valley but their own countries have been part of their success too.”

How to supercharge your nation’s start-up ecosystem

From start-ups’ perspective, McClure believes venture capital investment is more than just the money, it is about relationships. He urges them to do their homework. “The biggest thing to find out [about VCs] is have they been helpful to other start-ups and founders and do they have a track-record of getting companies to the next level?

‘If the Irish Government was to make $500m magically appear, I would suggest that allocating $5m to 100 different VC firms would be better than putting $50m into 10 VC firms’

“If you are taking angel investment from an individual, make sure they can also be helpful within an area of domain expertise – whether it is building product, selling product, hiring people or raising capital.

“Ultimately, try to make sure you don’t end up working with assholes. People that push you and challenge you aren’t assholes. Some people are going to be adversarial in a relationship, but there are lots of different roles investors can play.”

One of the little-known facts about Silicon Valley’s venture capital ecosystem is that it got its initial push from the US government, which matched new funds with federal money.

I ask McClure about what nations can do to supercharge their start-up ecosystems. “For me, the emphasis has to be on the investor side. Innovating on the investor side is what makes it easier for the entrepreneur. I think creating a fund to fund a structure that invests in small funds would be my ideal scenario.”

A report that Startup Angels produced ahead of the Angel Summit on Dublin pointed to how Irish tax laws are punishing towards returns made from stock options. The report also called out for more angels and venture capitalists at the seed stage.

“If the Irish Government was to make $500m magically appear, I would suggest that allocating $5m to 100 different VC firms would be better than putting $50m into 10 VC firms.

“Again, the lots of little bets strategy works at the investor side and at a fund level as well. We were very succesful in making a small amount of capital go a long way for our start-ups.

“Having more investors who write smaller cheques is better than a few investors who write big cheques.”

Unlike start-ups of 16 years ago, McClure says today’s start-ups don’t require huge amounts of capital in the first year or two.

“There’s still a lot of failure and that’s why you need more diversification.

“Our rule is: find smart people, give them money, wait for good s**t to happen.”

Dave McClure image by Loic Le Meur via Flickr/Creative Commons

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years