500 Startups’ Marvin Liao – ‘I don’t invest in PowerPoint start-ups’

14 Sep 2015

Start-up success is about creating a business model that ensures longevity, not jumping from accelerator to accelerator, warns Marvin Liao.

On a sweltering hot afternoon in San Francisco, 500 Startups partner Marvin Liao takes stock of the time we are in: “there is a liquidity bubble, there are unicorns… but success for me is start-ups who have figured out how to be around in two years.”

500 Startups is a seed accelerator and investment fund started by celebrated Silicon Valley investor Dave McClure in 2010. The company took in its first batch of start-ups in 2011 and since then hundreds of US and international start-ups have been through its classes.

In recent weeks, 500 Startups closed its most recent US$85m fund. The company is expanding worldwide and, as well as a new office in Tel Aviv, it has opened a US$30m fund in Japan.

After the fanfare of the Apple launch in San Francisco last week I wandered down the street to meet Liao at 500 Startups’ base in the city.

Liao will be in Belfast on 25 September, where he will host a European-wide pitch event at the ICONS festival.

‘I am either a skeptic or a cynic. More a skeptic. Heck, if I was a cynic I wouldn’t be doing this’

As well as a hub in Mountain View, 500 Startups’ San Francisco hub is located in a former newspaper office. Dozens of young entrepreneurs from all over the US and the world kitted out in t-shirts, shorts and flip-flops are hard at work, many silent in concentration, others murmuring ideas to one another, while a couple of others play ping-pong.

Liao is a fascinating character who probably asks me more questions than I ask him, relishing insights and enjoying going against the grain of sentiment in San Francisco where much of Silicon Valley has gravitated towards lately.

“For this batch I took 1,100 start-ups and whittled them down to 34 – they are from everywhere, the US, Ghana, Brazil, Serbia, Finland, Dubai, Jordan, South Africa, we had an Irish start-up called PlotBox in Batch 11.

“Each typical batch last four months.”

We’re not going to have a party like it’s 1999

I ask him about the sentiment at present in Silicon Valley where unicorns continue to soar as liquidity roars and I admit it’s all a little 1999 to me.

Nodding in recognition – he was there before, having worked at Yahoo and other e-commerce firms before, during and after the infamous dot-com crash of 2000 – he says big change is the nature of the beast.

“Every start-up is a snowflake,” he says. “I am either a skeptic or a cynic. More a skeptic. Heck, if I was a cynic I wouldn’t be doing this.”

The key thing he tries to impress on start-ups is selling. “Every company that is in our batch does between US$5,000 and US$35,000 in revenue. It’s our job to help them get their sales model working.”


‘I’m not taking on people who just have a wonderful idea, I don’t invest in PowerPoint start-ups’

This, he says, is critical if firms want to attract investment. “If you don’t demonstrate growth then it is hard to raise funds. If you have a working business model it gets easier.

“All founders figure this out eventually, but we help them to do that in a smaller period of time.”

Key to helping each batch succeed is a full distribution team who help the companies to grow and get their model working.

“Each batch we take in is different and 30pc to 50pc are international.”

But does he believe we are in a tech bubble? “Probably, there are a lot of stupid valuations alright. It’s certainly a liquidity bubble, interest rates are low and money is going to where the returns are.

“Tech is sexy right now and a lot of the tech companies are making money, unlike 1999 or 2000. Uber is making a lot of money but it is just not profitable because it is investing.

“I don’t agree with the strong valuations on some of the unicorns but I can’t deny that they are making an impact on a ton of industries,” he said, referring to Airbnb in accommodation as an example.

“I don’t believe there is going to be a nuclear winter like 2000. Success for me – I don’t give a s**** how much money a company raises – [I only care about] one metric: if they are going to be around and growing two years from now.

“It’s all about grit, and longevity of a company’s business model.”

Liao admits Silicon Valley and San Francisco are bucking the global trends because of the sheer concentration of investment capital and this is changing people’s attitudes to risk.

“How we think about risk is different in the Valley – if you fail, you get a job at Google. I admire entrepreneurs, particularly those from overseas, who start businesses and don’t have this robust ecosystem. In San Francisco, if your start-up fails you get a job at another funded start-up or go to Google or Yahoo. Either way, you win because the skills you learn from doing start-ups are helpful.”

‘We filter out the start-up pretenders, people jumping from accelerator to accelerator’

A regular visitor to Europe, Liao is particularly impressed by the standard of tech talent in Sweden and France.

However, he feels that while there are great venture capital funds in the form of Balderton, Hoxton Ventures and Point 9, the maturity of funds and the availability of post-Series A funding poses a problem.

“We are seeing the rise of a lot of interesting VC companies [in Europe] but the maturity level isn’t anywhere near Silicon Valley.

“We have created the Distro Dojo in London, a 12-month programme focused on post-seed companies. Many companies in Europe have encountered the Series A crunch, they have seed money but they are struggling to get to the next level. It’s about the sales process and a much more later-stage version of what we do here in San Francisco.”

Weeding out the start-up pretenders

Across the world the notion of doing a start-up as a lifestyle option is a dangerous idea that Liao believes could only hurt people putting in the real effort. In other words, there is a lot of propaganda out there making start-ups look easy when the reality is more crushing, more dangerous.

“We filter out the start-up pretenders, people jumping from accelerator to accelerator.

“It’s about finding the missionaries versus the mercenaries. We try to fund the missionaries – those people who are meaningfully trying to solve real problems. Is there a real market for what they are doing? Have they a team with the right backgrounds and will they stick through the start-up journey?

“Half the battle is the grit.

“I’m not interested in pre-launch companies. Do you have something working? I’m not taking on people who just have a wonderful idea, I don’t invest in PowerPoint start-ups.”

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