Dave McClure’s 500 Startups hits 750 investments

• Dave McClure sees a US-centric success story becoming more global
• Sticks to diversification strategy with expert group of 1,200 adding value

IT may come as a surprise to note that Dave McClure (pic), through the three [corrected] venture funds he has established under 500 Startups where he is founding partner, has made over 750 investments in the past four years.
 
500 Startups is a Silicon Valley-based global venture capital firm that also runs an accelerator programme.
 
To McClure, this investment diversification as part of the venture model still seems to be part of a relatively new strategy. In a conversation with Digital News Asia (DNA) in Kuala Lumpur recently, he points to Naval Ravikanth of Angels List as one of the few, like him, who are brave enough to admit that they are not always right.
 
The diversification strategy acts as the hedge to the reality that picking winners in the startup space is darn difficult.
 
This reality is tough for most venture capitalists (VCs) to accept, he observes.  “Most VCs still think they are brilliant, adopting a very concentrated investment strategy,” he says adding that even making 30 picks is no guarantee they will hit that billion-dollar company.
 
But in trying to give his coterie of startups the best chance to be that billion-dollar hit, McClure has established a global network of 1,200 experts who are able to offer his investments the specific help they need at any particular point in their journey.
 
This approach is based primarily on the belief that it is the entrepreneur who makes the company, not the VC. “I think there is this misconception of this august VC who is up this mountain and you worship him to get the magic formula to change your company,” McClure says.
 
Yet the reality is that while investors can be helpful and open doors, ultimately it is the entrepreneur who makes or breaks the startup.
 
Rather than have VCs on their boards, the trend is now if for startups to tap experts who can help them with specific challenges they face, which is why the 500 Startups model of making 1,200 experts available to startups is more helpful.
 
Coming into the picture are companies like 500 Startups, Y-Combinator and Google Ventures which are building networks of experienced people, primarily with operational experience in engineering, design and marketing – the three critical early aspects of a startup that dictate if they can get early traction.
 
“These operational capabilities are not always exemplified by VCs who went to Ivy league schools but by those who started companies and those who work at platform companies such as Google, Facebook and Twitter,” McClure argues.
 
The expert group that 500 Startups has put together consists of fellow founders, those who work at platform companies and investors. “We are trying to apply the network effect to the companies invested by us. The more we add to the portfolio, the greater the increase in value happening,” he says. “I think this model is very scalable.”
 
For startups that are hoping to attract the attention of 500 Startups and get into their network, McClure points out that while ideas are nice, 500 Startups ‘de-risks’ quite a bit by mainly investing in companies where a functional prototype is in place, and where there is a modest level of customer usage and revenue.
 
“That is kind of the sweet spot for us. Where we see they have a product out of the door and with some paying customers or users, though perhaps not in a large scale. We invest at this stage with an optimal perspective of helping them get to a larger number of customers,” he says. “If we are successful, the company will make money.”
 
With McClure having started investing four years ago and having enjoyed a few large exits, DNA asked if he had a sharper sense of clarity into investing in startups. “It’s a real pain in the ass,” he bursts out laughing.
 
Getting serious, he says that while most startups still fail, it is generally easier to solve the world’s problems due to the costs coming down and it getting easier to reach out to a global customer base.
 
He is also very optimistic about the future. While historically 500 Startups winners have been very US-centric, McClure is now starting to see a global story emerge – which is why he has a significant portion of his portfolio outside the United States and why he spends a good six months of the year travelling.
 
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