about this episode
There wasn’t a big enough swear jar! And things got juicy… and deep. When Jason sat down with Dave McClure, he opened up about the PayPal mafia, which VCs are doing the best work, and how he was essentially fired from Mint at age 41. Live from RockSpace, Jason talks with the founding general partner of 500 Startups. If you haven’t yet heard this interview, now’s the time.
Dave McClure, I’ve known for a while. He’s got quite a track record. He was the director of marketing over at PayPal from 2001-2004. Then, he was the head of marketing at Simply Hired. Wow. I remember that. Old school, 2005-2006. Then, he managed the Founder Fund’s angel investment group. Sean Parker, Luke and Peter Thiel. The other PayPal mafia, 2008-2009. Then, the Facebook Fund in 2009… The Facebook Fund was part of Founder’s Fund? Or was Facebook and Founder’s…
Dave: JB between Accel and Founder’s Fund who each put in $5M. And then administered by Facebook until I came in, busted their chops and then took it over.
Jason: Right. Then, of course he founded 500 startups, in 2010. He admitted his first class of 12 startups in 2011. And has invested in over 400 startups in 25 countries.
Dave: Probably 450 about now. Maybe 460.
Jason: It’ll be 475 by the time the interview’s done.
Dave: I gave two verbals today.
Jason: Spray and pay. How many people in the audience have Dave McClure as an investor? OK. You’re all going to get a complimentary investment on the house.
Dave: No shit. We have no 500s in the house?
Jason: No. Somebody raised their hand over here. I saw one, two.
Dave: Who’s that?
Jason: I saw one over there.
Dave: Do I know who you are?
Jason: The good news is, if everybody looks under their seats, you have a $250K uncapped note. Congratulations.
Dave: You’ve got a new car. You’ve got a new car.
Jason: You’ve got an uncapped note.
Dave: You’ve got a new Series A.
Dave: Except, we don’t do that shit.
Jason: This is going to be a great night. Wow. We’re not even through the intro. Investments include… It’s going to be one of those nights. Investments include Mint, SlideShare, Twilio, SendGrid and Wildfire.
Dave: Mint and SlideShare were personal, not 500. But, yes.
Jason: Oh, personal, right? You still get credit for those. All startups applying for the spring 2013 accelerator program are applying through…
Dave: Yes. Get your shit in now.
Jason: Hey, so let’s talk about that for a second. That’s a good place to start. We’ll start with AngelList.
Jason: That’s had a profound impact on startups.
Jason: What is it that they’ve done so well?
Dave: They’ve helped a lot of fucking startups raise money.
Jason: By the way. I forgot. Everybody knows the rules of the show.
Dave: Somebody is going to make a shitload of money on this.
Jason: Each curse is $10. He’s $20 in.
Dave: I’m not giving you money. This is entertainment. I’m getting you audience for this crap.
Jason: No, no, no, no. These are the rules of the show.
Dave: Fuck that.
Jason: We knew… See that’s $30.
Dave: You get this shit for free man.
Jason: $40. But, here’s the thing. We knew Dave was coming. So, we brought out a Dave McClure size.
Dave: Shit, bitch, cocksucker, motherfucking tits.
Jason: Right now, Dave McClure is in competition with…
Jason: No. Chris Sacca.
Dave: Oh. I can beat the pants off Sacca.
Jason: He went fucking crazy. So, I’ll just put that in here.
Dave: Sacca’s a fucking lightweight. Sacca’s a total fucking lightweight. Gary might give me a run for the money.
Jason: OK. So, let’s go back to AngelList, which I agree is fucking awesome.
Dave: So, when Naval started AngelList, two and a half years ago…?
Dave: About the time that we got started.
Dave: Which, at the time was like maybe ten of us. We were all like, “What the fuck are you doing again? Why should we do this?”
Dave: Naval is a really smart guy, awesome reputation. We were like, “OK, cool. We’ll try that out.” At the time it was just a curated list. It was an email list of startups that he thought were awesome. We were like, “OK. This is kind of working.” I think we did one or two investments off of that initially. The website came out pretty soon after that. It was just a web page I guess at first really. But, in very short order, he pretty much changed the entire playing field. I can’t remember when that sort of tipped for us. Once we started doing our accelerator batches, there was a point we were like just list everything we doing on AngelList.
Jason: You were a huge proponent of it early. Venture Capitalists were very upset about AngelList early on. In fact, Bryce from…
Dave: Bryce wasn’t that upset.
Jason: Well, he’s a great guy. From Alpha…
Dave: Bryce was like, “I think this is inflating pricing and social proof is not necessarily a good thing.”
Jason: And he…
Dave: Took his ball and went home.
Jason: And he turned off his account. Obviously, he must be back on it now.
Dave: That was probably unnecessary, I thought. Suster had a couple of comments that I thought were a little bit more balanced. But, in general… I don’t know. I wrote a follow up post that was also inflammatory. But, I was just like, “Period. Ageless is the best fucking thing since Paul Graham started YC.” Possibly more influential than that. I would say, in hindsight, yes. Probably more influential.
Jason: Do you think it accelerated the amount of investment.
Dave: Oh, yeah. Absolutely.
Jason: So, why is that?
Dave: That could be in a good way or a bad way, but I think in general it’s been in a good way. It’s also accelerated in places where it wasn’t as available before. Like, I think you’ll hear Naval say the initial storyline for AngelList was really about getting New York startups access to Silicon Valley investors. That was like the big channel of things that was happening through AngelList initially. Cause, there were some interesting startups in New York that Silicon Valley investors didn’t usually travel for. Probably a little bit of vice versa. But then, soon after that and even perhaps as that was happening, there was a lot of other regions of the US where startups were starting to become more visible. Some information about like what level of activity was going on. It was kind of a natural thing, right? You look at LinkedIn and Facebook being social networks for other areas in Quora for questions. OK, you’re like, “This naturally needed to exist at some point.”
Jason: Now they have been experimenting with accredited investors.
Jason: Folks who have enough money to invest. According to the SEC’s current law structure.
Jason: People with over… whatever… $2M. What is an accredited investor now? $1M, $2M. I don’t know.
Dave: I don’t remember the rules. I think it’s like, if you have $25 in your pocket and a car that’s made after 1995, then you can be an accredited investor.
Jason: But, anyway. They’re doing accredited investors, second market…
Dave: That was a joke motherfuckers. Wake up.
Jason: It wasn’t a good joke.
Jason: He’s now got… I don’t know.
Dave: I think it’s $300K a year in salary, $400K for a joint account, or $1M in liquid assets.
Jason: He now says they’re doing $150K, a $1K at a time or more.
Dave: That’s the deal with Second Market.
Jason: With Second Market.
Dave: Who is a broker/dealer.
Jason: Who’s a broker/dealer.
Jason: So, now a startup can raise $750K then, also say, “We’re going to do $150K potentially if we can aggregate… I think it’s a 100 it triggers or something. So, I went through and I did… I just looked at the companies, then I just said, “Maybe, I’ll just put $1K into these 3 companies as optionality. Without meeting the startups. Cause, it looks cool. I think you were the referrer on one. So, I was like, “If Dave’s the referrer, that means…”
Dave: Then, it must be good.
Jason: Well, at least they’ve got some social proof. I know that they’ve been vetted on some level.
Dave: Really? You think I look at things that closely?
Jason: I hope so. But, anyway, it’s not… There’s no… There’s very little downside risk investing $1K in a startup company.
Dave: One can only go to zero.
Jason: Right. So, $1K to zero is not that…
Dave: Somebody tweet that. i just want to get quoted for that shit.
Jason: Do you think that this sort of crowd funding amongst accredited investors could have a dramatic impact on the space?
Dave: Well, I don’t know if it has a dramatic impact on the space. I think it’s a great opportunity for barely accredited investors who are new to startups to start investing on a small budget. When I started investing, I was just leaving PayPal and probably had more dollars than sense at that time. Not a lot. I probably made about $1M at PayPal. A third goes to like taxes. A third goes to like fucking around, playing around money. Like, buying your uncle a car or something like that. Then… I bought a house for my mom. Or, at least part of a down payment for a house. Then, I had like $300K in the bank. I was like, “OK. What the hell do I want to do with this? I really don’t want to buy real estate in California. So, over the next 3 or 4 years, put that money into like 13 startups.” But, I was a fucking idiot. I put like $150K into the first two deals that I did. Which is not the way you’re supposed to do it.
Jason: Yeah. It’s not really a balanced portfolio.
Dave: Not at all. You know, I got lucky later, with some things that worked out. But, I wish I had more money when I encountered Mint and SlideShare after I got sort of a little bit of awareness going on. So, I always tell people, when you’re starting out if you want to do angel investing… By the way, setting your fucking dollars on fire is probably a better activity. But, if you want to do angel investing, just figure out how much money you want to throw away and then take half that… Half of that should go into like 10 or more startups. Then, the other half should go into the ones that survived out of those. Which would probably be, maybe 3. Or 1. That’s like a very basic diversified approach. You probably want to give yourself time to learn about startup investing. But, you kind of need a decent budget to get started with that. Like, I was probably on the edge of having enough money to really get some kind of diversified return from angel investing and I still really didn’t know what the fuck I was doing. Now, you can do it on AngelList, you know theoretically for only a budget of $25K. You could potentially put $1K into ten startups. Then, put $5K into the 3 that sort of make it, out of that.
Jason: And, have a positive result?
Dave: Maybe you’d have a pos… I think the number I’d feel more comfortable with is 20 investments is enough that you might have a shot at getting something interesting.
Jason: And, consumer internet is incredibly random, what works.
Dave: I don’t think it’s random.
Jason: OK. The success rate…
Dave: It’s not obvious when you start, what is going to work. Let’s say that.
Jason: Right. The overwhelming outcome is failure.
Dave: Oh, yeah. By far.
Jason: So, when you’re picking these companies, have you learned something over 450 investments?
Dave: That I’m an idiot. Yeah.
Jason: Well, I mean, seriously, is there some pattern that’s starting to emerge, after 450 investments, about consumer… cause it is your speciality. Marketing is your speciality.
Dave: I wouldn’t say… Probably half to 60%, I would say, are pure play to consumer in some form. But, there’s probably 20%…
Jason: Let’s talk about that half.
Dave: There’s 20% that are probably enterprise of B2B. Actually, some of our bigger wins have turned out to be B2B. So, Twilio, SendGrid, Wildfire essentially are all enterprise. Even though Twilio and SendGrid started out developer, Wildfire started out S&B. Then, they all morphed into enterprise.
Jason: So, what have you learned about… Let’s start with consumer. What have you learned on the consumer side about what works? Maybe what kind of founders work, what kind of process works to have success?
Dave: Let’s start with just that after doing 450 investments in the last 3 years… Not all of which I did. Let’s say half of them were maybe me.
Jason: I’d say you did. Yeah.
Dave: Probably 50 or 60 before that. You really can’t predict a hell of a lot. I think… Our whole thesis is just that, you try and do risk reduction, you try and invest in things that seem like they have a shot. Then, 6-18 months later you sort of know whether you’re on track. Then, you kind of double down on the shit that looks like it’s working. I think that’s the basic observation. The one I’m most critical about traditional ventures is like, they’re the ones who are gambling, because they’re the ones who are making such large bets on such small sample size with very limited information. They have to be post-traction betters to make that strategy work. They have to be good post-traction betters to really make it work.
Jason: Because they’re making a $3M bet, not a $300K bet.
Dave: Or, they’re making a $30M bet. More importantly, they’re only making 30 bets in a four year cycle for a $250M-$500M fund or bigger. So, still most things fail. At that size they probably don’t fail. But let’s just say something that looks like it has traction, doesn’t get a 10X-20X return. It might only get a 1X-3X return. Right? So, if they’re investing in say… A large fund might put down a $10M bet on $25M valuation to get started. Maybe they’re doing Series B investing. Then, maybe they do a $50M follow on or something like that, if it gets really big. But, they need those bets to sort of workout at billion dollar outcomes. They’re probably only going to get, at best, like 5 of those out of 30, that really end up being, you know, billion dollar outcomes or better. If you do the math on it, they need 5 of those unless one is a Facebook or a Twitter, maybe a YouTube.
Jason: In your economics, with a $30M, $40M, $50M fund, you can get what? One billion dollar exit and you’re great?
Dave: Yeah. But, we don’t plan for billion dollar exits. So, strange as it might sound, we’re trying for ten $100M exits and probably forty $20M exits. That’s still hard but that’s not completely irrational. Out of 250 companies, if we could get 10 wins that are $150M or better, $200M if we’re lucky or more, then forty or fifty that are probably between say $10M-$50M. Then, I think we’ll make 2X. It depends on how the model plays out and how we do our follow on betting. We’re aiming for ten $100M wins out of 200 and forty or fifty… Actually that’s probably a little bit more challenging. It’s doable. Right? But, getting five $1B outcomes out of thirty is fucking hard.
Dave: And, not common at all.
Jason: It’s not…
Dave: We’re talking 5 YouTubes out of 30 bets.
Dave: And, you sort of hit your target. I had a conversation with Roelof at Sequoia, after he just made the… Like YouTube had sort of been bought. You’re like, “Holy fuck. A billion and a half dollar…” His first investment at Sequoia. Like Roelof is probably one of the smartest motherfuckers on the planet, was CFO at PayPal when he was under 30, was the youngest partner ever at Sequoia and like does YouTube right out of the gate. You’re like, “Fuck. You are set.” He’s like, “No. Not really.”
Dave: You’re like, “What?”
Jason: Yeah. Nice guy. Tumblr, Evernote, Square and everything else he’s got.
Dave: He’s like, “Yeah. Well, you know. YouTube was a $1.5B exit. We maybe owned 20%-25% or something, a $300M outcome.
Jason: Pay back the fund.
Dave: They got a $500M… No, no, no. Probably it’s a $500M fund. You need a 3X return on the fund.
Dave: Right? So, you need $1.5B in returns. $300M, you’re 20% of the way there.
Dave: So, you need 5 YouTubes…
Jason: To keep going.
Dave: … to make that fucking fund work. Or one Twitter or one Facebook.
Dave: How good do you… You think you could pick 5 YouTubes out of 30? Good luck motherfucker.
Jason: It’s hard. It’s not easy.
Dave: Even with Sequoia’s deal flow that’s not easy.
Jason: Right. In terms of characteristics around entrepreneurship, we seen… The game has changed significantly from when you and I got into it. The PayPal days or Simply Hired. Today…
Dave: God. We are old aren’t we.
Jason: No. We’re definitely old.
Dave: I’m old. I’m old.
Jason: It’s definitely different today in terms of what it takes to have a company scale
Dave: It should be easier. Don’t you think it’s easier? I think it’s way easier.
Jason: Easier to start?
Dave: I was giving Fred shit about this when he wrote that like… Something about back to enterprise or whatever?
Jason: Yeah. Everybody going back to enterprise.
Dave: He was like, “Fuck this mobile shit. It’s too hard.”
Jason: Mobile is extremely hard, isn’t it?
Dave: It’s not harder than it was two years ago.
Jason: It’s not? There’s not more noise?
Dave: No, but let’s just think… As much as I respect Fred. he wrote this post called ‘Mobile First’ two years ago. He was like, “Mobile first. Let’s go.”
Dave: “Android, billions of devices.” Which is true.
Jason: Now, he’s disillusioned?
Dave: I don’t think Fred’s disillusioned. I think he’s observing that the rest of the market is disillusioned.
Dave: He’s probably right in that sense. That there is investors who don’t know what the fuck they’re doing in mobile. Deciding like, “Oh. Screw this shit. Let’s go back to enterprise. We know how to sell hundreds of thousands of dollars in licensing. We just find some good salespeople, we shove shit down the pipe and we’re all good.”
Dave: You know, we’re going, “The game’s just kind of getting started. We’re just starting to figure it out.” If you haven’t noticed Apple and Android have been selling hundreds of millions of fucking devices.
Dave: Like sure, maybe distribution is hard maybe monetization is hard. But, it’s not harder than it was 3 years ago. I’m pretty sure, that’s the dominant trend. So, figuring out how to get mobile to get distribution and how mobile is going to monetize is the opportunity on the table. If you’ve been practicing that shit for the last two years, hopefully you’re starting to figure it out. In the next 3 years is when you’re going to get the payoff from that shit. So, don’t… Stay the fucking course. Don’t leave mobile. If you’re like believers in that shit, figure it out and make it work. If you’re clueless, fucking go back to enterprise. Great. Go for it. You know. Can someone get me some more beer?
Jason: More beer. Keep giving him beer.
Dave: I don’t mean to rip on Fred. I think Fred’s a really smart guy. I think he correctly observed that there is a lot of stuff going on. I think he was over-emphasizing Android when clearly iOS platforms were monetizing a hell of a lot better. So, even though there’s a shit load of Android devices out there, I think the opportunity for developers is probably is still primarily iOS for the next year or two and just starting to be interesting for Android. But there’s challenges in getting distribution and monetization on Android that maybe are not quite… Monetization is not as much of a challenge on Apple as it is on Android. Distribution’s still hard on both.
Jason: Let’s talk about the magnitude more… the larger group of startups we’re all dealing with.
Jason: You’re funding a lot of startups. We’re seeing a lot more come out of accelerators. Whether it’s Tech Stars…
Dave: Series A crunch baby.
Jason: … or YC’s. Even before we get to the Series A crunch, are we widening the funnel too much? Are we going to…
Dave: Yeah. Maybe. Probably.
Jason: … and…
Dave: The industry’s too fucking sexy. That’s going to attract like stupid people.
Jason: Go ahead, bring it up. Thank you. I’m good Alex. No. It’s OK. Thanks Alex. Appreciate that Alex. I’m good.
Dave: I’ll get more entertaining year zero to 3. Then, I’ll fall of the fucking wheel in like between 3-5.
Jason: So, we probably are funding a little bit too many entrepreneurs and diluting, maybe the teams?
Dave: Oh. That argument is so fucking tired. No we’re not.
Jason: Well, you just said before, “Maybe there’s too many entrepreneurs.” So…
Dave: I thought we talking about there is too many investors in incubators.
Dave: There’s probably too many wannabe entrepreneurs, but they’ll get the shit kicked out of them after the first or second startup. They’ll decide if they want to stay in it or not. Yeah. I think, for a lot of entrepreneurs, it probably takes 3 startups before you figure out what the rules of the game look like.
Dave: Hopefully, you’ll get the chance to work at a place like PayPal or Google or Facebook and learn some things from the big side. Hopefully get the chance to work at a small startup. Even if you hit the wall, you’ll will probably learn some things there too. But within the first 5 years, maybe you have 3 shots at the wheel. These days, maybe shit, you can get 3 shots at the wheel within like 9 months.
Jason: Are you looking for people who have had a couple of swings at the bat?
Dave: Yeah. Absolutely. I think a sweet spot for entrepreneurship that we’re going after is probably 3-10 years of experience. You know, probably 3 years or less, you haven’t stubbed your toe enough to probably figure shit out. Ten years or more, you should have made enough money to be able to finance yourself. Although, there’s probably…
Jason: Some exceptions.
Dave: We’re not being agist on that. As much as I appreciate the opportunity to invest in entrepreneurs who are over 35, very few folks, I think, have the late bloomer opportunity that I’ve had.
Jason: Yeah. The wherewithal. I’m mean, you’re an investor too, which is a lot easier.
Dave: I am primarily an entrepreneur.
Jason: Do you feel more like an entrepreneur than a VC?
Dave: I’m disrupting my industry.
Dave: It just so happens that I happen to be disrupting an industry that’s called venture capital.
Jason: How are you disrupting it? How do you…
Dave: Jesus. Have you been watching lately? Fuck you.
Jason: I have. I just want to know what your perception is of that. I want to hear you say it.
Dave: Paul’s doing a better job than I am. PG is doing a better job than I am. I’m pretty sure I’m right up there in the top five.
Jason: Right. What do you think is the disruption occurring?
Dave: Sorry. That’s a fucking arrogant statement, but I can back that shit up.
Jason: The fundamental disruption that’s occurring is you’re getting to these companies before the VCs?
Dave: A little. That’s easy because they don’t want to do it as early as I do.
Dave: I mean, Paul is going after the same stage we are, but he has a different filter than we do. I mean, we’re doing it in a bunch of different ways. We’re doing it at scale, early, before traction, international, women, marketing, design. All sorts of like things that are different. We have to. We’re fucking 5 years late after Tech Stars and YC, so we have to do that different. We invest in YC and Tech Stars and other places. We, both, compete with them and like expect them to do a good job, so we can filter. I think there’s tons of different ways we’re going after that. We do conference and events. We do other bullshit. Probably… If I were an entrepreneur I would tell myself, too many fucking features… like I probably haven’t doubled down on the thing. I think we decided a year ago, a year and a half ago, that international was the primary thing we were going to try and differentiate on. I mean, two things really, scale and the international stuff.
Jason: How is international an opportunity?
Jason: When you say international…
Dave: We can have a whole conversation on that.
Jason: … as in, the company is located outside of The United States? Or international, the company’s in the Valley or San Francisco and we’re going to take it international?
Dave: That’s an opportunity too. But, I think for us right now, the big opportunities probably are Brazil, India, Mexico, Middle East, maybe Southeast asia, maybe China if we can figure it out. Those are the things that we’re really trying to go after right now.
Jason: Does that mean you’re getting on planes and you’re investing over there?
Jason: Or you’re going over there and bringing them here?
Dave: Both. Really more importantly, I think more importantly, we’re trying to find the right people to hire in those geographies, to meet the right mentors, to meet the other right angel investors and entrepreneurs. We need to figure out the fucking ecosystem before we start investing. People think when we get on the ground, we’re going to start writing checks. Occasionally we’ll do that but like the first year is just figuring out the lay of the land and who’s got their shit together. Usually it’s not us. Trying to identify a person that we think is the right cultural warrior for us, who’s going to open up that territory. They have to be able to sort of speak that language, culture and speak Silicon Valley language and culture and merge those. Then, disrupt shit.
Jason: Yeah. Hey, when we get back from the commercial break, I want to hear more about diversity. You mentioned women as a thesis.
Dave: Absolutely. Yeah. That’s not charitable.
Jason: This diversity issue had come up a little bit, in the last week for some reason. I don’t know why. I want to talk about also, which is a serious topic, founder pressure and some of that stuff. Which is kind of heavy for both of us. Also the design thesis as well. Let me take a moment just to thank our friends at SquareSpace. SquareSpace offers 24 hour support, 7 days a week, for creating beautiful, professional looking websites. I have a dozen of them at my company. With SquareSpace v.6, every site has it’s own automatically resized mobile version. Go toSquareSpace.com/TWIST to try it out for 2 weeks. No credit card required. Purchase a yearly or bi-yearly plan and get 20% off. If you decide to keep that trial, click…
Dave: Jesus, this is a long commercial.
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Dave: We’re doing sports talk radio with geeks. I love this.
Jason: It is a little bit that. Let me just do the other ad for a second here.
Dave: And we’re back with Dave McClure.
Jason: Oh, yes. I can use my radio voice. Thank you to our friends at ShareFile by Citrix. Send files of almost any size. Access files from any… I can’t do that voice for too long. It hurts actually. Safe and secure cause it’s built for business. We’ve been using it here at ThisWeekIn and Launch. It’s got some great features like requesting files. For people who don’t use the system. They can put it in that secure document locker, email alerts when somebody uploads or downloads files and an audit trail of all your files being used. Visit Sharefile.com, click on the radio microphone button and use the promo code TWIST and you’ll start your 30 day free trial. Go ahead and thank @sharefile by Citrix on your Twitter. It’s a great product. It’s a new product by Citrix. It’s wonderful. Thanks so much SquareSpace. Thanks so much Citrix. So let’s talk about diversity for a second.
Jason: You mentioned one of your thesis…
Dave: Sacca is DMing me right now. Says, “I’m sure you can beat me in a volume of curse words, but I’m artful. I’m a vulgar savant. A craftsman of offense.” Shout out to Sacca.
Jason: Shout out to Sacca. He is pretty good at it. Let’s talk about your thesis…
Dave: He’s good. I would agree.
Jason: What is your thesis on women?
Dave: Yeah. They’re 50% of the market. They’re probably more than 50% of the purchasing market. Most entrepreneurs are single and male. So they don’t have much relevance or understanding. Moms and families and kids are a huge market opportunity that’s being underserved right now. You have a 1 year old?
Jason: 3 year old.
Dave: Sorry. 3 year old.
Jason: There is a lot of money that is spent… Yeah.
Dave: Jesus. A shit load of money that gets spent.
Jason: A lot of commerce that occurs.
Dave: Literally we moved. We moved to be in a neighbor hood where we could have the chance to be in a lottery for this like charter school.
Dave: Then we got in. After all this hassle it didn’t quite work. We’re like, “Oh, fuck.” We like literally fucking didn’t buy a house but changed where we were living to get into a school.
Jason: Based on to get into a school. Right. So, big deal. Is your perception that diversity is increasing in Silicon Valley? You’re seeing more female entrepreneurs? I mean…
Jason: Clearly, not enough.
Dave: Enough is a difficult metric to… There’s way more women entrepreneurs now, than there were at least 3 years ago. That’s been noticeably increasing.
Jason: I agree with that, yeah.
Dave: The Women 2.0 Conference is coming up February 14, in San Francisco. Shout out to Shaherose. That conference was amazing last year. I was kind of blown away. There was easily over 1,000 women in the room. Probably at least half of them had businesses off the ground. A bunch of them that we were investors in. It very, you know… I’m probably not the right person to be saying this, but it was very inspiring. I think as much as there is still challenges for women in the investment world… I think we’re making progress there… Maybe women are not anywhere near a level playing field in terms of funding. But, I don’t think it’s like…
Jason: Do you think there’s a difference in Silicon Valley… let’s ask the hard question…
Dave: I don’t think the problem is here. I think the problem is elsewhere.
Jason: OK. So, in Silicon Valley somebody comes in, male/female, with the same metrics, the same hockey stick… or you know, potential hockey stick curve. They’re gonna be treated the same?
Dave: No. There’s probably still unintentional bias.
Jason: Intentional bias against…
Jason: Unintentional bias.
Dave: I hope there’s not intentional bias. I think that’s not likely the case anymore. But, maybe. There’s probably a shit load of unintentional bias.
Jason: If a female entrepreneur comes in and they have the hockey stick, they have the growth, then VCs will fight over each other no matter what. If the performance is there, it’s going to be a dog fight.
Dave: Yeah. But, I bet her pre-money will still be like 20%-30% lower, than if it was a man walking into the room, if it was a white guy walking into the room.
Dave: I’m just good at guessing. I don’t know. I’d probably do it. I’m sure that I’d probably do it.
Jason: I can’t fathom you doing it.
Dave: It’s… Well, you just have to take yourself out… You’d probably have to look at the data.
Jason: You’ve invested in the firm… Your partner in the firm is a woman.
Dave: 3 of my partners are women.
Jason: 3 of your partners are female. You have a female thesis amongst your…
Dave: Actually four. We just hired another one. So four.
Jason: You are the most pro-female founder out there. I think, you’re not giving your…
Jason: In terms of investors? I mean, you probably have been the most vocal about it.
Dave: I think we’ve got over 75 female CEOs. It might be over 100. I’m not sure. Easy over 100 female founders.
Jason: On a percentage basis.
Dave: We’re probably at 15%-20%. Which is like 3X anybody else. But, we’re still not anywhere close to…
Jason: That’s what I’m saying. You’re not giving yourself close to the credit.
Dave: Well, I’m just saying. We probably still have… I bet you if we look through the data I bet you we would still have some kind of measured bias in terms of other factors. I don’t know whether that makes sense or not. I’m just saying that we invest in things that we know. The models that we see are probably white, nerdy guys. Or asian guys. Maybe now starting to be brown guys that have had success. Those are the things that we sort of value because…
Jason: This pattern recognition.
Dave: Right. It’s only been recently that we’ve seen women with large success stories. A few, not a lot.
Dave: Until we start seeing that pattern more frequently and more consistently, we probably will intentionally sort of bias against that, a little bit. So, you know, hopefully more Victoria Ransoms and Rashmi Sinhas and Leah Belskys in the world, maybe that will change over time.
Jason: Let’s talk about the stress of being a founder. The stress of running… As an entrepreneur yourself, exactly how stressful is it? Is it getting more stressful than it’s ever been?
Dave: No. I don’t think it’s getting more stressful. You know, we’re not in a war zone. We’re not like starving. We’re not facing like extreme racial, gender or sex bias or other things. I think, those are much bigger stories. So, it’s a first world problem.
Dave: But, it’s still stressful. For people who place a lot of importance or emphasis on being a founder and like that’s your vision, not achieving that or struggling with not achieving that can be crushing. Can even result in some fucked up things happening.
Jason: Like Jody killing himself.
Jason: You think that when… I mean, you were an investor with Jody. Or, just knew him?
Dave: Yeah. We were friends first and investors second.
Jason: Friends first, investors second. He’d been on the show. Do you think that the startup pressure is… I don’t know what you know. I certainly don’t have a lot of insight into it. He was quite an individual.
Dave: I didn’t know Jody that well, but I would consider him a friend. I thought he was a real creative person. I thought he went after a market that’s cool, Ecomom.
Dave: Which, I still think is a great company and hopefully still continues to have a great future ahead of it. For whatever reason something got to him. That’s really a shame.
Jason: Do you think it’s the pressure? Do you think there’s a pattern emerging? Do you think…
Dave: I’m guessing it had something to do with it. I don’t know enough to try and comment. I saw Jody three weeks ago, less than three weeks ago in LA and had no clue. Which, I sort of wondered, did I fuck that up? Did other people… did we not notice? Hopefully people don’t take it to that extreme. I mean, as much as I love Jody, I think he fucked up and I think he made the wrong choice.
Dave: I don’t know whether there were other issues going on, whether it was medical conditions, financial conditions…
Jason: Or the founder stress. Personal stress. It could have been anything.
Dave: Whatever. I want to emphasize to people, it’s not that bad. Don’t do that shit. Talk to people. Try to figure out can we figure out ways to… It’s a discussion that happened within the portfolio with other people. We were like, OK we should start thinking how we solve that before it gets to that.
Jason: Yeah. Like, who in the portfolio is stressed out to the point of just having a breakdown?
Dave: Yeah and I hesitate to say that we’re dispassionate about that. I mean, you know, when you’re investing in 400, 500 companies, yeah people do become numbers. You do sort of gloss over the fact that there is a person behind that company that you’re saying, “Well, we’re probably not going to do that follow on investment.” Or, “We’ve just written off…” Or like, “Shit. I don’t want to do that meeting cause he’s going to be asking for money. I don’t think we’re going to put more money in it.” That’s a puss out on that answer but I face that story weekly. Like probably daily. I’ve been on the other side of that. I’ve been on the other side of struggling with the company where you need to raise money and people don’t want to fucking meet with you because they don’t want to tell you no. You know, it starts to color every interaction. Right? You’re not just… You can’t even go have a drink with people because they think they might ask you for money. Right? They don’t want to have to ask you questions about your company because they know it’s not going well.
Jason: That’s exactly when the person needs to talk to somebody.
Dave: Right. Exactly.
Jason: Is when it’s not going well. To get a bunch of high fives when you’re on top of the world. You don’t need the high fives then. You don’t need the pep talk then.
Dave: Well, you know everybody’s got the Silicon Valley ‘yeah it’s going great. Everything’s awesome. It’s all exciting.
Jason: Every curve is like this.
Dave: It’s wonderful. How’s it going?’ Awesome. It’s going great. You’re like, “Can I fucking make payroll next week?” You know. I have been there. You’re like… You gotta put that fucking show face on cause you’re trying to make it all work. You’re trying to get your employees… Sometimes you can make it work. You know?
Dave: So, it’s not like there’s no reason to do that. There is a reason to do that. But, you know, you want to have a safe place where you can have that conversation.
Dave: It’s probably not necessarily with the rest of your team.
Jason: No. You don’t want to have the team…
Dave: Certainly, not with your fucking investors, usually.
Jason: I mean, that is the problem right? If you’re the CEO of a company… I mean, even yourself, as an example, founder of 500 Startups. You can’t go to your team…
Dave: Dude, I’ve had some dark days.
Jason: We all have. I’ve had dark days.
Dave: We got an investment this week. I got $2.5M in the door. We just wired about 13, 15 companies out. I was like very relieved. It was like an incredibly stress-relieving day.
Dave: It was awesome. Had that not happened today, I would be stressed the fuck out right now. So, I think, everybody’s pushing it.
Jason: You can’t show weakness to your team. You can’t show weakness to the…
Dave: You can. You can. You have to…
Jason: Not so much that you rattle them.
Dave: Probably not. And, when shit’s really going bad, probably not.
Jason: Yeah, you want… I mean, they can see you’re human perhaps.
Dave: I think you want to show a level of transparency that breeds trust. You don’t want to show a level of desperation that breeds concern.
Jason: Like, panic. That’s well said actually. Then, looking up, telling your board or telling your investors, “Hey, this could come off the rails. This is not going…”
Dave: Which, they might take the wrong way.
Dave: They might fire you. They might, like, not fund you. They might not make introductions. That’s a really dangerous one to have…
Jason: Where does the founder go? In that situation, how does the founder find…
Dave: I think you, hopefully, go to other founders. I think that has to be, sort of, probably people have been around the block a little bit more.
Dave: Who’ve probably had the fucking shit show. I think it counts for a lot more when you’ve actually hit the wall.
Jason: PayPal almost went out of business.
Dave: Oh, like ten fucking times.
Jason: I remember talking to Elon about this and David Sachs.
Dave: All kinds of different ways. Ran out of money, fraudsters, Attorney Generals suing them, Ebay… Like, there was like 15 different demons chasing PayPal. Which is why a lot of it … I would always say that one of the reasons that PayPal succeeded was that they never had an easy time.
Jason: It was always hard.
Dave: I think if you look at places that were tough. So, let’s choose Google, Yahoo, MicroSoft. Pretty easy times. Amazon, PayPal, Facebook. Pretty hard times. It’s like tough figuring it out. Tough getting to profitability. If you look at where the entrepreneurs came out of, they come out of those companies. They didn’t come out as much of the others. There’s still a lot of talented folks that came out of those other companies, but on a per head basis…
Jason: So, a lot coming out of PayPal and Facebook because of the struggle.
Dave: Maybe not so much now, but in the early days Facebook did struggle to, sort of, figure out monetization. They didn’t struggle with growth but they did struggle with monetization.
Jason: What’s your outlook on Facebook? Do you believe this is going to become a… We were sitting here talking two years ago and people were saying Google had a Facebook problem. Boy, does that not seem…
Dave: They still do, yeah. They don’t.
Jason: I mean but Google’s hitting all time highs and Facebook’s still not above their IPO price. Google’s having record quarters and…
Dave: Oh, come on. Seriously. Facebook’s a $68B market cap. Who’s sad? The IPO investors?
Jason: No. I’m not saying that it’s sad. But, the idea that…
Dave: Fuck them, come on.
Jason: But, the idea that Facebook would trump Google.
Dave: Dude, I said that 5 years ago.
Jason: Well, it seems laughable 5 years ago.
Dave: It seemed laughable when I said it. I thought I’d fucked up when I said it. Now, I’m pretty fucking sure I’m right.
Jason: You think Facebook is going to take out Google?
Dave: I think Google has really done some amazing things. The search business is obviously huge. I think Android is really amazingly interesting. I think YouTube is overlooked. I think they’ve got other crazy shit in the works that might actually turn… No question, Google has been an incredibly innovative company in multiple areas and has continued to respond to competition. But, let’s be serious. Google doesn’t know social from it’s own ass with two hands. They’re clueless about social. Even when they’re trying, they’re still fucking clueless about social. That’s not nothing. That’s like a big fucking deal.
Jason: Can they solve that by just buying Twitter?
Dave: I think they should have done that like two years ago.
Jason: Why has that not occurred. With all that cash…
Dave: Probably cause the price was too high. From what I’d heard, the numbers that were offered were between $10B and $20B. Twitter was probably asking something north of $20B.
Jason: So, double their current valuation. Which was already considered pretty rich.
Dave: I mean, if you’re Twitter you’d be asking $30B or $40B cause you’ve got growth kicking in. If you figure out monetization, shit it might be worth $50B-$100B. So, why sell now for $20B? Cause the market’s fucking easy and open.
Jason: You said YouTube is overlooked.
Dave: YouTube’s still overlooked.
Jason: What would YouTube be worth if it was an individual company right now.
Dave: Fuck. I don’t know. Like it’s…
Jason: $4B or $5B in revenue probably.
Dave: Chad and Steve sold because of the liability concerns.
Jason: Yeah. They couldn’t get out from under the lawsuit.
Dave: They could have. They just needed the money.
Jason: A lot.
Dave: Right. Google had the money and was already fighting some of those issues. So, it was a great marriage under that sense. But, the strange fucking thing is YouTube is not very social. Imagine if YouTube had the social network. Gmail is like an amazing platform that Google has not paid attention to and really fucked up, in my opinion. Like, that was clearly the social network that Google had in it’s back pocket that they just didn’t… Gmail and YouTube are the biggest social properties that Google has and they’ve done literally nothing with them, in my opinion.
Jason: Yeah. They are starting to integrate.
Dave: They are huge successes nonetheless.
Jason: Right. But, Google+ and YouTube are starting to merge a little bit. The handles on Google+ will become the channel names on YouTube.
Dave: I think they will make a success of Google+ but it’s not challenging Facebook or Twitter by any means, whatsoever.
Jason: No. What’s your take on Apple in relation to startup companies? I mean, obviously, it’s a very aloof company that hasn’t been particularly acquisitive.
Dave: Apple’s out-executed everybody. They like fucking kicked everybody’s ass, period. The only thing they haven’t done… Again, they also don’t know what the fuck they’re doing on social. Again, if I were Apple, I would either buy Facebook or Twitter. Facebook would be hard. Twitter would be possible. Cause, there’s so much value in having a social channel that’s like tied into mobile. Maybe they can get it through partnership but I feel like that’s… Apple’s so fucking huge they should just buy Twitter. It’s like obvious.
Jason: Right. Well, you said a number…
Dave: Apple could overpay and buy Twitter for $50B.
Jason: You said a number over $20B. They made $24B in profits, last quarter.
Dave: If Apple could buy Twitter for $50B, I would say do it in a fucking heartbeat.
Jason: They could?
Dave: I think.
Jason: Of course. Five times…
Dave: Jack’s been auditioning for the job for the last 3 years.
Jason: As CEO of Twitter? As CEO of Apple?
Dave: As reporting to Steve Jobs. Except that position ended a year ago. I don’t know. That’s all bullshit commentary.
Jason: Do you think he was recruited?
Dave: The super amazing deal would be if Apple could buy Square and fucking Twitter.
Jason: Then, just put Jack as the Chief Product Officer?
Dave: Magical. That would never happen but that would be magical.
Jason: That would be magical.
Dave: It would probably work.
Jason: When you look at an entrepreneur, when you’re meeting with them, what are your signals that you use… I’m trying not to use the words you used at the Launch Festival. But, what are the things that make you…
Dave: Raging hard on I believe.
Jason: Yes. I didn’t want you to say it but, you said it anyway. What are the things that give you a raging hard-on with startups? Did I just really say that? I can’t believe I said it. Go ahead. By the way, he’s reading your Twitter comments right now. Lest you think he’s not interested.
Dave: Trying to. Trying to. I think there’s basic things we try to do when we’re filtering for initial investment.
Jason: No. You personally. When you’re in the meeting and you’re meeting with a founder…
Dave: No. But, I think I have to dial that back cause you get like all excited and passionate and you know. Love it for a sight sort of vibe. You gotta back off that cause it doesn’t always work.
Jason: Are you the type that’s excited in the meetings?
Dave: Oh yeah. Easily.
Jason: Makes a rash decision?
Dave: A lot.
Jason: That’s what we want to know. What are the things that make you irrational, that get you enthusiastic to that level?
Dave: I think you want to see that there is an attention to customer need. There’s a sort of creativity of solving that need that is differentiated from stuff you haven’t seen before. I get particularly excited about people who can think fast on their feet.
Jason: So, if they know that vertical really well, when you ask them questions they can answer them crisply?
Dave: Look. As much as I get thrilled by certain entrepreneurial attributes or characteristics, we try and look at product. We try to look at how product works, what problems are trying to be solved, what the basic economics look like. A business that got me real fucking excited was… On AngelList I found Farmeron. Which was a company out of Croatia. It was the…
Dave: Yeah. Which we seed capped the investment. Jeff Clavier of SoftTech did the seed or Series A. I can’t remember which it is. So, it was a guy out of Croatia. His dad was a farmer. His dad had a problem. Which is, he had a bunch of cows. He needed to get milking data for the cows measured. These days farmers have computers and even have mobile phones. The milking devices actually have other data that that you can read. It was like, “Oh, well we can gather that data, put it into spreadsheets, measure it on the web and then figure out milk production. By the way, that’s our income.” So, web metrics for cows…
Jason: Who knew?
Dave: … is kind of a pretty fucking unsexy business that’s not Instagram. But, to me that was like, “Wow. That is pretty fucking cool. That’s solving a real problem. How many farms are there in the world? Small business farms. About 100M.”
Jason: With twenty cows on each.
Dave: The other thing was like, “Yeah. Farmers in Croatia are willing to pay us $1K a year, up front, to get this shit.” You’re like…
Jason: In Croatia?
Jason: So, in The United States…
Dave: OK. That’s like a $100 a month, $50-$100 a month subscription in a developing country.
Jason: Right. So, this could be a $500 a month subscription in The United States.
Dave: You’re like, “Damn. That’s a good fucking business.”
Jason: This investment was 2 years ago, I think. How has it worked out?
Dave: Good. They’re growing like crazy. They have deals with a couple of large farm production companies in Germany or someplace. Trying to figure out how to move into the US market and potentially other markets, like India and Brazil.
Jason: What do you guys typically put in? $250K? $500K?
Dave: Our first check is usually $50K-$100K. Occasionally, we go up to $250K.
Dave: Second check is usually $100K-$250K maybe, up to $500K. The largest check we’ve written so far is $500K.
Dave: We would probably do more like $1M or $2M in the future if we have the capital. We haven’t had as much capital in the past. But, it’s kind of incremental. We intentionally design our investments so that we’re not likely to be more than 20% of a round. We’re looking to have down stream capital, be the lead in the round and not be too sharp elbows for them. But, we want to be able to do more on the second or third check.
Jason: Let’s talk about valuations for a second. We seem to have had an out of control moment last year, where two or three person companies were doing uncapped notes or $15M caps. I said, “I’ll sit this one out for a little bit.”
Dave: The weird thing is, occasionally, those are the best companies.
Jason: Usually they are. They got the most…
Dave: Not usually.
Jason: I find they have the most…
Dave: Usually the $15M cap or uncapped notes don’t fucking work.
Jason: OK. For that it’s different. They usually seem like they’re getting the most angel investor attention, so therefore they feel like they have…
Dave: Early valuation traction, probably not consistently correlated with exit size.
Jason: I’ll agree with that. Yeah.
Dave: So, it’s just like the heat of the moment.
Jason: What did you do during that time period? Did you sit it out? Did you suck it up?
Dave: We did some of those deals. We tried to also negotiate them into situations that weren’t quite as crazy. We have some access and some resources that most other investors don’t, that we can probably use to get better deals. We have put in a lot of time and effort building up a mentor network of several hundred people. We’ve got international distribution. We’ve got a portfolio of other companies. There’s things that I can bring to the table that an individual investor can’t. We feel it’s important to continue investing in YC companies, even though we compete with them. Those are some of the best companies out there. I think being a consistent and regular investor in YC is a good investment thesis. I’m not sure that median entry point at $12M is a good investment thesis, but maybe a 50% premium over the rest of the market is not crazy.
Jason: Things have calmed back down.
Dave: A little bit, but I still think there’s still going to be people pushing the envelope on that. We’ll see. I don’t really understand the recent changes that YC have made. I think they’ve sort of dialed back a little bit. I do think that they’ll probably dial back up, in the future. They clearly have been leading the way and pushing the envelope on scale. We’re trying to do it too. Probably, them and us are the two that are really…
Jason: Scale of the number of companies?
Dave: The number of investments and the number of companies. I think they’re over 5… The interesting thing that I think I heard is YC is actually over 500 startups right now.
Jason: And you’re at, whatever, 450…
Dave: We’ll hit 500 by Q2.
Jason: Is that some sort of milestone for what you’re doing?
Dave: Minor. We’ll throw a big ass party. There’ll be some branding and marketing around that, but I think that’s not anywhere close to the ambitions we have.
Jason: Now, how many funds does 500 Startups have?
Dave: So, this is where I’m supposed to make sure I have checked with my lawyer.
Jason: Yeah. Exactly. Well, let’s assume the last time you raised a fund was 2 or 3 years ago.
Dave: No. That’s not true.
Jason: When was the last fund raised? When was the last announced fund?
Dave: Let me just think about what I can say and make sure…
Jason: Well, you don’t have to say anything. If you tell me…
Dave: I’m going to be saying things but I just want to make sure That I’m not saying stupid shit that gets me into trouble with the SEC or other people.
Jason: We can do shots. Jager Bombs.
Dave: That’ll loosen me up. But, I don’t think you want me going to jail.
Jason: No. I don’t. The SEC is right back there.
Dave: The non-solicitation rules have been changed. So the first fund was $29.5M that was closed. We’ve invested most of that. Fund 2, if you believe SEC filings…
Jason: People have reported on it, yeah. It’s going to be some… It’s in the works.
Dave: It’s not closed.
Dave: We are actively investing out of the second fund.
Jason: Oh, OK.
Dave: If you look at our pace, you might suggest that perhaps that second fund would be…
Jason: Slightly larger.
Dave: Probably our initial investments out of the second fund will be wrapping up sometime soon.
Dave: So, the natural progression would be something else also.
Jason: Yeah. So, that means you’ve been somewhat validated by your…
Dave: Accredited investors, could you see me at the end of this session at the back of the room. We’ll have some beers. I’m hopeful that the SEC does take to heart the changes in the JOBS Act. Which are mostly company facing but for many folks they’re also fund facing. So, the non-solicitation rules for funds basically requires funds to not make public statements about raising funds to unaccredited investors. That restriction has been removed, legally. The SEC’s ruling for how that new lay of the land operates is unresolved.
Dave: So, at the moment I could not issue a press release on TechCrunch suggesting that I was raising fund 2 or still raising fund 2. Or, I could not, under the SEC restrictions suggest that I was issuing a press release in a few months that we might be raising another fund. Or that we were raising funds for regional vehicles and other countries. Or that we were raising a fund for any follow-on investments in our first fund. I could never suggest that our performance was good enough, such that I might insight investor interest in those vehicles based on results. However, since those laws have been theoretically abolished by the JOBS Act…
Dave: … then I theoretically could make statements in a public forum to unaccredited investors about any such fundraising activity. Which, I am not suggesting that we are doing by any means.
Jason: Nobody would be suggesting that you would be suggesting that.
Dave: Because we do not raise funds from unaccredited investors, there is really no risk, assuming that we are getting accredited investors. The issue is right now, the accredited investor test is that they say they are.
Dave: Now, under this change of ruling, probably the test will be that we need to verify that they are at a higher standard than just them saying that they are.
Jason: So, they send you a tax return or you call their banker or something.
Dave: Theoretically, I’ve been quoted in the past as saying, “You don’t really need to be accredited to invest in startups. You just need to sign a piece of paper that says you are accredited. So that you can’t sue the startups and the startups can then say, ‘You can’t sue us.”
Dave: Theoretically, someone… not me, not you… could suggest that you are an accredited investor when you are not.
Jason: You might have done that with your first couple of investments.
Dave: Cause some of us haven’t been accredited investors when they made their first or second investment.
Jason: Do you think that the crowd funding laws will actually get passed? We had…
Dave: Did I navigate that OK? I think I did.
Jason: I think you got it perfectly. We got all the information we need. You’re deep in the game. I’m going got take questions next. Queue up your great questions. Kirin has the microphone somewhere. Where are you, Kirin. There she is. When you do ask your question, if you’re a super fan you can say what your favorite episode is. If your favorite episode is Sacca, just say ‘Sacca’ then the next one. Since, I do get that too often. Although, this one might put a big dent in the Sacca’s.
Dave: We should come back and do this again.
Jason: Crowd funding for non-accredited investors. Are you pro it or are you against it?
Dave: Crowd funding for non-accredited investors. I’m pro to it some level.
Dave: I actually think the current laws for accredited investors are completely un-American. The fact that a net worth test should be some intelligence meter for if you can be an investor or not strikes me as completely un-American. It’s un-egalitarian. It’s an elite rule for elites.
Dave: Having… Yeah. Right. Fucking A. Anyone should be able to lose all of their money investing in startups.
Jason: Or, the truth is, if you were going to bet on a sports game, or bet on Facebook in year two, or LinkedIn in year two or three, like I think a lot of people in the room here would have a better chance picking…
Dave: One can only go to zero, baby. I’m just going to keep saying that.
Jason: No. I know but, you’d have better odds I think betting… I think everybody here knew that Linked In would be an important company, right after they filled out their profile. Everybody here knew Facebook would be an important company. I think everybody here knew that Twitter would be an important company. If crowd funding was available, people in this audience who are not accredited would have said, “Fuck it. I’ll put $500 into that.” Or $100 or a $1,000.
Jason: What an amazing world… Now, you know where I stand. But, what an amazing world it would be if…
Dave: We don’t have to protect against a world where everybody makes a shit load of money. That’s not the concern. I think the SECs concerns are legit. There will be fraud. There will be people fucking around with you. There will be people who like waste your money. There will be people who sell time share condos in Miami to people who are not sophisticated investors.
Dave: However, I don’t think that has anything to do with their fucking net worth. They’re will be people in their 70s who are clearly accredited investors with many of dollars who should not be investing in startups. There are teenagers who have like $10 in their pocket who probably know more than you or I do. So, net worth is not the intelligence test for investing in startups. There is a certain amount of money that anyone should be able to fucking burn and blow on startups, if they want to. We encourage a ridiculous amount of money going into residential real estate market. Which has burned people fucking terribly in the last five years. Ridiculous numbers of people in this country are upside down on mortgages and are bankrupt because legitimate regulatory approved agents have like shoved real estate mortgages down their facing throats.
Jason: That they didn’t understand. Or not in their best interests.
Dave: We have subsidized with our tax dollars. We are the people… Like, you fucking blame the investment bankers… Fuck you. It’s you voting for your representatives who are in the pockets of like Sallie Mae, Ginnie Mae, Fannie Mae whatever. Who are shoving shit down the pipe that is like… and Moody’s and all these other people who have like crap verification. Like, if you want to protect the small investor, don’t let them buy a fucking house in this country. Because, that is the most dangerous thing you can do with your money. Period.
Jason: Wow. There you go.
Dave: Investing in startups, which might fail, but you only lose $1. You invest in a house, you put 5% down, or sometimes, 0% down and you can lever up a ridiculous amount of money.
Dave: You could lose 20X your investment in a house. People do it everyday. They think it’s a good idea to lever up 20X on your fucking house. Everybody is like, “Oh. Buying a house is an awesome thing.” I literally talk to my mom and my wife every… like, month for the last ten years. Like, “No. I don’t really think investing in housing is such a great idea. Cause I don’t really know what the fuck I’m doing.” You know. Startups, I kind of know what I’m doing. Worst best case is I can only lose $1.
Jason: What about guns?
Guest: One can only go to zero.
Dave: Let’s all say it together. One can only go to zero… if you’re investing in startups. But, if you’re investing in housing, one can go to negative fucking 20.
Jason: That’s true.
Dave: So, why don’t you put all of your life savings into housing? Because, you get a tax deduction. Except, you might lose 20X your life savings and have to declare bankruptcy.
Jason: First question from our audience. You’re listening to 89.9 KCRW.
Dave: Let’s protect people from investing in startups cause that’s so goddamned dangerous. But, lets encourage them to invest in housing through tax incentives. Thank you US representatives.
Jason: Thank you for tuning into NPR. The voice of all nations. Our guest today is Dave McClure. Who’s talking about insanity.
Dave: Really. This is where I go off the rails and it goes from like reason to argument to, “Boy, that motherfucker’s crazy.” Sorry.
Jason: Go ahead.
Dave: By the way, I just confirmed an investment in DropShip on AngelList.
Dave: Which is, theoretically, illegal that I just said that.
Jason: Oh, yeah. Theoretically. OK. Go.
Guest: OK. I just want to thank you Jason and Dave. I enjoyed the interview a lot.
Jason: Can we hear his microphone?
Guest: Hello. Is this working? OK so…
Dave: Enunciate motherfucker. What is your question? Be passionate about it. Don’t suck.
Guest: Alright. My fucking question is…
Dave: He’s behind the pole. I can’t see. There he is.
Jason: Is that microphone on?
Dave: Have a take. Don’t suck.
Guest: Alright. My question to David is, you recently opened up your application process to AngelList.
Guest: Before you only did inbound through your own network.
Guest: Are you still looking for referrals and inbound responses…
Dave: So, referrals is still the best way to do it. It’s just that AngelList is the platform for that. In particular, there are places where we don’t have network where we do kind of want to invest. Particularly, intentional. So, it’s harder for us to get referrals from places, like Croatia. Actually, it’s easy for us in Croatia. Let’s… some place else. I don’t know. Mauritius. So, if you’re a company with traction in Finland, it would be hard for us to find out about that through our normal network, so we might be able to find out about that through the AngelList application process. But still, you’re going to be fast tracked to the AngelList process if you know a founder, a mentor, a co-investor. You know, somebody else that we sort of have a connection to. So, referrals still count for a hell of a lot. It’s just that AngelList is a great platform for filtering that shit.
Jason: People going and just looking at your portfolio and finding the founders and just saying, “Can we go get coffee? I want to tell you my idea,” will get you there.
Dave: Well, that’s tough. I don’t scale to do that. I mean, I can still do that a little bit.
Jason: No. I’m saying, if you were the founder coming in… If I want to get into the next 500 Startups class, if I go to five of the founders who have done best in your program and have coffee with them, that’s going to start them at second or third base.
Dave: Yeah. That’s the best way to do it. The best way to get into 500 is to find other mentors or founders in 500, who are in domain areas of similar expertise. Hopefully, not competitive but go talk to people because they’re building a business for moms, or they’re building a business for SMBs or they’re building a business in mobile in Brazil and talk to them about that. If they think you’re cool, we probably also will think you’re cool. If you find 3 of those people that think you’re cool, we’ll probably do the investment.
Jason: Next question.
Dave: And, don’t come fucking pitch me for 30 seconds and think that’s going to get you in the door.
Guest: This is kind of a free association question. I’d just like some commentary on that. We’ve heard a lot of things today. One of them was that it’s demographic bias, sometimes. You’ve admitted that.
Dave: Yep. All kinds of bias.
Guest: The second thing is that you look at the product first. You say that even in a personal meeting, you’d be looking at the product first.
Dave: For early stage startups, that’s pretty much the only thing that we can validate. There might be customers or revenue also but, the product is the thing that you have built.
Guest: Right. So, what I’m going to say is, somebody where they may be on the… not able to get in, is personal responsibility and persistence and communicating better along with those two other things. So, you’re a heavy investor and a lot of the startups in the room…
Dave: So, where’s the question here? Where are we going?
Guest: Well, it’s a free association thing. Those factors…
Dave: Your free association is not free for me or the audience. Where are we going?
Guest: I’m sorry about that. I’m saying, given all those factors, what’s the best way to be persistent to get there?
Jason: I can rephrase the question. How… Maybe I can’t. How important is persistence without being annoying? Putting aside, like OK I’ve got a good product.
Dave: Because, it’s a pain in the ass to get in touch with me, when is the point at which you should stop trying to get in touch with me?
Jason: Right. I’ll make up a good question. When does persistence turn into, like, go into the negative zone. Where you’re holding it against a person.
Dave: See, the problem with this is, the people who understand the answer to this, aren’t the people who need the answer. The people who need the answer aren’t going to understand what a fucking answer is anyway. When do you stop hitting on the really hot chick when you have no fucking chance? If you’re dong it, you’re never going to figure it out anyway.
Jason: Yeah. An hour ago. Two hours ago.
Dave: I don’t know. There is something to be said for persistence. But, that just encourages you to be annoying to me. So, like… you know.
Jason: I can answer that question.
Dave: Teach me something about the industry that you’re in. Don’t pitch me directly. Pitch me indirectly by showing me that you’re smart. Have other people tell me that you’re smart.
Jason: Ahh. Great tip.
Dave: Send me a screen shot, a white paper, an info-graphic, something about your industry and why it’s interesting. Identify all the competitors so that I know a little about your industry. I mean, there’s lots of different ways to be creatively interesting. Be awesome. Just be awesome.
Jason: A lot of what you talked about was data and supporting your case. Not saying…
Dave: You should invest in my company.
Jason: … “You really should invest in my company, because we’re brilliant.”
Dave: Cause we’re awesome.
Jason: “If we could just have a half hour of your time.”
Dave: Or because, “I need you.” That’s the other one. “Cause I really need your advice.”
Jason: Build your case with facts.
Dave: Your need for my advice is not my burning desire to have a coffee with you.
Jason: Yeah. Building your case is what you’re saying? Through data.
Dave: Look. I’m not trying to be better than anybody else. I’m just like a guy with an opinion. Everybody… you’ve got to have an interesting story and somehow communicate that. It’s just that, like, we get a shit load of stuff coming at us. So, it’s hard. People are always like, “Here’s the mountain. How do I get to the fucking mountain? What’s the shortest path to the mountain? There’s two things which I always say, which is, like second most important person in the room. So, it’s not me or Jason, it’s the people in our network who you can reach. The other one, the really better one is like, what’s your network? Right? Then, how do you expand that out one layer? So, like work the edges and the important influences in your network and then say, “What’s the possibility of that network if I just worked it a little bit more? And you do the boomp. Right? Or, I do the boomp over here and like, “OK. These two things just opened up.” Right? Now, those connections might get to that mountain a little faster or easier. But, even if they don’t, it’s not that you need to get to the mountain. It’s like what directions are you trying to expand that network? Do I need to understand somebody who is in financial payments? Do I need to understand somebody who is in Google’s network? Do I need to understand somebody who’s got connections to corporate America that does consumer goods? Or moms and education? Then, like, you bump the network that way. You don’t go, “Oh. I want to go get a meeting with Mark Cuban because Mark Cuban is fucking sexy and he’s on Shark Tank.” I mean, Mark Cuban is sexy. Believe me, I got a meeting with him two fucking weeks ago and we were so excited.
Jason: Yeah. I know. It was all over your Path. It was crazy.
Dave: But, don’t expect that that’s the path.
Jason: No. But, in the case of Mark Cuban… You getting a meeting with Mark Cuban is a no brainer. Of course…
Dave: Mark Cuban was 5 years of other networking…
Dave: … and having him accept a Facebook request like a year and a half ago and not being annoying as shit on that, doing other shit to get his attention, having 3 or 5 co-investments with him. Then, he was like, “Oh. OK. I’ll accept that meeting because you’re not weird or psycho. I have some context.”
Jason: Right. Great. No weirdness, no psychoness. Go ahead.
Dave: The other rule is don’t be a fucking psychotic weirdo three times in a row. Be in the same room with me. Be a normal person and don’t ask for too much shit. After three times I’m like, “Oh. That was a normal person in the same room as me. They didn’t ask for too much shit. You’re part of my tribe. OK.”
Jason: Right. OK.
Guest: Hi, David. Besides the fall in US residential property markets, given your exposure to consumer internet, what do you see as your greatest fear that keeps you awake at night, the next 12-18 months?
Dave: Sorry. What’s going to fall apart? What was that question?
Jason: Yeah. What scares you in the market?
Dave: What scares me in the market?
Jason: Do you have concerns about the global market? The sort of meta stuff.
Dave: Yeah, but I mean…
Jason: What about it?
Dave: You can’t play for despair. You have to play for win.
Dave: You know, we have a balanced portfolio. So, I probably worry least about that than anyone. Just cause of the amount of diversity in our portfolio. Both, within the US and internationally and across like different investment thesis’. The biggest risk for us is that probably most of our investments might be small wins. Those small wins have tenuous opportunities at exit. So, it’s much harder to get an exit for a $5M-$25M valuation company than it is for a $100M-$500M valuation company. $5M-$25M valuation company might be a small number of people, it might be high variability in revenue, the founder might get tired, there might be a key man dependency or a key woman dependency. So, like there’s just a dearth of buyers in that particular segment. Our biggest issue is trying to figure out liquidity at such a small size.
Jason: Which, to be honest, it seems like that kind of activity has picked up greatly. So…
Dave: In the US.
Jason: In the US. It might have been very pressing.
Dave: It’s still a risk internationally. So, the fact that we’re trying to do money ball style investing internationally is assuming that an M&A market develops in those geographies that looks like here in 5 years.
Jason: All of this repatriated cash… Is that part of the thesis? The Apple $80B, the MicroSoft $20B, the Google $50B outside the US?
Dave: No. I mean, like to get back to that other question, I mean there’s 2 or 3 billion people in this world that are living, probably at incomes of $1K-$10K a year and on their way to $20K-$50K a year in the next 5 years. That’s the amazing growth in the world right now. So…
Jason: A new middle class.
Dave: Second world countries on their way to first world. Then, if you’re really over the edge, third world countries on their way to first world in 10 years are the interesting parts of society. So that’s… As I mentioned before, Brazil, Mexico, India, Southeast Asia, probably Indonesia primarily. The Middle East, China if it’s not too complicated. Africa eventually. Maybe eastern europe. Although that’s a little bit more fragmented. The challenge is like there are a lot of countries where there’s so much language and country fragmentation, it’s harder to get to. So, like the places you start with are the big block countries that are one language.
Jason: Yeah. A Brazil. A Germany.
Dave: Brazil, India, China, maybe Russia. Although, I think Indonesia is a little bit more interesting than Russia right now. Then, look at speaking blocks. Four global languages in the world. What are they?
Dave: Mandarin, right? He got the fourth one right. Arabic’s the forth one that most people miss. It’s English, Mandarin, Spanish, Arabic. Then, if you go a little further, Hindi sort of except that most Hindi speakers also speak another language and probably english is the default anyway. Although Hindi’s still sort of interesting. Portuguese, Russian. If you do GDP weighted, then it’s interesting in places like Japan and Korea and Germany. The four big blocks where there’s like tons of opportunity, English just cause it’s the world’s language. Mandarin because it’s a big fucking block. Although, the population growth is static, the GDP growth is significant. Then, Spanish and Arabic because the internet penetration, the mobile growth, the GDP growth are all big. The challenge is both of those are highly fragmented. They’re across multiple countries. I’m going down to the weeds on this. But, that’s why we’re betting big on spanish speaking markets and that’s why we’re going to bet big on arabic speaking markets. Just because there are 300M speakers on their way to 500M-1B speakers. They’re young, they’re upwardly mobile, in terms of GDP. They’re upwardly users, in terms of internet devices and mobile. Payments still suck, delivery and logistics still sucks, but they’re all going to get better. So, you have like 4 or 5 different factors all going up and to the right at the same fucking time in those markets. US investors generally think those things are not interesting. Cause they’re fucking idiots. They don’t speak the language. They don’t go to those countries. They’re lazy and they sit on Sand Hill Road. They think that Brazil’s sexy now. Which is true except that was really a 3 year old story. China and India are sexy except that’s a 10 year old story. So…
Jason: Next question.
Jason: I just want to get the questions in.
Guest: You were talking about being a late bloomer and being afraid that you’re a loser because of it. What one piece of advice would you give to late bloomers?
Dave: Wow. I want to say, “Keep trying.” I’m not sure that’s good advice. I got lucky.
Jason: I got it. I can answer this one for you. All in. All in. The chips…
Dave: I don’t think that’s…
Jason: That’s what you did! You were a marketing dude at the…
Dave: I was a lost soul 5 years ago.
Jason: Well, if tonight proves anything…
Dave: Let’s get fucking super clear.
Jason: Super clear.
Dave: I’d like to say that I almost got VP of Marketing job at Mint. The actuality is fucking Aaron fired me. You know. He let me down easy but, he still fired me. He let me invest some money in the company. You know, I basically got pushed out of Simply Hired. I basically got fired at Mint. You know. I was a lost fucking soul in 2006 and 2007.
Jason: Why? Yeah.
Dave: Cause, I’m like… I can’t focus. You know. Sorry. This is getting super real right now, right?
Jason: Yeah. It feels that way.
Dave: Cause, I like to say, “I worked at Mint for… you know.”
Jason: But, you leveled up.
Dave: I did some creative things at both places. I think both… The CEO of Simply Hired, who is a dear friend and Aaron who I consider, maybe not a dear friend, but someone who thinks I’m not an idiot. Both would say I did interesting work there. But, they both probably chose not to have me in a role that was significant for the company. It might have been the right decision. I’m like 42 at the time. I can’t remember the numbers. Sorry 2007, 41. Like, you kind of get fired from an amazing job that was like awesome, right? And, you’ve been fired from the last two jobs or you like didn’t find your path. You’re like, “What the fuck am I doing man?”
Guest: Maybe you’re just not an employee.
Dave: Maybe. You still want to be able to show some executional ability even if you’re working for somebody else. It’s not good to be completely…
Jason: It seems that you have figured out that that ADD…
Dave: Like I said, ‘I got lucky man.’
Jason: Got lucky to have a fund?
Dave: Sean Parker, if you’re listening man, I owe you a big fucking favor. I don’t care how crazy the motherfucker is… gave me a shot when no one else would. Summer of 2008 I was trying to raise money for my own fund. September 2008, the bottom dropped out of the fucking market. Like, I don’t care who you are, you’re not going to raise a fund in September 2008.
Jason: Financial crisis.
Dave: So, I’m like… I actually turned Sean down a couple of times. Then, I came crawling back. “Hey, man. You got that gig?”
Jason: I need work.
Dave: So, like Founder’s Fund giving me a shot… I was the only person… I’m sure I was the only person in venture capital hired in Q4 2008.
Jason: Yeah. All the other people he hired were all 22 year olds.
Dave: Anyway. Peter and Sean are amazing people. I don’t care what you say about them, they’re like amazing people. That was like, you know… I got lucky.
Jason: Yeah. But, it seems like you made the most of that luck. You did lean into this opportunity.
Jason: You had the balls… to give you some credit… you had the balls.
Dave: Craziness. Not necessarily balls.
Jason: You had the crazy in you to say, “I’m going to invest in 500 startups.” When people were saying this was not a good idea. You leaned into it and it’s worked out for you.
Dave: I think that was after I had a little bit of confidence from being at Founder’s Fund. You know, on a $2M budget for FFAngel and maybe a $1M budget out of the FB fund. You know, I got to invest in over 40 companies over like two years. That was a really amazing opportunity. I pinch myself that that even happened. How many people get the chance to do that. I mean, we’re trying to create that opportunity for other people. I think the situation that we’re doing now, is really a lean startup for a VC. If you really want to call it that. I think it’s a tough path… If you want to break into venture capital… Anybody want to work in venture capital? Awesome gig, right? Sounds like amazing. Like, let me go invest in companies. Good luck. You should probably take 20 years figuring out how to get there. Like, it took me 20 years to figure out how to get there. And, I still had to do it myself cause nobody would hire me. Founder’s Fund did for a year.
Dave: I think, If you’ve been at it for 20 years and you’re not finding your way, I can’t always say all in is the answer. I mean, I wrote that post ‘Late Bloomer’ because I was comfortably passed the point where I was OK with that. Me admitting that I was fired from Mint, i couldn’t have said that 3 or 4 years ago. I’m at a point where it’s safe now for me to say that. This has probably got some marketing benefits. So, like, I did say that.
Jason: You’re very vulnerable now. I find it very attractive. I feel like we’re having a moment right now.
Dave: I’m fucking fearless right now. The thing is… Here’s the thing like, I have built a family and like… I don’t want to say it’s an empire, we’re still like getting there but we’ve built something.
Jason: You did.
Dave: I could flame out tomorrow. That would suck but like it’s OK. It’s been an incredible ride. The thing is, the more you like do shit that matters and the more you build that network like… You can be fearless, cause people will pick you up. Not that I’m a good guy, perfect and everything else. But, like I generally try not to be a complete asshole to most people I work with and invest in. There are other people who play a different game. Sharp elbows, there could be a path to greatness too, that’s just not the path that I chose. Right? I’m trying to figure out, how can you be the good guy that gets to greatness. Like, nice guys finish last. No, I don’t want that. I kind of wants to be the nice guy that finishes fucking first. Right? When you actually work that as the brand, you become fearless. Because, people will help you everywhere. It’s amazing. You know. I could fuck this up. I could fuck something else up. I could fall down flat on my face. It wouldn’t matter anymore. People will come up and they will pick you up. You have to build those relationships. When you build those relationships, you can do anything. Like so, I am fucking fearless right now.
Jason: That’s good.
Dave: You know. I may be worried a little bit about… I don’t know. I don’t always pay all my taxes on time. I probably run the edge of sort of funding rules and all this other shit. Like, OK I know a couple of people. Maybe they’ll help me out. I don’t think I’m going to get… It’s not going to be a felony. It might be a misdemeanor. You know.
Jason: I don’t exactly know how to swim in the ocean but I know there’s life guards.
Dave: Yeah. Exactly.
Guest: Dave. First of all, I feel like a stalker being at the third Dave McClure event this week.
Jason: Is this your third Dave McClure event in a week?
Dave: Three times in a row, without being a weirdo, psychotic bastard.
Guest: Well, you know I’m a swede so I can get away with everything.
Jason: Well, swedes are kind of weird. That’s just off the bat.
Dave: It’s a brand thing. I think if swedes are weird, you sort of like pay attention. You’re like, “Oh.”
Jason: That weird swede’s here again.
Dave: “There’s another weird swede.” We invested in a weird swede already.
Guest: Anyway, Dave. You work with a lot of amazing, international entrepreneurs.
Dave: I hope so. Yes.
Guest: You are. You know it’s a pain in the ass to get them over here. You know, with all the immigration issues and things like that. We finally are seeing some traction now with immigration reforms.
Dave: It might actually happen.
Guest: If you can change one single thing today, right now, right here. What would that be and why?
Dave: One single thing?
Guest: Just one.
Jason: You can fix one thing about immigration today. Boom.
Dave: That’s sort of like not extremely useful to just like wish shit into…
Jason: Well, I think what he’s trying to get is, what is the most important thing that could be fixed? What would have the best effect?
Dave: For us, selfishly, it would be a modification to the EB5 visa or the creation of an EB6 visa. That would be if a foreign citizen came to the US with a minimum of let’s say $250K-$500K in capital, that we would let them in. That was the Startup Visa proposal that we were trying to get done and actually had support from both sides of the aisle. The other one would probably just be anybody with STEM background getting a green card or conditional green card stapled to their science, technology, engineering, mathematics. If you come to the US for a degree in one of those areas, you should have a two year conditional green card stapled to your graduate degree. Hopefully you should convert that conditional green card into full citizenship. Assuming you do something useful. So, this startup visa stuff is actually a narrow… The challenge with us getting that passed was that it was a very narrow need. It was a need for certain geographic metros that were probably like Silicon Valley, New York, Boston, maybe Seattle, maybe Chicago. Then, you just didn’t have enough support for the rest of the country to give a fuck. The practical implementation that I think is more useful is actually what the administration has been doing. Which is to educate people in Homeland Security. My partner, Paul Singh, is actually been one of the EIRs for Homeland Security to help educate them. Luis Arbulu, from Hattery also, about what the fuck is a startup? So, why should we let them come to this country? Because the predominant populace storyline is you’re taking our fucking jobs. It is really hard to get passed that. You ever see like any posts on foreign entrepreneurs or visa and immigration issues, just look at the amount of crazy fucking comments. From mostly probably trolls that are fake accounts. But, like there are people who are extremely motivated to go nuts on your ass as soon as that stuff happens. They call their congressman and they lobby. They’re like crazy motherfuckers. It’s a populace story that is really hard to get past if you’re an elected representative.
Jason: But, it seems that the Republican Party losing has changed their tone.
Dave: That has changed the story a little bit. A little bit. Still, the easier issue is to not change the law. It’s to reinterpret the existing law. So, reinterpretation of the existing laws just to say what’s a crazy sort of immigration story? And what’s someone who’s coming to create jobs?
Jason: If somebody’s getting $500K in investments they’re going to hire at least two people, in addition to themselves. So, that’s a lock.
Dave: The entrepreneur visa that we’ve granted to foreign citizens, right now, is for them to bring $1M in capital into the country or a half million dollars in capital into economically disadvantaged zones. Usually that results in people coming and houses.
Jason: Yeah. It’s being gamed right now. I read the New York Times story.
Dave: Actually, the people coming here as entrepreneurs don’t have the capital, they get the capital from investors. So, it’s just a shift in that law.
Jason: Right. We want the latter not the former. Next question.
Dave: I’ve went to Canada and walked across the border… tried to walk across the border with a startup that we invested in. We put $50K in and a Canadian venture capital firm had put $50K in. They got pulled aside and fucking reamed by US immigration for hours. Like, at 6 in the morning I was trying to get a canadian entrepreneur across the border. I sat there with them for two hours while they got reamed by a fucking US immigration official who basically accused them of being a terrorist, a liar and a criminal. This is a person who’s an entrepreneur, who’s going to come to the US to create jobs, who’ve been invested by both VCs in Canada and The US. It’s ridiculous.
Jason: Welcome to America.
Dave: Welcome to America. Like, we’re idiots.
Jason: You have a lot of intelligent people from China and India going to Europe for their graduate degrees. We’re losing them.
Dave: So, we should like open our doors… In my opinion, we should open our doors to everyone. But if you wanted to be smart about it, you should open your doors to everyone who’s got an education or someone who has money or who’s going to create jobs. Those would be the three areas that you could be like… That would be my magical change.
Jason: No brainer.
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