It’s around 8:30 on a warm Friday night in Mexico City, and we’re all milling around a podium set up in the lobby of the private residence of the U.S. Ambassador to Mexico, Earl Anthony Wayne. Dozens of Mexico’s tech entrepreneurs and investing elite are mingling with more than 40 members of Geeks on a Plane, a traveling tech-revue of sorts organized by the Silicon Valley investment group, 500 Startups. Just outside the lobby, an expansive manicured lawn leads up to a massive, high rock wall. Guards with bullet-proof vests ushered the group through the fortress gate only about an hour before.
The Ambassador gives his polished remarks, followed by one of Mexico’s
rare venture capitalists. Now it’s time for Dave McClure, the investor behind the two-year old fund and accelerator group 500 Startups, to say a few words. He is decidedly non-descript – glasses that are thick, jeans that sag, a t-shirt that says “500 Startups: We’re kind of a big deal,” flip-flops, and a black blazer as a gesture to the formal occasion (“hiding his hillbilly” as he calls it). McClure is a throwback to a Silicon Valley of the time before the brogrammers.
McClure thanks the Ambassador for the special night and starts to speak. He throws down his first salvo:
“For the last two heads of states that I met with I was also wearing flip-flops, so please don’t take it as any slight. If it’s good enough for the President of Chile and good enough for Hillary Clinton, it ‘s damn well good enough for Mexico.”
McClure is trying to do something a little bit different. What Billy Beane is to baseball, McClure is to technology startups. And like Beane, he is willing to go anywhere in the world to find a slight edge to beat his richer, bigger and fancier rivals on Sand Hill Road. He is quirky, offbeat and unconventional, which is one of the reasons why entrepreneurs love him, and he’s also a marketing machine that can turn out slogans and brands like a finely-tuned copy shop on Madison Avenue.
He’s more like a man with a mission or a preacher with a sermon than an investor trying to make a living. 500 Startups partner George Kellerman describes McClure as being so driven it’s as if his bucket list has
just one item: to find the undiscovered entrepreneurs across the furthest reaches of the globe.
These principles are also where Geeks on a Plane comes in. The group brings together dozens of entrepreneurs and investors on a jam-packed, brain-jolting tour to meet with the local investors and innovators in cities throughout the world. Little sleep is had and much geeking (and partying) is done.
Geeks on a Plane Latin America kicked off last Thursday night in South Beach Miami — where the Mayor of Miami-Dade County, Carlos Gimenez, presented McClure with a plaque for tech industry excellence – and continues through Mexico City, Sao Paulo, and Buenos Aires over the next week. I’m traveling with the group (yeah, I have a rough life) and will be reporting on tech innovation across Latin America.
Moneyball for startups
So how exactly does McClure plan to disrupt tech investing? The group is starting out with what McClure calls a more “scientific” and “systematic” approach: essentially, it’s a numbers game. Instead of making a few several million dollar investments into promising early startups, 500 Startups is making smaller — $50,000 to $250,000 – investments into a lot more early stage startups; hence the “500 Startups” moniker.
The idea, as McClure puts it, is to fail more cheaply. And with more bets, the odds of hitting a winner is higher. The not-often talked about dark reality of the tech entrepreneur ecosystem is that it is wrought with failure. Some 70 to 80 percent of software startups fail, but if they fail cheaply and quickly, the heartache is a bit less.
For the 20 percent of companies that do hit some kind of stride or scale, 500 Startups offers follow-on rounds. For the couple of startups that are able to break out, 500 Startups helps usher them along to the venture stage, where more traditional venture capitalists step in. McClure points to a company like TaskRabbit as an example of a company that broke out and went on to raise successive venture rounds.
500 Startups’ first fund was for $29 million and I’ve heard that the group is currently raising another larger fund. By the end of 2013, 500 Startups will likely hit its namesake and will have backed about 500 companies, estimates McClure. Already they’ve closed on almost 300 companies.
Platforms & international markets
Part of the reason that more, smaller bets could work is because $50,000 is now enough to test out a Web or mobile idea and begin the scale-up process. Five to 10 years ago, before cloud computing and Web and mobile distribution platforms like Google, Facebook, Apple and Android, the costs to build and scale a tech startup were significantly higher.
McClure’s investing thesis is all about the low cost of
building on these platforms. For example, Wildfire sits atop Facebook, SendGrid is about cloud-based email, and 955dreams is a product of iOS. He once taught Stanford students how to tap into these new Web and mobile platforms through his now famous Facebook class and later went on to make investments in the Facebook Fund.
International – and underserved — markets are
another investing thesis. 500 Startups is one of a few firms that is willing to go more than 30 miles away from Sand Hill Road to find a deal. The truth is that the more traditional venture guys are scared to pursue this global strategy – the lifestyle is hard (constant travel). McClure, who is married with two children, says he spends close to three to four months on the road traveling. Geeks On a Plane is a large part of this international strategy.
Of course, 500 Startups isn’t all about McClure. His partners travel, hustle, party and forgo sleep (almost) as much as he does. Paul Singh somehow is able to keep up with McClure’s exuberance for entrepreneurs and is leading the fund’s work in India. Bedy Yang, who tells me that she “has the best job in the world,” can speak Chinese and Spanish and is heading up investments in Latin America. Newer partners include Christen O’Brien, who leads all of the Geeks on a Plane trips, conferences and corporate partnerships and Kellerman, who has a long history with the tech industry in Japan and was once a firefighter (really).
A marketing machine and a cult of personality
500 Startups is also as much about Moneyball as it is about marketing. McClure’s partners say his penchant for naming things and branding ideas is one of his invaluable skills – 500 Startups, Geeks on a Plane, the family-tech focused Mama Bear conference, the designer’s Warm Gun conference. As a
marketer at heart, McClure is able to help companies think through growth better than pretty much any investor.
He’s also honed a cult of personality around a profanity-fueled, take-no-prisoners character that yells and swears when presentations get boring and writes brightly-colored rants on the company’s blog and Twitter feed. One of the most memorable scenes from the Geeks on a Plane India trip in December was when McClure shook up a startup demo event in Bangalore by telling the unpolished, young and earnest Indian entrepreneur presenters to “stop being so f*cking boring.”
The created personality is the branded Dave McClure. The real Dave McClure is much more mellow and thoughtful. He’s also first and foremost entrepreneur-friendly. In international markets like Mexico City and Delhi, McClure likes to tell local investors that it’s their fault if the tech ecosystem isn’t producing many quality startups — it’s not the lack of entrepreneurial talent in the regions, says McClure.
Will it work?
McClure can be entrepreneur-friendly to a fault. Kellerman described him as bordering on altruistic. That’s one reason why he doesn’t have a shortage of deal flow, but that could be another reason why a Limited Partner might feel more comfortable giving funds to a more cut-throat crew.
Another question is whether or not the return on the fund’s breakouts will be high enough to make back the desired amount of money. The traditional VC model is that one or two companies out of dozens can make back the entire fund. But if the fund’s stake in the firms that make it big is too small, 500 would need many more hits to collectively win big.
McClure acknowledges the risk, but says they’ve helped solve that problem by having 500 Startups do follow-on investments as well as the initial seed stage. And McClure can point to some breakouts that they’ve ushered along through that process like TaskRabbit, Twilio, SendGrid and Wildfire. His most famous exits were personal investments including Mint.com and SlideShare.
Another potential downside could be the pace of the investments. While globetrotting, red-eye flights and constant networking and mentoring can be exhilarating, they come with sacrifices, like being away from family and mental and physical burnout. Such a rapid pace could also cut down on the time for a decent amount of due diligence. Yes, many of 500’s first seed investments are experiments, but the partners need enough time with the entrepreneurs to make a somewhat smart bet.
From here to there
McClure grew up in West Virginia and about two decades ago joined the ranks of Silicon Valley as an engineer and programmer. He ran marketing for job search engine Simply Hired and joined PayPal as its Director of Marketing in the early 2000’s, which he describes as a time where “everything was going to crap but Google and PayPal were doing pretty well.” PayPal doing pretty well meant that when he left he had some funds to use to experiment with angel investing.
In 2007 McClure gained fame when he taught a Facebook platform class, and then went on to manage two small funds for the Founders Fund and the Facebook Fund. While he had less than $3 million to play with, he made about 43 investments. And that’s where he says he began to hone the idea of the 500 Startups model.
The bigger question is why. Why does McClure have a burning passion to scour the world for undiscovered entrepreneurs? McClure says:
“It’s because I f8cked up. I was Billy Beane. I spent 20 years in the Valley and didn’t make it. Then I discovered I was a lot better at helping other people make it.”
Today, 500 Startups is just two years old, so it’s got a bit of time before it will prove out whether its model will become the future of tech investing. But the coming Facebook IPO could actually become a transformative act for the group.
In the late 90’s, Ron Conway was just another Silicon Valley angel investor. But with the Google IPO, he was transformed into the godfather of Silicon Valley start-ups. Likewise, Facebook’s IPO could act as an accelerant for McClure’s group.
As Facebook grows and also seeks to fill the positions of departing execs, it will look around to buy companies. It’s already started to increase its acquisitions. 500 Startups has backed companies with some of the top product and design people in the Valley, and many of their companies have the Facebook platform baked into their DNA. It doesn’t hurt that McClure spent years teaching and investing in the Facebook platform effect either.
Perhaps next week’s Facebook IPO could turn out to be the fund’s undercover lynchpin to remaking the landscape of tech investing.
Disclosure: Dave McClure was compensated by GigaOmni Media with stock and cash for his consulting efforts during the early days of the company. We have not had a business relationship since the end of 2006.
Image courtesy of Steve Nagata.