VCs, are you scaling yourself? - Dave McClure


Dave McClure of 500 Startups delivered a keynote at the Asian Business Angels Forum hosted by Mumbai Angels. Dave talked about why investors should be bullish right now, the dramatic changes that have made starting up more economical than ever before, and he addressed why the VC industry needs an overhaul to keep pace with the innovation in technology and marketing.

Excerpts from the speech:

600 investments in 4 years 

We have been operational since the last 4 years. We have invested in 600 businesses. 400 of those are still alive. About a 100-200 of them might matter someday. We have a very unique culture and philosophy as a fund. I doubt if there is anything that we do which is like any other fund out there. We are in 6 different countries with a lots of networks of founders. We had 28 exits in the last 3 years. 3 of them are notable with over 100 million dollar exits. We have over 150 investments outside of the US. We have done investments in Asia, Latin America, Europe, and in Middle East as well. Many people are bullish about investing in English speaking markets. But actually I am more bullish about non-English speaking markets, particularly Spanish, Arabic, Chinese, Portuguese and Hindi speaking markets.

The playground has changed 

The costs of starting up have come down drastically. A lot of things for which we used to pay a couple of million dollars, can now be done at a couple of hundred thousand dollars. Another big change is that a lot of people are now online, this is pretty obvious statement, but we have more number of ways to touch our customers than ever before. If you are an entrepreneur and you have the internet, you can touch half the world today, and probably more than half the world very soon. They might not all pay you just yet, but that will change too in the next 5 years. We are can now fail cheaper than ever before. We can fail faster than ever before. I would hence argue that we can also learn faster now than ever before.

If you think about how dramatic these changes are - today the cost structures have reduced by two orders of magnitude. The access to customers has increased by two orders of magnitude.

VCs, are you scaling yourself? 

I would say that as investors we are not keeping pace with the innovation that is happening in technology or marketing at all. I think the dot-com bust of 2000 and the financial crunch of 2008 have taught us what not to do. Before these incidents we were pushing very unsustainable companies onto the public markets.

About 10 years ago, we have seen the micro-VC or super angels coming into existence. Lately, we have seen traditional VCs do a lot of things that don’t look like investing, including recruiting and business development. I would say that is a good development. I would say that VCs who take home big cheques as salaries are cowards. They are not invested completely in their own companies. They are telling their companies to scale, but they are not scaling themselves. If you really cared, you will reinvest in making your companies better, and making yourself better.

VCs have been extremely lazy in the last 10-15 years. They have been taking their big pay cheques home from very lazy LPs. And the probably really is LPs. They are not challenging their VCs enough. Most VCs walk around like they are Golden Gods. More than half of the VCs don’t return capital, and yet we think we are Gods. We have been terrible investors, if you look at the industry as a whole. Even the best funds are not consistent performers, with a very very few exceptions.

Series A crunch? Not really 

It is much easier to build valuable software companies now than ever before. Some people think that because of too many companies being started, there is something called Series A crunch. But a large number of people building small companies at efficient cost is a good thing. There is absolutely nothing wrong with that.

10 years ago you had to pay for expensive servers, and to raise capital you had to go to Sandhill Road. But now you don’t have to pay for expensive servers, you can rent off space on the cloud. We have very short development cycles. We have half of the world online. We have access to capital all over the world. This is a lot better state to be in. There is no Series A crunch. There are lots of companies being started and we as investors have lots to choose from. That is a good thing according to me. I would be happier with 1 out 5 25 million dollar exits compared to 1 out 25 100 million dollar exists. We are working towards that.

My theory is that the initial conditions for building a company are much better than ever before and we as investors should be bullish about this. If you are a venture capitalist or an angel investor, you should be optimist. I urge everyone to make lots of smaller bets. Some of them will fail and some of them will succeed. The ground has changed massively. And as a result our investment thesis should change. We as investors should play differently now.


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