In recent months, there’s been some hand-wringing about a “Series A Crunch” — namely, a glut of startups raising seed and angel funding, then struggling once they need a proper Series A. But in a recent interview, 500 Startups founder Dave McClure said those complaints are misguided.
McClure was interviewed Thursday by TechCrunch’s Alexia Tsotsis at the Founder Institute‘s Founder Showcase. During the interview (video embedded below), McClure made it clear that he sees no problem in backing a lot of startups. When comparing 500 Startups to Y Combinator’s Paul Graham, he said his firm is “more of a singles or a doubles hitter” in contrast to Graham’s search for home runs. He estimated that 500 Startups has invested in more than 250 companies, and when asked if he could name all of them, said, “No, no fucking way. With a spreadsheet in front of me, yes. I’m allowed to do that.”
McClure also ran through some rapid-fire math to argue that more firms should be taking his approach. Take a firm with a $500 million fund — it’s probably looking for a return of $1.5 billion in 10 years, and since it will typically own 20 percent of a company at exit, that means its startups need to be acquired or IPO for a total of $7.5 billion. And given the normal success rate of VCs, that means the firm is really leaning on a few exits to earn more than $1 billion.
“It’s too small a sample size,” McClure said. “Expecting that you’re going to get billion-dollar wins out of 30 picks is tough.”
At that point, Alexia wanted to know if McClure is “single-handedly responsible for the Series A Crunch,” and he fired back that “the framing of that is just wrong.” What’s really happening, he said, is that it’s much easier to build a company now. As for later-stage investors who are complaining, the trend should actually help them, because it means they get to choose from more companies: “It’s not really their problem, except on a selection basis.” And many startups aren’t going to need a traditional Series A, McClure said, because they will start earning revenue or can look for alternative sources of funding.
Anyway, McClure said the approach seems to be working for him. He said 500 Startups has invested about $19 million of the $29 million that it has raised, and that it’s currently showing a profit of 30 or 40 percent, though those gains are currently “unrealized.” He added: “We might do other things to increase that sum at some point.” When pressed on whether that means he’s going to be fundraising soon, McClure demurred, saying that any comments on that front would probably be a violation of SEC regulations.
“Which is a stupid fucking law, which should change,” he said. “I will change that in five years.”
Dave McClure is a venture capitalist & the founding general partner at 500 Startups, an internet seed fund and startup accelerator program in Mountain View, CA. Dave has been geeking out in Silicon Valley for over twenty years, and has worked with companies such as PayPal, Mint, Founders Fund, Facebook, LinkedIn, SlideShare, Twilio, Simply Hired, O’Reilly Media, Intel, & Microsoft. He also likes to play ultimate frisbee when his knees don’t hurt. Dave has been an investor in over 100...
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