Unicorns, Banana Suits, and 500 Startups; Just Another Night With Dave McClure

Editor’s note: Derek Andersen is the founder of Startup Grind, a 20-city event series hosted around the world to help educate, inspire, and connect entrepreneurs. He’s an ex-Electronic Arts employee, as well as the founder of Commonred and Vaporware Labs.

Until a few weeks ago I’d never met Dave McClure. Like many of you I have read all about him, casually Twitter followed him, and personally censored many of his YouTube videos over the past few years. After attending 500 Startups Demo Day earlier this month I was really impressed by the founders and their products which were as good or better than any I’ve seen. The person I shook hands with at the end of that day was a soft spoken, humble guy who seems to be in full grind mode pushing 500 Startups to a new level. Last week I interviewed him at Startup Grind in Palo Alto.

It was a nice week for McClure and the family. 500 Startups had just had its second anniversary, McClure was celebrating his 46th birthday, and one of his earliest investments, Wildfire, had sold to Google for $350MM. Prior to that he wrote two widely talked about blog posts, one on Techcrunch about women in tech investing more, and another where he talked candidly about his entrepreneurial journey and struggle. In April he raised a fresh $50MM fund adding two new partners, and Forbes named 500 Startups one of the top-10 Startup Incubators and Accelerators in the world. It’s been a good few months.

The Journey To 500 Startups

Dave grew up in West Virginia and Maryland where his father was an elementary school music teacher. After slugging through classes and graduating with an engineering and computer science degree at John Hopkins University, he took various programming roles, which led him to the West Coast where he founded his own consulting company called Aslan Computing. It was eventually acquired for under $1MM in what Dave described as, “spending 5-7 years doing a ton of work, for not very much money. It was more like a paid MBA and I wish I’d had that 5-7 years compressed to 1-2 years.” He adds, “There were a lot of things I learned that I would not have gotten as employee 300 at Paypal.”

He joined Paypal in 2001 as a Marketing Director rubbing shoulders with future founders of Valley staples like LinkedIn, Yammer, YouTube, and Yelp. As Dave put it, he’s been “a witness to genius.” Following stints working with Mint, SimplyHired, and Stanford as a lecturer, he joined Sean Parker at Facebook fbFund in 2008 where he helped close more than 40 investments including Wildfire, Twilio, Bitly, and TaskRabbit.

The details of 500 Startups founding in 2010 are still not totally clear. On Quora Dave explains, “One day a beautiful little unicorn farted, and next thing you know our star was born.” He neither confirmed nor denied this in person (watch the clip above). But what is clear is that it has exploded doing +360 startup investments across the globe. While 500 Startups is often compared to Y Combinator or TechStars, Dave points out those incubators were founded in 2005 and 2006 and have a 4-5 year head start. How quickly McClure’s fund, or as he calls it “startup,” has come into its own is evidenced no better than Dave’s absence in the infamous “Paypal Mafia” story of 2007 when he was relatively unknown, and thus overlooked.

Incubators and Investment Strategy

500 Startups focuses on engineering, design, and marketing. They do a design and UX review within the first two weeks. Generally they invest in 20-25 companies in the incubator program twice each year emphasizing that companies in the program actually work in their office space together in Mountain View. Dave found that with their first batch, “Five companies were amazing, five were miserable, and 5-10 were pretty good. We think the 5-10 that were pretty good got better because they were around the amazing companies. The amazing companies were amazing regardless. The second group models behavior after the first group and they level up.” Another thing that makes 500 unique is that they also invest in companies incubated at YC, TechStars, and others.

500 Startups is doing about 150 investments per year, funding about three companies each week. Why so many investments? As Dave explains it, the typical VC model theory is to invest in 30 companies over 4-years, take board seats, follow on investments with the winners, and ride a few to billion dollar exits and great returns. But usually that’s not what happens. “Most investors think they’re awesome. We don’t think we’re that smart,” Dave says. “But we think somewhere north of 75-100 investments per fund you start to get to predictability. We see who is successful, who figures it out, and invest more with them. Most VCs are thinking too small. There are thousands of ‘small’ businesses, $10MM-$25MM revenue businesses that solve real problems. Give me the rest of the long tail. Give me your tired, your poor, your huddled masses yearning for a viral loop.”

Want an invitation to join? Like most Silicon Valley firms they are referral based. But 500 Startups has a network of 180 mentors and 600 founders that have gone through the program. Get a few of these people to vet and vouch for you, and you will likely get an interview with the team. Ways not to get funded? Wear a banana suit to a Startup Grind tech event and wave a banner with your URL, as we experienced firsthand at Dave’s event.

International and Women

Unlike many VC funds, 500 Startups focuses on international investments as well as female founders. “300MM people live in the US. There are 6.5B outside of it.” What special components do these international entrepreneurs have? Dave says simply with hundreds of millions of people speaking Spanish, Arabic, Mandarin, Hindi, and others it creates opportunties to disrupt markets using learnings from Silicon Valley. They are focused on transaction commerce businesses, subscription businesses, and lead generation businesses using the following formula:

(# Language Block Speakers) * (Current Internet Penetration) * (Average GPD) * (Growth Rates of Language Population)

One final focus for 500 Startups is women founders, investors, and CEOs. Of their 15 employees, seven of them are female and while Dave says there’s not been a conscious effort to hire women, it reinforces their focus. They have funded +50 female CEOs and +100 female founders. Dave has encouraged women in tech to put their money into the arena was widely praised. As part of that, 500 Startups’ WIN Challenge is calling on anyone to make three $5K investments over the next year. Dave says it’s for anyone, but they’re pushing women to do it. So far they have about 120 females signed up for the challenge meaning at least $1.8MM has been committed.

Will these unconventional strategies payoff big returns and massive new disruptive companies down the road? It will be interesting to watch 500 Startups evolution and growth over the next few years as they hit their 500th startup next year and extend beyond that. But now after a 20-year tech career with no end in sight, Dave is on the horizon of what could be his first major founding and financial win. As he wrote on his blog a month ago, “I’m still betting my epitaph will read “late bloomer”, and not “failure”.”