Seed Capital From Angel Investors: Dave McClure, Founder, 500 Startups (Part 3)

By guest authors Irina Patterson and Candice Arnold

Irina: How many investments have you made?

Dave: It’s a little hard to keep track at times, those deals are things that I’ve been working on since the beginning of the year, probably 43, maybe 44 in calendar year 2010. Although the fund’s only been operating for two months, that’s basically the past nine months’ worth of activity.

Again, our target on an annual basis is probably around 75 to 100 once we’re up to speed, at about $100,000 sized average investment, anywhere from $50,000 to $250,000.

Irina: How are you different?

Dave: About ten different ways. The major difference is that we’re doing a much larger number of investments. We’re probably doing from 75 to 100 investments per year. Most funds probably do 30 investments in the life of the fund. Even those seed funds probably don’t do more than 60 or 70 investments total, they do that over a period of three to five years. We probably do at least three, if not five, times the number of deals that most other venture funds do.

We’re extremely active investors at the incubation and seed levels. At the same time, we’re slightly different from Y Combinator or TechStars in that we are also follow-on investors. Although we initially make investments at incubation and seed, we also are minority investors at the series A and series B levels.

We are not usually leading those rounds, but we do follow-on. In general, we don’t take board seats. Unlike maybe other large funds or even other small seed funds, we’re not typically taking large stakes in the companies or taking board seats. We may do that on a selective basis. But more often than not, for 90% to 95% of the companies we invest in, we’re not taking board member control positions.

We’re differentiating largely on services that we can offer. So, we have a designer and usability person on staff who’s working with our companies. One of the first things that we tend to want to do is a user experience or usability review of the company to make sure they’re working smart in that area.

We do have an offer in some pivotal states where we’re going to be having companies run through our accelerated program. We have a 10,000-square foot office in Mountain View and we’ll probably have anywhere from 15 to 25 companies in there, at any given time, that we’re working with. Usually, one- to three-person sized companies.

So, there are a lot of ways that we’re different.

I think we’re also different in terms of the exit target. Whereas most VC funds are aiming for home run, half billion- to billion-dollar exits or better, we’re optimizing for $50 million to $100 million exits . . .  hitting singles and doubles, as it were.

We still believe those are large exits that are meaningful for the entrepreneurs, for us as investors, and for acquirers.

I think there are a lot more companies that are interested in acquiring companies that are of that size as opposed to $1 billion size. I think a lot of that I laid out in an investment thesis I wrote called MoneyBall for Startups. It’s about looking for opportunities to efficiently build companies on small amounts of capital and efficiently find exit opportunities for them.

Smaller targets help bring a larger set of opportunities and higher probability of success, we think.

Irina: What else is different?

Dave: I think we’re taking a more focused approach on operational skill sets. The people that I’ve brought on to help, the mentors and other people we work with, have domain-specific skills in engineering, design, product, or marketing. Most, not all but a lot of VCs, operate more from traditional financial or MBA backgrounds. Most of the people I work with come from other Internet companies like PayPal or Google.

Irina: How do you envision your process of working with mentors?

Dave: We’re still working that out. That’s one of the things we’re spending time to think about. We have about 50 or 60 mentors whom we’ve recruited so far. We’ll probably be aiming to reach at least 100 by the end of the year. Our general goal is to have at least two mentors for every company that we’re investing in. And we’ll still be trying to figure out the best ways to match them up.

This segment is part 3 in the series : Seed Capital From Angel Investors: Dave McClure, Founder, 500 Startups
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