Seed Capital From Angel Investors: Dave McClure, Founder, 500 Startups (Part 5)

By guest authors Irina Patterson and Candice Arnold

Irina: Do you hold any events for entrepreneurs?

Dave: Actually, I put on a decent-sized 300- to 500-person conference on a quarterly basis. I also run a lot of user groups and events, meetings, and dinners.

We’re running one called Warm Gun, a conference about design and measurable designs, for both engineers and designers.

Earlier this year we ran a conference called SMASH Summit that was about online distribution platforms, primarily Facebook, Twitter, and YouTube but also a bunch of other online marketing tools.

And then I’ve done different conferences that Eric Ries has run called Lean Startup; those are about customer development and conversion metrics.

Irina: How many people do you employ?

Dave: There are three of us full time and another three part time. Right now there are only two other people whom I brought in officially [full time].

One is a recent Stanford grad student who graduated this year. He helped me to run the Facebook incubator program last year, so I already had some experience with him. He comes from more of a design background; his name is Enrique [Allen].

And Christine [Tsai] was at Google for about six or seven years. She was doing product marketing at YouTube and ran the Google IO conference for a few years. She has more of a marketing and product background.

Irina: What are their responsibilities?

Dave: Enrique has been helping us set up the incubator program here and the startup program in the office. We have an office here in Mountain View where we’re planning to run a program starting later this year or early 2011. So, he’s been working on a lot of the space design and considerations, user interface and usability, and process how we can help a company in those areas. Design, UX, and usability are going to be core areas of focus for us.

Christine’s been working with us building out our mentor program and also working with several platform partners. These are companies we feel are going to be important distribution platforms for us, such as Facebook, Twitter, Google, and several others as well.

I think we’re looking at a lot of different search and social and mobile platforms for places where we’re going to be investing. We emphasize design, data, and distribution as the three things that we’re trying to use to differentiate ourselves from most other funds.

Irina: From all your sources, how many pitches do you receive per month?

Dave: Oh, boy. I can’t keep track of that. I don’t know, probably 100 or more per month, I’m sure. Maybe between five or ten per day, so a couple hundred.

Irina: Out of those, how many deserve a closer look?

Dave: Well, I get a lot of e-mails and requests, so it’s challenging to keep up with everything. Usually, most of the things that I take a look at closely were referred through former entrepreneurs that I’ve worked with or other investors. That’s something I try to pay attention to the most.

Irina: What is the average dollar amount you invest?

Dave: On average, $100,000. It ranges from $50,000 on the lower end to $250,000.

Irina: How long does it take for a company to receive funding?

Dave: It varies. Sometimes I take as long as a month or two, other times I’ve done it within 24 hours. It varies from company to company, but it’s usually a matter of weeks. We have to make decisions quickly.

Irina: Do you think in terms of valuation when you look at a company?

Dave: That’s part of the decision. It is not the only decision, but it’s a part of the decision.

We’re not focused on valuation. We’re focused on whether the company has interesting technology, people, or products.

But I would say the range of valuation at incubation, anywhere from $1 million to $2 million and maybe as low as $500,000, probably between $2 million and $5 million at seed. In some cases those seed companies’ valuations are rising above $5 million.

We’re investors in several Y Combinator companies, and in a few cases those companies’ valuations were higher than $5 million. But that’s usually only in special cases.

Irina: Do you think in terms of equity?

Dave: Not usually. I think we operate a little differently from most VCs. Most VCs are probably aiming to own 20% to 30% of the company in the first investment. We’re definitely not anywhere near that. Usually it’s a much smaller amount of the companies. Anywhere from 1% to 5% is more typical for us. I’m not really concerned about the percentage of ownership. I’m more concerned about the potential return.

This segment is part 5 in the series : Seed Capital From Angel Investors: Dave McClure, Founder, 500 Startups
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