Seed Capital From Angel Investors: Dave McClure, Founder, 500 Startups (Part 8)

By guest authors Irina Patterson and Candice Arnold

Dave: When I receive a referral from someone, I always ask, “Are you investing?” If he’s not investing, I really want to understand why. Why does he think if he’s not going to invest that it’s a good opportunity for us to invest? I sort of hold myself to the same rules.

Only in the case where it’s an area that we don’t understand very well but we think it’s an interesting company would we do that. If there was something in clean tech or green tech that we don’t do and we thought the founders were great, maybe in that situation we might refer them. But if it’s a consumer Internet investment, small business, financial services, Web infrastructure or an area that we do invest in, if we’re not investing, I usually don’t refer those deals. Unless it’s like later valuation or something.

Irina: What about referring them to someplace where they can get more feedback on what they are doing?

Dave: We’re big fans of Venture Hacks. I think that’s a great online resource for information about financing, identifying conferences or other places where they can find other people or talent.

A lot of times we’ll do that if we feel like they’re missing a core team member. It’s hard to be perfectly helpful in all cases. If there’s a company that looks like it has promise but isn’t all the way there, we like to work with them to identify what they can do to reach core significant milestones that would be a place where we could get involved.

Irina: What are some other areas that you are looking to invest in?

Dave: We’re probably pretty conservative, like I said, on the revenue models so we want to see businesses that do provide value that people would consider paying for. We’re looking at family and education customers a lot, people who are 25 to 45 who have kids is an area that we’re going to focus on more.

I have a high bar for the type of entrepreneurs who are coming out of those categories. They still need to meet our technical requirements and definitions, but that’s our area of interest.

Financial services, we’ve done a lot of stuff in that area. We’re interested in continuing to do that. In general, consumer and small-business customer targets and to a lesser extent, the Web infrastructure where other of our companies might be interested in the product.

Irina: Do you invest in e-commerce?

Dave: We do, where there’s a clear, identifiable market that they’re specializing in that actually meets our criteria for transactional revenue model.

Irina: Do you invest in enterprise software?

Dave: Not so much. We have a few in that area but usually, where the sales cycle has run via a direct salesperson or enterprise sales [holds] less of an interest for us. Most of our expertise is on Internet marketing and distribution.

In a few cases now, we’re doing businesses where it’s a business customer target and the developer community is kind of a channel. We’ve been investors in companies like Twilio [which provides a cloud API for voice and SMS communications] and Recurly [a recurring billing API, and subscription billing service].

Irina: What is your preferred type of investment?

Dave: For the most part we’re investing in preferred shares. We do a lot of convertible note structures that are debt initially and then converted to preferred shares. In a few cases we’ve done common [shares] investments in more special cases. We’ve done that in a few scenarios.

Irina: What is your personal biggest investment success to date?

Dave: Probably the one that’s had the most visibility is Mint.com. I was an investor in Mint – I was actually a consultant and worked with Mint on the marketing side one or two days a week for about six months in early 2007. But I was also an investor in the A round. I put in about $25,000. That resulted in their being acquired. I got about a 10x return on that investment.

This segment is part 8 in the series : Seed Capital From Angel Investors: Dave McClure, Founder, 500 Startups
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