Seed Capital From Angel Investors: Dave McClure, Founder, 500 Startups (Part 7)

By guest authors Irina Patterson and Candice Arnold

Irina: When you’re deciding whether to invest in a company, to what factors do you give the most weight?

Dave: Usually, product is the most important to me. But I think a lot of people say team is most important. I do agree with that, but it’s also really difficult to get an understanding right away of who those people are unless you already know them. If you look at the product, that’s probably the most useful information that reflects on the team.

Things that are also important are a strong technical founder, strong design and front end experience, and some ability to understand distribution channels, not only traditional marketing but more of an online distribution or marketing function that might be built into the product. It could be that some has skill sets in search of social platforms.

We tend to focus on team and product, but product is a reflection of the team. And then within the team, we look for a technical founder, a designer, and probably someone involved in marketing and distribution.

Irina: What about the market size?

Dave: I think we really don’t care about market size. In fact, we might even optimize for smaller markets rather than larger ones because it allows the company to focus more on a specific customer demographic or allows us to differentiate from the competition.

Sometimes when people are going for big venture businesses, that can be great and there’re lots of big opportunities. But sometimes it also encourages entrepreneurs to go for too many different demographics and not focus on a specific customer or a specific problem.

So, we actually like rich markets that will allow us to tightly define what the problem is, who the customer is, how we can go after the customer, and how we’re different from other competitors. It may be that we invest in businesses that only end up making $5 million to $10 million to $20 million in revenue. We still think we can get interesting exits out of those types of businesses.

Irina: Do you look for any specific character traits in the entrepreneurs?

Dave: I think we want to find people who are passionate about solving a problem. As much as we are in it for making money, we don’t necessarily want to invest in people who are in it just for the money. I think we want to understand that they wake up every morning thinking about a particular problem – or particular customer – and how they can solve it, and that they have a lifelong passion or at least five years’ worth of passion to go after that business.

We definitely lean toward technical founders, people who are programmers, engineers, or developers. But we’re equally interested in people who have strong design and UX backgrounds, as well as people who have experience in online distribution and Internet marketing.

Typically, we’re looking for people who come from one of those three personality profiles, someone who is an engineer, someone who is a designer, and someone who is a marketer. And at least one of those three should be entrepreneurial in nature and come from a background where they are interested in starting a business and going after it.

Irina: Do they have to have previous business experience, or can they be right out of school?

Dave: I’m OK with funding people out of school, but I probably prefer people with five years’ experience. It doesn’t have to be 10 to 15 years’ experience, although there are some great people who are older entrepreneurs.

We definitely invest in entrepreneurs in their 30s as well as in their 20s, even sometimes later than that. But I think there’re a lot of great things about people who come right out of college being very enthusiastic, having a lot of energy but not knowing what they don’t know.

At the same time, I think people who have three to five years’ experience working in an existing industry and also maybe have made a few mistakes and learned a few things. So, we like to see people who have at least a few years’ experience in domain expertise areas.

Irina: What do you do with the businesses that you don’t invest in?

Dave: We try to go through a process where we do give them feedback. Obviously, we can’t do that for everybody. With companies we’re taking a serious look at, we try to be transparent about why we’re not investing, identify for them what areas they might want to improve on or what skills or resources they might need to bring into the company.

In some cases, if it’s in an investment area that’s not our focus but it is an interesting business, we might refer it to other investors. Although, that’s usually not the case. I think it’s difficult for most entrepreneurs to get a referral from someone who’s an investor but isn’t investing in them.

This segment is part 7 in the series : Seed Capital From Angel Investors: Dave McClure, Founder, 500 Startups
1 2 3 4 5 6 7 8 9