Star investor, millionaire, merciless truth teller: Dave McClure is the face of the global startup culture. Digital Insights spoke with him.
Digital Insights: Dave, you’ve enjoyed cult status for a long time thanks to your famous last name. Tell us the truth: How often do people confuse you with Troy McClure, the washed up actor in the TV series The Simpsons?
Dave McClure: I'll tell you something: all the time! When I started with PayPal fourteen years ago, someone even gave me an employee badge with Troy McClure on it. It's funny how people keep bringing him up. But I love The Simpsons!
Digital Insights: The picture people have in their heads of a wealthy investor is someone in a natty suit with a silk pocket handkerchief peeking out. But with your unconventional outfit you don't fit that mold at all. You once told the Wall Street Journal that you’re the only homeless person who ever lived in a used Lexus. How did that happen?
McClure: I got to Silicon Valley in the middle of the 1990s and founded my first eCommerce company with Aslan Computing. I had rented an apartment in Palo Alto for $1,000, but I was almost never home because of the hours I worked. I didn't even have a bed, just a mattress and a TV with no cable. At some point I thought, why in hell are you paying $1,000 every month just to sleep on the floor? So I moved into my ten-year-old Lexus. It was great! I used the back seat as a clothes closet, and I could shower for free at the gym.
Digital Insights: It seems to have been worth it. You sold your company at a profit at the height of the dotcom bubble, before landing at PayPal as marketing director in 2001. Was this the perfect springboard for your later career?
McClure: PayPal was a fabulous experience. I have to point out that I began just six months before the company started preparing its stock market launch. So my share in its huge success is somewhat limited. But it was still a very rewarding time, especially because I was working with exceptionally visionary people. David Sacks for example went on to found Yammer, Reid Hoffmann LinkedIn, Chad Hurley, Steve Chen and Jawed Karim created YouTube, and Yelp was made big by Jeremy Stoppelman and Russel Simmons. And then there were Peter Thiel and Elon Musk.
Digital Insights: What was it like to work with these visionaries?
McClure: After the dotcom bubble burst, the mood in Silicon Valley was pretty grim. The fact that there were still people who believed in the future of startups made a lasting impression on me. I don't know if I would put my money so aggressively into young companies today if Peter Thiel, Ron Conway or Reid Hoffman hadn't been so brave back then, investing full-tilt in startups. A year before I left PayPal I was also infected. For four years back then I invested in thirteen young startups in all, with checks for $25,000 to each. It worked out well. SlideShare, Mint and Mashery all sold later for more than $100 million.
Digital Insights: What is your secret to success?
McClure: I don't know if successful is the right word. My investment strategy is really very simple: I'm often going to be wrong, so I wager a relatively small amount and hope that I come out ahead with a few of the investments. And most of my investments have been colossal failures. So in that sense I probably have more luck than acumen.
Digital Insights: Sorry, but that's ridiculous. Not everyone manages to sell their portfolio companies to tech giants like Google, Amazon, LinkedIn or Intel. Don't you need more than dumb luck for that?
McClure: Okay, let me put it this way: of course as a programmer I have a good foundation of technical knowledge, and then I perfected my skills as a marketer at PayPal. I think that many entrepreneurs and venture capital companies really value having someone like that on their team. So that opened the door for me to many promising deals early on. But basically startup investments are like baseball: You only hit the ball really well maybe 30 percent of the time, and you make a home run at most with five percent of your times at bat. So it's very important to put together a diversified portfolio of startups, especially if you're investing in the early phases. That's when you take the biggest risks.
Digital Insights: What do you think makes a successful startup?
McClure: There is often far too much time wasted on the product in the beginning. Marketing and sales are at least as important in those early phases. Luckily there's been a change of thinking about this area lately. A startup always has to be able to answer these questions: How can I make my product attractive to both consumers and business customers? How will I generate fast enough user growth? What 500 Startups is about is teaching entrepreneurs with no marketing or sales experience how to run successful online marketing with online platforms, social networks, search engines and smartphones. The bottom line is, a data-driven marketing approach is more important than ever. I at least advise startups to find a user acquisition strategy that is truly scalable. In other words, what Google does for searches, Facebook and Twitter do for social media and Apple and Android for mobile platforms.
Digital Insights: About 500 Startups: with your startup incubator you've been churning out young companies on the path to success for years. There are no fewer than 1,000 startups in your portfolio. What do you personally expect from the startups that pitch to you?
McClure: We don't invest in ideas. What we're looking for are startups that already have a tangible product or at least a functional prototype. We also expect initial, visible user growth. That doesn't mean achieving millions in sales right away: Someone taking in sales of between $5 and $50,000 a month significantly raises their chances. It is in particular the transition from design to functioning product to first customer that is very risky. Even someone who's already making profits but can't scale up can fail. This is the phase where we come in and help scale up the business model effectively.
Digital Insights: How can entrepreneurs still benefit from 500 Startups?
McClure: If we only invested seed money we'd be nothing more than a blank check. I think that now we're very appreciated by many startups above all for our networks in the Accelerator. We invested a lot of time in creating a huge pool of mentors and resources for startups to call on and now we're probably one of the largest networks of entrepreneurs on the planet. Since we began five years ago we've invested in more than 300 startups in 50 countries. A third of our team is not from the United States, we speak 20 different languages and are active in ten markets. That's very unusual for a venture capital firm in Silicon Valley.
Digital Insights: What are the hottest tech trends that will change our lives in the next few years?
McClure: I'm afraid you're asking the wrong person.
Digital Insights: Why is that?
McClure: Because I prefer to invest in boring shit. Boring shit that makes money. That's why we do a lot of eCommerce, lots of Software-as-a-Service. Education, food tech and family tech have also always done well in the past. Right now the digital healthcare field is big for us. I do think, though, that virtual reality, drones and artificial intelligence are probably the most important trends for the next few years. But again, we mostly focus on startups that solve real problems, have a robust business model and are scalable.
Digital Insights: Can you name a few potent examples?
McClure: I think we have a few unicorns in our stable now – startups worth more than a billion US dollars. Finance platform Credit Karma and cloud-based communication service Twilio are among them. Then there are the centaurs, worth over $100 million. Right now we have 25 of these in our portfolio. Viva Real for example, a real estate marketplace. It's a little harder to make predictions about our companies from the Accelerator, because they're still relatively young. But Talk Desk, a call center service for SMEs, and ToutApp, an e-mail solution for sales specialists, are doing very well.
Digital Insights: What do you think of the German startup scene?
McClure: Germany is a great place for startups, Berlin in particular seems to have become a real place to be. We've already invested in two German startups that came to the United States: Shippo and Versus. Given the positive development of the German startup scene over the past few years, we've invested relatively little there with 500 Startups. We can and want to do more there in the future. It's really just a question of having the right person to build the business there. I'd be very surprised anyway, if we don't have more going on in Germany soon.
Digital Insights: As the poster boy for 500 Startups you're very active internationally, but you don't always make a good impression in the sector. Again and again in public forums, you come across as a hardliner who ruthlessly tears down ambitious startup ideas. What do you say to this accusation?
McClure: Well, I just happen to be an asshole.
Digital Insights: Now that sounds rather frank...
McClure: If you're not honest with a startup founder, you're doing him or her a disservice. It's that simple. Plenty of investors might listen to your pitch without telling you what they really think of your idea, even if it's total bullshit. That's a huge problem. It unnecessarily weighs down the next iteration of your product. So what I do is just think out loud. In other words, if I think you as a person are full of shit, I'll tell you. If I think your product's full of shit, I'll tell you. If I think your strategy's full of shit, I'll tell you. If I can see you're building castles in the sky, I'll tell you. Some people might think that's harsh and that's probably why I create such strong reactions. But I believe most people value my opinion – whether it's positive or negative.
Digital Insights: With all the talk of startups your personal life seems to be shunted to second place. What does your family think of your life?
McClure: They, too, think I'm crazy. I only see my two children in the mornings and on weekends. I'm on the road a whole six months out of the year, with probably something like 100 days spent on planes. My wife was a musician before we had our children, and I hope that still helps her to tolerate my lifestyle. Still, it's not always easy.
Digital Insights: How do you unwind from work?
McClure: By getting some sleep! If I happen to be home, I either do something with my kids or watch TV. I'm a cartoon addict. And I'm always up for a game of ultimate frisbee. As long as my knee isn't giving me trouble. Good God! I'm going to turn fifty next year.
Digital Insights: What tools do you have to have in your work day?
McClure: Techmeme and Nuzzel, to keep up with the news. Twitter, Facebook and WhatsApp of course. At 500 Startups we use Slack and WeChat for team communication. I manage my to-do lists with Google Docs, but I spend a lot more time adding to-do's than getting any done.
Digital Insights: And now we'll open Pandora's box: how much money do you have in your account right now?
McClure: Not as much as I'd like. I mean, of course, on paper I'm a millionaire. But I certainly have less than a million dollars in my account right now. Most of my money is in various companies.