Controversial Investor McClure On Doing 50 Deals This Year, Clashing With VCs, and More

Dave McClure is rather unlike most investors in Silicon Valley. He curses like a sailor, for one thing – publicly. He tweets almost constantly, no matter the time of day. He has also become a central character on the seed investing scene, seemingly through sheer will, and has taken to bashing venture capitalists on a regular basis.

He recently went on a 2,500-word rant against traditional VC firms that invest in Internet companies. “Most consumer internet investors, large or small, have no goddamn clue what they are doing,” he blogged. “They are getting killed on IRR, and most of them should be put down and put out of their misery… NOW [sic].” He went on to urge those VCs to “HURRY UP & DIE ALREADY, U FRIGGIN’ PATHETIC DINOSAURS [sic].”

Unlike many investors, who have founded successful companies or headed a division of one, McClure was working as a database consultant and programmer for a number of companies 10 years ago. Then came a job at PayPal in 2001, where as a director of marketing, McClure formed close friendships with other famous PayPal veterans like LinkedIn founder and investor Reid Hoffman. After a brief stint running marketing for the job search engine Simply Hired, McClure began mining that PayPal network -– and rapidly expanding on it -– by helping to chair Web startup conferences; becoming an advisor to and an investor in companies like the personal finance site Mint.com; and co-hosting Startup2Startup, invite-only dinners that bring together angel investors, entrepreneurs, and first-time entrepreneurs and that remain one of the hottest tickets in town.

Nearly all the while, McClure was investing in what are now more than 70 startups — including through a seed investment program he recently managed on behalf of Founders Found, Facebook and Accel Partners. Little wonder that his first institutional fund, which he began investing out of last month and that aims to close on $30 million, is called 500 Startups. (Little wonder that McClure is known for wearing 500 hats.)

While many of you are no doubt watching McClure and August Capital’s David Hornik duke it out this week on TechCrunch, I thought you might also enjoy a calmer, gentler conversation we had last week, one that touched on McClure’s new fund, AngelList, secondary sales and, yes, VCs vs. angels.

With high numbers of angel-led deals in recent years, more angels are selling to secondary buyers right now. Is that acceptable in the community, or is there a stigma attached to exiting a deal, as there once was in VC?

I think looking for some return after some amount of risk has been taken out is fine. If we’ve been investors for three or four years, I don’t see the [problem]. Also, on the other hand, the opposite could be true. If we’re believers in a company and want to increase our position, I could see buying into common [shares] in a round that’s actually somewhat tight, where the company is doing well and the founders don’t want to take too much dilution on the preferred side.

But selling is more a function of: Do we think we understand something that other people don’t? Once we agree that the company is valuable and the company has been able to accomplish getting past risk and either product development or acquisition, then we’re playing a new game, and I’m not a big believer in holding onto positions because we think we know something that others don’t.

We think we know something about acquiring customers or we believe something that others don’t strongly. That’s really our advantage as [seed] investors, understanding where opportunities exist and getting entrepreneurs up the curve. Once they’ve done that, it’s an opportunity to take some risk off the table.

So there’s no stigma?

No, it’s something we talk about. Liquidity and exits are among the biggest concerns when it comes to whether our investments perform or not.  The fact that there are firms like SecondMarket and [Digital Sky Technologies] stepping into the market is actually a good thing for us. It just gives us more flexibility.

I also think there are liquidity trends based on better pricing information than before. Buyers are better able to understand not only performance in dollars, but in terms of uniques, conversion [and] how people are using the service. Companies like Kissmetrics [one of McClure’s portfolio companies] allow you to understand a lot more about a company than you used to be able to, which makes these companies more like public equities because of that visibility.

But the uptick in secondary sales also seems to confirm that consumer deals have been getting marked up a lot over the last 18 months. Do you think it’s fair to say that things have grown bubbly?

Yeah, we’re seeing deals move up from where there were a year-and-a-half ago, definitely, although I’m not completely concerned about that. I kind of feel like that play is in my favor. The way it wouldn’t play in our favor is larger funds feeling like they have to compete on price, and you’re seeing them use price as leverage. I don’t want to set a prematurely high value on a company, because it can get out of whack with what the proper financing is for its stage. And occasionally you’re seeing larger funds stepping down and pricing up deals in order to get them.

Doing the Quora or Foursquare early stage deals that are [done at] $80 million [pre-money valuations] -– I’m not a big fan of those deals. You are taking a huge amount of risk, not being able to exit at $100 million. The median exit for consumer Web companies is sub-$100 million, and there are more acquirers than ever, so companies are getting bought earlier. For seed investors, that’s a great thing. We can make money investing between $2 [million] to $5 million [over the life of a company]. But I don’t always think bigger values are better for anyone.

Everyone in your network seems to now be using VentureHacks’ AngelList. How has it changed the way you interface with new startups?

In particular it’s been helpful for companies out of the local market. I’ve invested in a couple of companies in D.C. and Chicago and L.A., and most Silicon Valley investors don’t tend to do a lot of that. And while it’s not hard for a company with its act together in Silicon Valley to get financing, for others, it’s a little hard to get attention from investors. So if I find something I’m interested in, I can run it through my own network to gauge interest, but I’ve found it’s quicker to work with [Baback] Nivi [co-founder of VentureHacks].

I’m also seeing deals that I might not have discovered through AngelList. I saw one company that was in New York that had a lot of recommendations, for example, and it prompted me to take more time to talk with them [when I met them] and I ended up investing in [the team]. I’m not sure where they are trying to take [AngelList] right now, but it’s a very useful service.

Do you think AngelList is having an impact on valuations or first round fundings? Some entrepreneurs have said publicly that without the list, they wouldn’t have gotten funding and that because of it, they wound up oversubscribed and in some cases raised a lot more than they had intended.

There’s something behind momentum investing and I wouldn’t argue with anyone who says that VCs are like sheep. And as more people get into angel investing, I think you’re seeing the same thing -– people making decisions based on other angels, rather than on the companies’ merits. That doesn’t bother me much. I try to make decisions based on the small number of people I trust and my direct reactions to companies’ abilities. But if I didn’t know what the f*** was going on, I might be worried.

A lot of words have been traded between so-called super angels and VCs. You might have seen a tweet of David Cowan [of Bessemer Venture Partners] last weekend, saying: ‘VC approach to startups is akin to eHarmony. SuperAngel approach is like Hot-or-Not.’ I noticed on your Website that you now refer to yourself as a venture capitalist instead of an angel, but do you have a response?

I retweeted it! Look, HotOrNot is a fabulously successful service, one that sold for tens of millions of dollars without dilution from VCs. So if [Cowan] wants to compare HotOrNot to eHarmony, which took more than $100 million in dilution from VCs [including Sequoia Capital and Technology Crossover Ventures], I’m down with that. The IRR for HotOrNot was much better. I also think that using the crowd to select and filter investments [as HotorNot used the crowd to select and filter who was attractive] is a great parallel that fits very well. [Cowan] was probably making the comparison pejoratively, but I take it as a compliment, as should James Hong and Jim Young [who founded HotOrNot in 2000 and sold it in 2008 for $29 million].

Can we talk about your investing thesis? What can you share, given that you’re in registration to raise a fund?

Well, what I’d state differently [than Cowan] is that VCs want to take a long time to make decisions, and they want to see traction. On the contrary, [at 500 Startups], we’re investors before product market fit and before traction. We can make those investments quickly, writing small checks of between $25,000 and $250,000, and if the company does break out, we can invest pro rata in the next round or add to our position.

VCs can’t be nimble for the most part and they are going to miss opportunities because of it.

You say “we.” Who is working with you?

It’s myself and two hires, one a Stanford grad, Enrique Allen, who helped me run the incubator program at Facebook, and the other is [former Google product manager] Christine Tsai [who has been hired as a principal]. Christine is focused more on product marketing and platforms than financial services. I’m not hiring people with investment banking or venture capital backgrounds, but rather people with design and engineering and marketing backgrounds. So we look a lot different than even other seed funds and dramatically different than most VC firms. We’re really engineering ourselves to provide scale and resources to startups. We’re hiring a Web designer, creating a usability lab [within 500 Startups’ in-house incubator], and we’re going to basically set the record probably for number of investments per year. We’ve made in 30 investments in the month of August alone.

What?!

Well, I say that for effect. I should say we were playing catch-up. The fund opened a month ago, but we’ve been working on a lot of these deals since January. Either way, we’ll probably be at 50 investments by the end of the calendar year, and that’s a minimum target for us on an annual basis. We’ll definitely be bringing a few more people on by year end.

For more information on some of the many startups already backed by 500 Startups, Crunchbase has them listed here.