Andrew: Hey there, freedom fighters. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart.
And you know, a few weeks ago, somebody broke into my office, actually got past security on the first floor, which sometimes doesn’t let me up unless I have proper ID, got past the security door up here on the twelfth floor, broke into the office, broke into my drawer right here, stole my passport, some stock certificates and my Social Security number. Yeah. I see Dave has got his mouth agape.
Dave: That sucks.
Andrew: It really does. I thought the office was the most secure thing. Then I started investigating different ways to protect myself and to see if my Social Security number was used and my reputation that I worked so hard on was being ripped apart.
And of all the different products that I tried, Credit Karma, this brand new startup is the one that had the most intuitive software, the easiest to use, and unlike the other services that I used, they were actually free. So, I signed up and now I’m actually keeping an eye on what’s going on and feeling really comfortable with my ability to control my own credit.
The reason I tell you that is because today’s guest is an investor in Credit Karma. It’s one of many companies that he invested in. As we talk about different companies, I want to just keep remembering that there are people like me who are being affected and having their lives improved by the software that today’s guest has backed and helped bring about.
He is, and you might have heard his voice before, he is Dave McClure, the founder of 500 Startups. It’s a Silicon Valley seed fund and accelerator that backs startups from over 40 countries around the world. The companies they invested in and backed include many Mixergy interviewees, like Trulia, SendGrid, Udemy, Wildfire, AngelList. My goal for this interview is to understand the making of this investor, not just how he got here, but also I want to understand, Dave, how you developed your thinking about investing in startups.
Before we start, I should say this interview is sponsored by Toptal. If you need a developer to build your product because your team is too busy and you don’t have time to hire somebody, go to Toptal. They are a network of top developers. They will reach out to their network, find the right person for you. If it’s a good fit, you can hire them often the next day.
Andreessen Horowitz backed them because these are good people with a great business and I’ve had terrific experience with them and I urge you, if you’re looking for a developer, to check out Toptal, Toptal.com. Tell them you’re a friend of Andrew’s. They’ll take really good care of you.
Dave: Good morning. Thanks for having me.
Andrew: Thanks for being here. So, I heard from somebody at your company that when founders present their startups, you’ve been known to just toss yoga balls at them. Is that true? It is true.
Dave: Yeah. I guess that’s true. We have a bunch of large inflated medicine balls or yoga balls that people sit on and I tend to pick those up, bounce them around and throw them at people.
Andrew: Why? Why do you do that?
Dave: Well, it’s fun. Why not? I guess the idea is I want to try to distract them or give them an environment that maybe they’re not used to when they’re doing their pitch. I think when a lot of people get up on stage, lots of different things may happen. Their AV equipment might not work. They might forget what they’re going to say. They might get nervous in front of the audience.
I think we want to sort of just get them used to the fact that it’s going to be an uncomfortable experience and they’re going to have to deal with anything that’s thrown at them, literally thrown at them. But it is sort of a fun way to sort of release steam. I think they kind of understand that I’m trying to distract them and they have to stay on message.
Andrew: This kind of sounds like the movie “Whiplash,” where the music instructor wants to make the drummer better by throwing a cymbal at him.
Dave: I think that was a little bit more sadistic. I actually just saw that on a plane a month ago. That was really hardcore. I’m not that bad. I’m not that guy.
Andrew: That’s why you scream at them too sometimes. If there’s somebody who’s talking in the back of the room while an entrepreneur is presenting, what will you do with that person?
Dave: Well, I occasionally scream at people to say, “Shut the fuck up,” or get out if you’re still making noise. But I think actually when people that are talking in the back of the room, it’s really the presenter’s challenge to get them to pay attention and motivate them. I think when people are just asking people to shut up, they’re ignoring the real problem which is that people are just not that interested in what you’re saying.
Andrew: So, it’s not just the person in the back who’s to blame. In fact, the bigger issue is that the presenter is not captivating enough and you need them to step it up.
Dave: Absolutely. In fact, I really encourage people not to yell at the audience, even though I do occasionally because it’s not their fault. They are to be entertained or interested and if you’re not interesting or entertaining, they’re going to start talking to the person next to them or checking their phone or doing something else. So, I think you have to encourage people to really grab the attention of the room, capture people’s imagination and carry their tone of voice and how they present to people and not just be fucking boring all the time.
Andrew: There’s a determination in you that I want to explore later on in this interview. For now, I’m just aware of it that most people wouldn’t be willing to put themselves out there to the degree that you are. But let me ask another question. I asked one of the entrepreneurs you backed about what your style was. What was it like to work with you? What was it like to see you make a decision? One thing he said was, “I pitched the guy for two minutes. We both had a couple of drinks. And he said yes.” Is this typical?
Dave: Well, I wouldn’t say that that happens every day. But I have probably made a few decisions in whatever flexible settings than maybe most venture capitalists. But I think I try and capture people in not their onstage persona. I want to capture them in their normal, everyday manner.
Andrew: Why? What can you pick up on two minutes of conversation with this guy where neither one is in a professional setting?
Dave: I’m trying to figure out which deal you’re talking about.
Andrew: I’m hoping that you can’t, that this has happened enough that I’m protecting my source. I don’t think that you’d be upset if you found out who it was. But the bigger question is I asked him, “What’s going on with Dave? Is Dave operating on gut instinct or does Dave have a mental framework that is so clear that he can decide quickly who’s right and who’s not?” And this entrepreneur said, “Ask him that. I really would like to know. That’s your job, Andrew, as an interviewer.”
So, help me understand, what is going on in your head? You’re a self-identified geek who, if anything, has spent a lot of time in your head growing up, from what I can see. This isn’t just, “Hey, let’s throw money around because that’s the way the environment works.” There’s a logic there and I’d like to understand it in this conversation.
Dave: Well, I think we actually write relatively small checks compared to most other investors. We typically do about a $100,000 investment, which might sound like a lot of money, but for us, I think we did 300 investments last year. We’ll probably do 400 this year. Mostly what we’re looking for is a functional product and early customer usage or revenue. We hope to understand that there’s a pretty clear match between what the product is doing and what the customer need is.
So, we’re not typically investing in the next Facebook or Twitter. We’re not typically investing in, I don’t know, some space age robot that’s going to save the planet. We’re usually investing in things like, “Hey, I need to find a nanny to help my kids. I need to find a business productivity tool that will translate my information into another language or help me write some copy for a student for a class that I’m teaching or attending.”
So, most of the things that we fund are fairly straightforward consumer or business needs. It can be for an adult. It can be for a family. But they’re not usually that hard to understand. And then we want to kind of experience the product a little bit. And then we want to understand what the number of customers are and maybe some of the economics behind the product.
But most times, we have to make a very early decision. We’re not really seeing the whole play. We’re seeing like the first five minutes of a play. We have to make a decision about, “Okay, is this going to be an interesting play and am I going to stick around for the next act?” So, I think we do have to make a lot of decisions on gut or intuition.
But most of those decisions are fairly straightforward based on us putting ourselves in the shoes of the customer and saying, “Would I use this product? Would I want to use this over other products?” And then doing a little bit of business analysis on, “Hey, does this product seem like it could make money? Could it get big?”
That’s probably the biggest guess or decision that we have to make. Is this product going to be used in large numbers and can the person who’s building the product or someone on their team figure out how to get a large number of customers?
Andrew: Let’s break down what you’ve said so far. The first thing you said is, “We’re not trying to invest in the next Facebook. What we’re trying to do is…” And then if I understand you right, you’re looking for businesses that have real money and have a real reason for customers to use them today. Where like Snapchat could have had some time to figure out what their business is, your investments need to know it early on and therefore can prove it. Is that what it is?
Dave: I think so. We might invest and we have invested in messaging products before. So, when we’re looking at stuff that doesn’t have an obvious revenue model, we probably want to see that there’s already some level of usage. So, we did a messaging product that came out of Taiwan. I think when we made the investment, they probably were at one or two million users. They had pitched us before when they were really at single hundred thousand digits of users. At that point, we were still maybe not quite sure.
So, we would need to see either some substantial usage or growth or a clear business model, hopefully some form of both. So, I’m kind of saying we’re not trying to pick the next Facebook or Twitter, where there wasn’t a business model for five years. Although, at the same time, you could probably have said, “Well, if they had a large amount of usage, maybe it’s not crazy to think that they could figure out a business model with all those users or customers over the years.”
Andrew: Do you think you could almost write a software program that would give you that answer yes or no? Is it that logical or do you still have gut instinct?
Dave: Maybe in a few more years with better AI, that’s possible. What I do think is I can teach other people how to make reasonable decisions as an investor, probably in pretty short order. There are a lot of people in the venture capital industry who say that it takes 20 years to be a good venture capitalist. Maybe they’re right.
But I think I can get someone to probably reasonable levels of decision making within a year. When we bring people on, we try and encourage them. We give them a small budget to start making some investment decisions. We watch what they do. But hopefully within a year, they really pick up the basic pattern.
Andrew: And you can tell. So, Shawn Percival who’s now working with you here in the Silicon Valley office, you gave him money and you said, “Here’s some cash for you personally to invest in companies you believe in and we’ll explore your decisions in a year?”
Dave: Well, what I did was he was empowered to make investment decisions on behalf of our fund. I’m guessing he probably made somewhere between 15 to 25 decisions. At least so far, it seems like a few of those are working.
Andrew: How can you tell?
Dave: How can we tell whether the companies are working?
Andrew: Yeah. How can you tell within a few months?
Dave: Well, I wouldn’t say it happens maybe in one or two months, but between six to twelve months, I think we can see whether those companies continue to grow, whether they raise money, whether they make money from some type of revenue model. If we look back six months, did that company noticeably improve in scale or in usage or did they raise more money? So, it’s really pretty straightforward.
Andrew: I see.
Dave: Those three things–more users, more revenue, more funds raised–are sort of the typical parameters for us to decide is this company working or doing better than it was.
Dave: I should really add the other thing is that the importance of the way that we invest is by doing that at scale. So, I think what I’m not saying is I can teach someone how to make a great investment given one investment. What I’m saying is if I give you the opportunity to make 20 investments, I think I can hopefully suggest that 20-30 percent of them will do reasonable well within a year a progress and maybe over the course of five years or more, maybe five to ten percent of those decisions will do extremely well or at least have a 10 to 20x sort of outcome.
Andrew: I noticed as you were coughing that there were some things on your wrists. What do you have on your wrist? I’ll get back to the business in moment, but I’m curious.
Dave: This is a little bit… I’m trying to remember where I got them. It was either in Jordan or some place in the Middle East. Anyway, I think there are a lot of different religions of cultures that have these. I guess they’re called worry beads in some cultures.
Andrew: I see. Do you wear them because you worry?
Dave: They’re just things for me to play around with.
Andrew: But you don’t use them–when you’re nervous you might play with them.
Dave: Do I worry? Yes. I probably worry constantly. I have 1,000 little children to take care of.
Andrew: Okay. Over the last 24 hours — actually, forget 24 hours — last night, did you wake up in the middle of the night with worry?
Dave: I was out a little bit late last night, so I didn’t wake up that much with worry. But I probably wanted to make sure I got to a meeting this morning. So, I think I woke up at 6:30 and 7:30 and finally at 8:15 I got my ass out of bed.
Andrew: Another entrepreneur you invested in actually told me that he had a panic attack. He came out here. We had scotch. He said, “I had a panic attack.” He said, “I’ve had them several times.” He said now that he’s talking publicly about it–I won’t say his name because he’s not talking that publicly about it–he said that he’s noticed other entrepreneurs have had it. That blew my mind. I had no idea that people are going through this. Have you ever had a panic attack or anything like it?
Dave: I guess maybe about 20 years ago or 25 years ago when I first started doing public speaking, that was an area I got very nervous about. That might still happen in a few scenarios. But I think I’ve probably done so much public speaking at this point that I don’t worry about making an ass of myself.
Andrew: Do you worry about being homeless?
Dave: Do I worry about being homeless?
Andrew: Yeah. Do you ever think, “You know what? This whole thing could go away. I’m taking such big risks. Maybe I’m embarrassing myself. I won’t be able to get a job. I’ll be out on the street.” Do you get to that level? For some reason, I’m still on that level and I’ll always come to it, even though I’m not living on the street. I’m being nice to you. I can probably live on your couch for a few weeks, I’m hoping. But that still is a worry. Is that a worry for you?
Dave: You can stay on my couch any time, Andrew.
Andrew: Thank you.
Dave: I don’t think so. No. I guess two or three years ago when we were still getting off the ground, there were a lot of concerns. We’ve had moments where I freak out about something going awry, but I think after five years, three funds, 1,000 companies, I think we’ve kind of reached some level of stability where I probably don’t worry about being thrown out on my ass every minute. Maybe once in a while I’m like, “These guys might wake up one morning and realize I’m just a sham or kick me out on my ass.”
Andrew: You still feel that sometimes.
Dave: I think that because venture capital takes a long time to figure out returns, at least, most funds take 10 years to play out, I think it’s challenging some days to know whether it’s working or not. You make a set of investments. You think they look like they’re doing well. But it really takes three to five years to see exactly what the actual returns are. I can sort of tell you, okay, I made 250 investments out of our first fund. I think 50 to 75 of them are doing well.
On paper, it might look like we’re doing 20 to 30 percent performance, but until you actually finish seeing all those companies exit and get to actual cash and pay back your investors. It’s not obvious well you’re going to do until you’re fairly late in that cycle. So, there is, I think, a healthy amount of fear or concern about, “Well, I’m making decisions right now that are going to play out over the next five to ten years. I hope I make good ones.”
Andrew: Okay. Let me go to something else. In 2013, you told the Wall Street Journal that you lived in your car and that’s a bad ass story when you first started the business.
Dave: In 2013, I talked about living in my car in 1996.
Andrew: When you came to San Francisco, to the Bay Area and you came to work here. What I’m wondering is — and it was a Lexus, too.
Dave: Well, it was actually a used Lexus. It was a curious story.
Andrew: What’s the story behind that?
Dave: I was living in Palo Alto at the time. I had actually been in the Bay Area maybe about five or six years by then. But I was paying for an apartment, I think about $900 to $1,000 a month. I was working really long hours and working like 16 to 18 hour days. I had literally nothing in the apartment. I had like a mattress, a TV that wasn’t hooked up. I wasn’t even paying for cable or anything and I think my wife’s piano or something. And she was on the road a lot.
So, it was really, there was no need for me to have an apartment. We had an extra room in the office that we weren’t using. I was like, “Why the hell am I paying $1,000 a month? I should just move into the office and I can take showers over at the YMCA.” I had bought a used Lexus. It was probably about an eight or ten year old car at the time. I just put a bunch of my clothes in the back of a Lexus. So, people used to make fun of me that I was the only homeless guy they knew who drove around in a Lexus.
Andrew: I see.
Dave: But it really was true. I really didn’t have an apartment.
Andrew: But you were living out of your office.
Dave: Yeah. I just did the math. I was like, “I don’t need to be spending an extra $1,000 a month when I’m really not doing anything besides sleeping there five or six hours a day. I can do that in the office.” So, it was actually a very practical decision.
Andrew: Yeah. It’s not like a sad story.
Dave: It’s not. I wasn’t out on the street homeless.
Andrew: But it is a badass story in the sense that it proves your willingness to work, right? It’s kind of like the drummer in “Whiplash” who’s willing to bleed on his drums to get that rhythm going and keep it up.
Dave: Am I that dude?
Andrew: I kind of feel like you are. I get that sense from you. First of all, you’re a really happy guy here. You’re reminding me I should be smiling more in this interview. I’m so determined to do a good job here that I’m noticing my brow is furrowed–
Dave: You’ve got purpose.
Andrew: Yes. It’s like, “I’ve got to do a good job here and show all of the people who listen to this interview that I’m not just a flimsy interviewer.” I get that sense from you too, but there’s also a happiness. Are you happy?
Dave: I think so. I’m generally a happy person. At this point in my life for my career, I’ve had a few things go my way. So, I’m probably in a generally good mood. You know, I’ve had certainly lots of ups and downs and definitely as both an entrepreneur and as an investor, I’ve had some tough times to get through. So, I’m not always like happy.
Andrew: So, there’s a determination there. I want to understand the reason for it. What were you aiming for? For me, I’ve said this a lot of times on Mixergy — I felt like a nobody. Growing up in New York in a city where people were autographing the skyline, building incredible things all around me and I felt like in comparison I couldn’t even talk to girls.
So, I’m in this nobody in this world of great giants. I will sacrifice anything because it all sucks compared to being a nobody in this world. I will sleep on the floor. I’ll not sleep. I’ll do whatever it takes. I’ll eat the dollar rice from the Chinese restaurant because I’ll keep the money for work. That’s my determination. What was it for you?
Dave: Well, first of all, that sounds like a great reason to work really hard. I’m going to help you work up the courage to talk to that girl some time. I think there are a couple of different things going on. One was when I was growing up, I was kind of a smart kid. I skipped a couple of grades. I went to college early. Most of the things that I did with math and science were pretty easy and were generally fun.
When I got to college and certainly after college, things got a little harder. I realized I hadn’t developed a strong work ethic. I often like got through things just because I was able to come up with an answer quickly and I didn’t have to study very much. That might seem like a great thing, but it doesn’t build a useful set of work habits that I think can be helpful later in life.
So, I think for a long time after getting out of college and coming out west, I was really trying to figure out what I was good at. I was really trying to understand where I could spend time. I bounced around through a lot of different types of careers and roles. I was a programmer. I was kind of a small business entrepreneur. I did marketing. Eventually I did angel investing.
A lot of times, I had modest levels of success but I really wasn’t convinced that I was figuring out my life mission or passion. Along the way, I met a lot of other people who I thought really did, some really amazing people that I worked with at PayPal, some really great entrepreneurs that I got the chance to work with.
Andrew: Sleeping in your car was before PayPal, wasn’t it?
Dave: Yeah, it was probably about five or seven years.
Andrew: So, was there something in the environment that you saw that made you say, “I have to do that?”
Dave: I’ve always been really fascinated by technology and entrepreneurship. I came out to California in 1989 and I was already saying, “Wow, that would be a really cool thing.” In fact, at the time, when I came out to California I was really planning to go to Japan because in the late ’80s, that was the place to be. Japan went through some economic downturn.
Andrew: Yeah. They were going to buy off all of the US.
Dave: Yeah. They were.
Andrew: There was a Pontiac commercial that talked about how they might buy up all of New York but we still create the number one car. But here’s the thing though — you’re willing to fly to Tokyo, whole other culture, whole other country in order to make it. You’re willing to sleep in your car instead of sleeping in your apartment in order to make it. You’re willing to put up with so much.
Are you introspective enough to know what that inner goal is, what that inner motivation is that drives you to throw balls at people, that drives you to put yourself out there on your blog, that drives you to do all this? Are you introspective enough to say, “Here’s the one thing I can point to?”
Dave: I don’t know if I’m very introspective sometimes. I feel like I live my life on my sleeve. There’s a movie about living in public or something. I can’t remember that.
Dave: So, I don’t know. I’ve always felt like a lot of the fairy tales or stories around entrepreneurship were things that I internalized. I definitely felt and identified with geeks in the valley. I was a Frisbee-throwing, computer programming nerd when I came out to the valley. I don’t program now. But I still identify with that. I think this journey to figure out, “How do I learn how to start a business? How do I learn how to grow a business? How do I hopefully have some success?”
That’s a really important thing. I’m trying to live that dream myself as well as pass that dream on to others. It took me a long time. I think I always tell people it took me 20 years to figure out how Silicon Valley works and I’m trying to pass that on to other people in more like six months. So, you take my two decades and sort of compress that into half a year, I think that’s a valuable service for other people.
Andrew: What’s the process that you go through to take someone who has a good idea, who’s maybe launched it already and gotten some traction and get him to understand what you’ve learned and do it all within six months, as you say?
Dave: Well, I think there are a lot of the pieces of the puzzle which today are much easier to work with and figure out than maybe, say, 10-20 years ago. You have platforms like AngelList where you can discover other entrepreneurs and investors. There’s lots of information about the legal structure and process. Lots of information has been written.
Andrew: But you know what? We all have these tools, the access to information about investors, the new software that’s cheaper and so on. Some people are using it brilliantly. Some people are almost embarrassing themselves with it. What are you teaching people that allows them to use this really well?
Dave: Well, I think because we’ve invested in so many people and we’ve seen, at this point, over 300, maybe 350 companies go through our accelerator programs, 12 different batches over the last three years. So, not everybody was successful. But we’ve seen a number of companies that have done things correctly. I guess we have enough experience to say, “Here’s a simple and quick way to do this or to do that.”
Andrew: What’s “this?” What’s one example of something that you have a simple and faster way to do?
Dave: I think when we want to invest in companies, we’d always ask them, “Do you have a profile on AngelList?” And actually for all of our accelerator companies because they have to have an AngelList profile to apply, they go through that process. When people need to raise capital and need document structure for a convertible note and security–
Andrew: So, you give them that.
Dave: We have free standardized documents. It used to be the case that you had to pay lawyers for those things, which didn’t make any sense. They were really very simple and similar documents.
Andrew: Other programs have this stuff too.
Dave: Yeah. They do.
Andrew: What’s the thing that you add? Can you give me an example of one entrepreneur who was part of 500 startups that you helped and help me understand what you did for them specifically?
Dave: I think the areas we probably focus on the most are around customer acquisition and marketing. That’s one really huge focus. We have about six people on the team that are sort of growth hackers and residents. They work with all of our companies to identify what methods are they looking at for acquiring customers, what are the costs of those channels? Can we scale those channels or help them scale those channels?
Andrew: Do you have a specific case study, maybe of ToutApp that you helped them?
Dave: ToutApp probably certainly. I can recall Boatbound.
Andrew: What did you help them with? Do you remember specifically? I’d love to see more case studies from you. When you used to give presentations — I know you still do — but you talked with such specifics and clarity that people would feel like they went home having been mentored by someone, not just watching someone give a speech, right?
Dave: I will say that I’m not necessarily the person doing all this these days. I have done some search engine marketing. I’ve certainly done a variety of different things that are marketing-focused — email, social media, etc. But we’re trying to bring on people that have real channel experience in specific areas. Search and social platforms are definitely part of that, but probably also mobile platforms, email and structure.
Andrew: I see. So, day-to-day you’re not there even supervising to make sure that these guys who are helping with growth get the right things done.
Dave: I am to some extent being part of the accelerator program. Probably the area that I focus on much is pitch prep. So, that’s the area that I spend time with. Maybe in the initial orientation I do a little drill sergeant boot camp things. But there are 50 people working at 500 Startups. Each of our accelerator programs probably has at least ten people supporting all the companies, maybe a bit more.
Dave: I have to go out and raise money for our company. So, I’m often on a plane while they’re running those batches. But I think just to kind of get back to the things that we really try to do is identify companies and products that have an audience and are beginning to scale and then we try and give the companies a framework for how to do that activity on a regular and frequent basis and really give them a financial framework as well as a mental framework for doing that.
And then if we have something that looks like it is working, that’s where we want to kind of get them to step on the gas and hopefully help them raise some capital. But that’s one of the areas that I would say we emphasize a lot. Probably the other one is really the connection to different countries all over the world and bringing companies from other places to the valley and bringing companies from the valley to other places for, again, expansion and product development.
Andrew: Geeks on a Plane is one way that you got started with that, getting outside of not just Silicon Valley, but the US. You also used to do something that I remember John Hering from Lookout now, he used to go to startup to startup, that was your event here, right?
Andrew: He used to fly from LA just to come out to your event. I wondered about why you do this event where you’d bring in a speaker, like Eric Ries, I think, was one of the early speakers, to talk to audiences of entrepreneurs. Were you, at that point, scouting people? What was your method? What was your reason for doing it?
Dave: This was an event I used to run with Leonard Speiser and a few other folks about six or seven years ago. It was usually about 100 people. We had a speaker talk for half an hour about a topic and then we would break into tables of eight to ten people and each of those tables would have a discussion about the topic the speaker presented on.
The speakers at each table, we sort of did like wedding planning to make it very specific. So, it was experienced entrepreneurs. It was some investors and it was rookie entrepreneurs. We always tried to make sure that the rookie entrepreneurs were the focus on the conversation, at least from what they needed and wanted to get out of it. That was really important because I had been at a lot of other events where there were kind of round table discussions and usually they’d get dominated by the investors and they’d get dominated by the experienced entrepreneurs.
I felt like it’s great that you have those really experienced people, but what you should really be doing is trying to bring up the next generation and help them out. So, that was a really explicit goal to say, “Let’s make these people who might not always be the most outspoken person at the table the point of the whole discussion and the focus of that table and let’s have these really experienced entrepreneurs and investors try and use their big brains to help the other rookies come up.”
So, it ended up being a really great format. We would choose a really interesting speaker and topic, hopefully. We had the founders of YouTube. I think Reid Hoffman, founder of LinkedIn, Mark Pincus who is founder of Zynga at different times. So, there were really interesting and entertaining stories but then trying to apply, “What was that person talking about and how does it apply to this rookie entrepreneur and how are they going to get their business started?”
For me, it was just really fun. It was great to make connections with people. As we were getting started trying to build a fund, it probably helped for us to get some visibility from a lot of other entrepreneurs and investors in Silicon Valley. So, there was a little bit of maybe strategic reasons that I was doing it. But still it was an event that was really fun and it was a lot of work, but it was a great experience and I enjoyed it a lot.
Andrew: It really was, I mean, both a lot of work and a great valuable event. Like I said, people would fly out for it.
Andrew: You started a company called Aslan. Am I pronouncing it right?
Dave: Well, I’m not sure I know the exact pronunciation. It was named for the lion in “The Chronicles of Narnia.”
Andrew: Ah, okay.
Dave: So, that’s where it came from.
Andrew: I was wondering where that happened. You sold it. I’m wondering what you sold it for. This is just me trying–
Dave: Not very much.
Andrew: How much?
Dave: The eventual acquisition, I think, was probably about a half million dollars. So, it was not a lot of money by Silicon Valley standards.
Andrew: How much money did you end up with from that sale?
Dave: I owned probably about half the business. So, I probably made about a quarter million on that.
Andrew: And how did you feel? Did you feel accomplished or did you feel in this city that you just hadn’t done enough?
Dave: I felt relieved because at various times I thought we were going to go bankrupt and I wasn’t going to get any money. In fact, I probably was going to owe people a quarter million dollars.
Andrew: I read that. You had such a great blog post about that experience. It started out with something like, “Most of the time I think of myself as a failure. When I’m optimistic, I think maybe I’m just a late bloomer.” Why did it get so close to bankruptcy? What did you do that–
Dave: Probably because I was a shitty entrepreneur.
Andrew: What made you a shitty entrepreneur? What are some of the big mistakes you made back then?
Dave: Well, I think a lot of it was just not really having a lot of experience running a business, not understanding how to manage financial planning or capital. There were a lot of other mistakes I would say in terms of having too much business concentrated with one customer. When that customer went away, that created a lot of challenges for us. I think managing people and learning how to run a company and learning how to manage my own psychology and the psychology of others. There are tons of things that I think… Nothing prepares you to run a company except running a company.
Andrew: The psychology part is something that we don’t hear many people talk about.
Andrew: What do you mean by managing your own psychology? What did you do wrong there?
Dave: I think most business that I’m part of are not really a straight line. There are a lot of twists and turns to that story, a lot of ups and downs, both financially and emotionally. I think you kind of have to try and dampen the highs and the lows if you can and keep an even keel. That’s really hard.
I talked to a lot of entrepreneurs and I think many people have this experience where they feel like one day you’re on top of the world and you’re going to conquer everything and it’s awesome and then the next day you’re like, “Holy shit. I’m completely stupid. That was a really bad decision. What could I have been thinking?” You have these really substantial swings of manic depressive attitudes. You’d think that you would get used to that after a while and it would even out, but it’s hard, I think.
I still feel like a lot of times I’ve been involved in at least several startups and several businesses and there are still days that I feel like, “Holy shit. I’m really screwing this up.” And then the next day I’ll be like, “I’m awesome. It’s great.”
Andrew: What do you do to get yourself to feel more level or to deal with those lows?
Dave: I think having been around the block now, a lot of times I think you just have to wait it out. I don’t mean like weeks. I’m just saying like you know you’re going to be up or down and it will probably be different in 24 hours and sometimes you don’t have to act on those feelings right now.
So, if you’re feeling really shitty, maybe the solution is just to like try and do a little bit of work and take some time for a break and then go to sleep and wake up the next morning and see if you feel better. If you’re a little bit crazy and a little too manic, maybe you don’t want to make too many big decisions when you’re at the height of your manic nature.
Andrew: That’s also hard.
Dave: Yeah. It actually is. In fact, there are a lot of times when I do get a little crazy and manic and at least initiate some decisions and then I think it’s useful to take a look at those decisions another 24 hours later and say, “Does that sound as good as it did yesterday or does that sound a little crazy and maybe stupid?”
Andrew: Doesn’t it almost feel like, though, when you go through a manic stage like, “This is the way to be. I keep allowing reality to change me. But I should be in this manic stage. He’s a brilliant guy.”
Dave: Well, there is a little bit of an addiction to that feeling. I think when things are going right, you do feel on top of the world. It is a pretty amazing sort of drug or feeling. But again, having been around the block a few times, you’ve got to realize, “This is going to wear off and I’m going to feel a little bit different.” So, just try and understand your own highs and lows and try to even that out a little bit.
So, I don’t know if I’ve figured out how to deal with it. I think too many people try and change how they feel. I think you can get out and run. You can go out and exercise. You can have some food or other things to affect your mood. But I do think just giving yourself time, that’s one way to moderate those feelings.
Andrew: You know, I’m looking at a conversation thread on Twitter that I’m not even sure how to introduce in this interview. So, I won’t even look like a good segue. I’ll just say it’s Sam Altman saying everyone tries to copy Y Combinator and they all include the co-working or shared living space. You’re smiling because you recognize it. Do you know there’s an undertone in there of something that’s not mentioned until later on in the thread, that “We have produced six billion dollar companies. They have, all of them, produced zero.” What do you feel about that?
Dave: I think Y Combinator has done an amazing job. They’ve been around a good bit longer than us. They probably started about six years before we did, at least five or six years. I think Sam is a really amazing person. We’ll see how things play out under his leadership. He already looks like a very strong choice to lead Y Combinator after PG. Obviously, I think just like any good entrepreneur, he’s trying to make his story as amazing as possible. I will say that Sam maybe plays a little bit more zero sum game sometimes than I would prefer.
Andrew: How do you mean?
Andrew: What do you mean by that?
Dave: Well, I think you just mentioned it. So, he said, “We, YC, have six $1 billion companies. No one else has any.” I think he’s wrong about that. I think what he maybe meant to say is no other accelerators have produced billion-dollar companies. I think there are at least a few examples of that, I believe. But at the same time, they’ve had ten years.
So, if you were to measure by the same yardstick, were those companies billion-dollar companies four or five years in? Maybe, but probably not quite yet. So, if we were looking at other accelerators, you would probably want to measure them also over an eight to ten year period and see based on the number of companies they invested in how many outcomes did they have that were billion-dollar outcomes and on a percentage basis, was that better or worse than Y Combinator?
Andrew: The competitive part of Dave McClure — I’ve heard there are two Dave McClures. There’s the Dave McClure who is the person we see on his blog sometimes, who’s aggressive, who likes to say the word fuck a bunch of times because he feels it and you’re not going to hold him back. And there’s the Dave McClure who someone has told me, several people, actually–what’s the name of that guy? I used to live right next to him. I said, “How does it feel to have sold your company?”
He goes, “Dave McClure came into the office and he gave me a big hug and he said,” I forget what it was, but it was something so meaningful. I go, “What the fuck does Dave McClure have time to go over to this guy’s office and just give him a big freaking hug. He could have text messaged him.”
But the first Dave McClure is fired up by this, is trying to just show the second Dave McClure’s face and say, “Hey, we’re going to keep working on getting our first billion-dollar company,” but the fighter says, “I’m going to show you and show the world that I will have this,” right?
Dave: I think when people criticize either directly or indirectly the things that we’re working on, I think that does fire me up, probably like nothing else fires me up more.
Andrew: So, did you feel at that point, especially with all these people not just reading this but chiming in, these guys who never mind never started a billion-dollar company but don’t even have a startup that they’re working on and they’re all chiming in and giving you advice. Do you feel like, “I’m going to show you guys that I can do this?”
Dave: Well, I hope I’ve figured that out. We’ll see. I think we have a lot of companies that are $100 million companies and on their way to billion-dollar companies, but check back with me in a few years. But I think when Sam says stuff like that or when other people say stuff like that, I don’t let it affect me too much, but I do take some energy from when that’s being said to say, “Okay, I’m going to prove you wrong.”
In particular, what I usually do is I retweet their negative comments and I share it around the company. It’s like the coach in the locker room who had the opposing player telling him like, “Oh that guy can’t cover me whatsoever.” You take that, and you put it on the main thing when people walk in the door and you say, “That’s what they’re saying about you. Are you going to let that stand?”
I think there was a commentary — I think Ron Conway was praising Y Combinator and they were talking about, “They’re sort of like Harvard and Stanford all rolled up together and there’s nobody else who’s even close,” and I was like, “Thanks, Ron.”
Andrew: One more quote for me to show.
Dave: I put it into a quote and I basically shared it throughout the company. I was like, “Yeah, here’s what they think. What do you guys think about that? What are we going to do? Are we going to take that lying down? We’re going to go out there and show them.”
Andrew: Do you feel that people . . .
Dave: The role of the underdog is a very important thing. Even when I feel like I’m winning, I actually prefer being number two or being the underdog role because I think it does motivate you. So, I don’t know.
Andrew: You are encouraging people to see you as the underdog. Frankly, Dave, at this point, there’s no reason for you to be seen as the underdog outside of you just encouraging them.
Dave: Don’t do that. I need to be the underdog.
Andrew: You do. There’s a sense of disrespect for you sometimes, right?
Andrew: Ron Conway in that TechCrunch article a while back about how you should be ashamed of the way you speak.
Dave: Angel Gate. I don’t think most people even remember that.
Andrew: No, they don’t. But here’s the part that stood out to me. People are very respectful of everyone except for you, right? And you want that. And you’re encouraging them to be disrespectful. But at the same time, do you feel like, “Come on guys. I’ve raised money here. I’m helping these entrepreneurs. You see real companies. Take me seriously already.”
Dave: Yeah. Sometimes they still don’t.
Andrew: Sometimes they still what? Sorry.
Dave: I think sometimes a lot of people still don’t’ take me seriously. That’s actually okay with me. I do feel like that fires me up and keeps me motivated. If everybody starts taking me too seriously and actually acts like I know what the fuck I’m doing, then I might lose my edge.
Andrew: Who was your best mentor in the early days of investing?
Dave: Well, I think there were a lot of people who were very–I don’t know that I had regular relationships with them, but they were role models for me. Ron Conway was certainly one of those. Paul Graham was certainly one of those. I think Fred Wilson, Brad Feld.
Andrew: Did anyone sit down with you and just guide you? Did Shawn Parker at any point sit down and tell you how he thinks? Why did you smile at that?
Dave: I owe Shawn Parker, an amazing debt of gratitude. He gave me a shot. He hired me into Founder’s Fund for a little while when I wasn’t able to raise my first fund in 2008. He gave me a job in venture capital when hardly anybody was getting a job in venture capital when hardly anybody was getting a job in venture capital.
Andrew: So, what happened was you were making investments on your own. You dug it. It felt right to you to do it. You tried to raise a fund in 2008.
Dave: I tried to raise a fund in 2008, not a good time to raise.
Andrew: The worst time to do it. It’s like trying to start an airline in 2011 or 2012.
Dave: It seemed okay in April of 2008. But around August of 2008, it wasn’t such a good idea.
Andrew: So, Shawn says, “Come on in here. I’ll give you a job.” Did he give you more than that? Was he a guide for you?
Dave: Not really. I think Shawn was flying all over the world a lot and working on his own deals. I had to figure out a lot of stuff kind of on my own. I would say that Shawn gave me a shot and gave me some resources. But I had to sort of like understand and figure it out from there. Sorry, for folks who don’t know, Shawn Parker was one of the folks that Facebook very early . . .
Andrew: Can we just say folks that don’t know Shawn Parker, go listen to somebody else’s internet interview show about why you should quit your job.
Dave: Yeah. Go watch “The Social Network,” although that wasn’t actually the exact story, I think. Shawn was in very early in a bunch of amazing stories, so Napster and Facebook are some of them. But no, I think I really had to figure out a lot of the investing stuff on my own. Some of it I’d been doing as an angel investor for the past, at that point, I think four or five years.
Reid Hoffman probably gave me a few tips here and there. I had worked with him at PayPal and then he went on to start LinkedIn. I got the chance to grab coffee with him every so often. I didn’t get to hang out with Peter Thiel all that often, but he was also someone. They were both taking risks when, after the first crash of 2000-2001, there weren’t a lot of people investing between 2001 and 2005, but they were active angel investors then.
Andrew: Do you remember a piece of advice that Reid Hoffman gave you or guidance about how to invest that still sticks with you?
Dave: Well, I think that one of Reid’s points has always been distribution, distribution, distribution. So, to him, I think a lot of the framework for investing is, “Can this thing really grow big? How does it grow big?”
Andrew: And it’s, “Can he get distribution with this?” is what you mean by that.
Dave: I think some of that is, “Is there a baseline level of organic growth that is substantial?” Whether or not its’ viral, I don’t know that that’s the requirement, but he likes to invest in stuff that has large network effects and continues to grow and expand. LinkedIn is an example of that and I think his investments in other companies, Facebook or Zynga also had some elements of that as well. So, I think that was one thing to understand.
I think when I worked with David Sacks, this was at PayPal, I was looking at ways to do marketing education and evangelism for PayPal. I kind of came up with a different set of game plans. One of them was physical events and conferences.
David was really specific about two things that he did not want me to do. One was he felt like doing online marketing was an order of magnitude more efficient if not two orders of magnitude more efficient both in cost and time. The other one is he didn’t really hold a lot of business development partnerships in high regard.
I think a lot of people that came out of PayPal tended to think about scale and speed first and foremost. I’m sure other people also had those experiences. But I found it was interesting that a lot of people came out of PayPal and were later successful. I think some of that framework of thinking probably rubbed off.
Andrew: The founder I was thinking of earlier is Ted Grubb from — what’s the name of the company? Foodspotting, they were acquired by OpenTable. Why would you go when you have now over 800 companies that you’ve invested in, I was always wondering, why leave in the middle of the day and go and shake Ted’s hand even? Why not say, “Ted, come over for dinner. Come to the office. We want to celebrate you?” The thing I always wonder about you is you’re flying all the time. Scheduling this interview was really tough because you’re in a different country, different time zone every time.
Dave: Yeah. Well, a lot of what we do is international and a lot of what I do is fundraising and speaking and meeting with other people on our team. So, I’m on the road about six months out of the year.
Andrew: Tell me if I’m reading too much into it–but there’s a logic to you to go to see Ted. There’s a reason why going and seeing an entrepreneur.
Dave: I think I would actually call that selfish on my part. Getting to celebrate the wins are much fewer and far between than the losses. The reality of being a venture capitalist, particularly the way we invest is that most things we do fail. So, most startups don’t result in success. In fact, most of them fail out right, but many of them, even if they don’t completely fail, they just aren’t very big.
So, we have a lot of cases where I’d say we were not right about the size and scale opportunity. You just have to be very humble and understand that if you’re even right as often as maybe one out of three times in a business that’s survivable maybe one out of ten times, it’s a business that’s got some scale, you’re doing pretty good. So, the baseball analogy often holds. I don’t even think most venture capitalists are as good as .300 hitters. We’re probably more like .100 hitters.
I think that it’s important to celebrate the wins, both for yourself and fro the other people. I think it’s great to recognize when people do get a win of whatever size. A lot of our companies are like family and friends and we do try and celebrate those moments when we can.
Andrew: You respond to a text. I asked, “How supportive is Dave as an investor?” One thing I heard back, I don’t know if I said it earlier in the interview, but you respond to text messages within five minutes unless you’re doing a Mixergy interview and you’re helpful.
Dave: Shit. Yes. I’ve got like ten.
Andrew: Yeah. I heard the phone buzzing. It was cool. I think it’s part of your personality and I’m glad to see it here.
Dave: I don’t know if that scales forever. I try to be responsive, at least via text or maybe via Facebook or Twitter messages.
Andrew: How? I don’t mean turn this into a Lifehacker episode, but I am curious. I don’t mean to turn this into a Lifehacker episode, but I do admire who they can take someone who uses his time efficiently and deconstruct his process so that we can learn. Can you tell me how can you do that? I struggle with email. We all struggle to keep up with all the messages coming in. Very few people have as many coming in as you do from so many people who are that important to you. These aren’t just readers or fans. These are people who you’re backing with your money or reputation. How do you manage it all? What’s a tip you can give us on time management that you’ve learned?
Dave: I don’t know that I’m the best person in getting shit done and managing time. I will say that I’ve shifted out of doing email. It used to be that email was day in, day out activity or at least a good portion of my day. I would say now it’s usually messages on my phone. There are some similarities there, but I would say it’s a little bit more of a constrained environment. I think a lot of my day is triage. A lot of it is just like there are 500 messages a day or more that come in via email. There are probably 700 via text on other channels. Probably you just need to pay attention to the top ten percent of those.
Andrew: And the rest you can let go.
Dave: I don’t want to say let go, but there are other people in the organization who might be able to help deal with some of those. There are things that maybe they’re important, but I don’t have to deal with them right away.
Andrew: Your EA is Melissa Grody, by the way. I love working with her. I could really tell the quality of an entrepreneur by the people who work with them. It’s so interesting to see it. I’m sure you have too. You can kind of say, “I don’t want to talk to you as an entrepreneur. Let me talk to the person who is with you every day and see how smart they are.” That’s a really good proxy for your intelligence.
Dave: Well, I think Melissa is probably a lot smarter than I am.
Andrew: Not just that, but considerate and on it. Anyway, does she have access to your email the way that Drew Houston’s assistant responds to his email in his name? Is that going on too?
Dave: Yeah. I mean, I don’t think she responds as me that often. There are times when she needs to do that and we’ve worked out how to do that. But yeah, she probably sees my life 24/7.
Andrew: So, she has username and password access and she’s responding to some messages.
Dave: I think if Melissa ever wanted to hack my world, she could do a lot of damage. So, I better keep her happy. Yeah. I think that there’s an interesting time — I’m trying to remember when it happened — I used to arrange my own schedule and then I kind of gave up that power to somebody else. It was hard at first to like not do it and I’ll still manage some things in my schedule.
But I think probably Melissa started working for me maybe five or six years ago. There’s a time I was in Singapore for some trip. I think it was one of the very first times I’ve been in Singapore, first or second time. So, she had been arranging meetings. She’s in one time zone. I’m in another time zone and maybe I wasn’t even in Singapore yet. I was in Japan or some place.
I think I had like five or six meetings one day and they all went perfect. I got to all the meetings on time. I got to where I needed to go. I had a driver or somebody when I went to the airport. I just thought to myself, “Wow, that was really amazing.” I went to a complete other country. I had never been there before. I had a bunch of meetings lined up and I got every place I needed to go.
It was one of those magic moments where I was like, I’m not sure that could have happened ten years ago. I wouldn’t have had a mobile phone. She wouldn’t have been able to coordinate all the stuff. It was just really interesting. I think since then I’ve sort of given in to having somebody else sort of tell me — I don’t want to say tell me where to go, obviously I’m driving some of those reasons to go to those meetings.
But a lot of times when I’m trying to figure out what’s next, it’s like I look at my calendar and magically things appear on there and I go to an airport and then crazy shit, like I’m in Kiev on the way to like Jordan or something. I think now I’m just kind of used to it. It’s not always perfect, but I think giving into the magic of having somebody else make your schedule work and then combining that with international travel, it’s just really changed my life. It’s kind of an awesome thing.
Andrew: I kind of feel like the future is software that does what you just previewed right now for everyone who’s listening to us.
Dave: I didn’t used to do this. Even when I was in my early 40s, I wasn’t traveling the world to like 30 countries a year. That’s a fairly recent thing that just happened four or five years ago. But it’s amazing how small the world is. I’m not saying what I do is cheap or necessarily easy for everyone to do, but I think there’s a lot more mental barriers for people to getting up and getting on a plane and going to another country than there are cost factors or other reasons.
Once you do it, you don’t really understand how easy it is until you actually start doing it. I used to go visit my wife, who’s Japanese, I used to go to Japan almost every year to visit her family. Shanghai and Beijing and Seoul were probably about a two or three hour flight from Japan. I was doing that trip for ten years and I never thought about going to those places.
I really feel it was a tragedy in my opinion. You go to New York and you’re like, “Oh, Boston is just up the road. DC is just down the road and I can get on a train or I can hop on a plane.” I don’t think we have these mental reasons where we think about it. Right now, we have a team in Mexico City and I wouldn’t have thought ever to go to Mexico City before. It’s a short flight. It’s shorter than to go to New York. People feel like it’s millions of miles away. They just don’t even imagine that they would hop on a plane and go to Mexico City. Yet, it’s super easy to go to Mexico City. I think the world is just compressing like that in ways.
Andrew: I don’t think it is for most people yet. I think you’re a little further ahead. I’ll give you an example of where I noticed how far it is. A few weeks ago I was on Skype with Juan Martitegui. I say, “Juan, you’re in Argentina. I’m drinking my yerba mate.” He says, “I’m not in Argentina. I’m in Mexico. I’m at 500 Startups’ office.”
He works for an educational marketing company for Mindvalley. He runs the Mindvalley Hispano. He is both in South America and he’s outside of the software business and in the worst way. He’d rather be in the software business. 500 Startups both reached outside of the industry and outside of the country and brought him into the fold and he has a brilliance that I don’t think most people recognize, especially when it comes to marketing.
It’s one of the things that I’ve always admired about your work at 500 Startups. Your mouth and your writing and your competitiveness is what got my attention. The part that I admired is you’d bring people together in an interesting way, including startup to startup and you’ve reached outside, starting with things like Geeks on a Plane, which we haven’t talked about it. It’s really been impressive to watch you and it’s an honor to have you here on Mixergy. Let me ask you one final question.
Andrew: Thank you. I should have actually paused and let you say thanks. I usually would do this behind the scenes, but I’m going to ask you right now–can I make the headline to this interview aggressive, not aggressive, can I make it shocking, like, “Dave McClure is Going to Prove Sam Altman Wrong?”
Dave: Oh jeez.
Andrew: I shouldn’t have asked you. No, but I want to ask. Are you still the kind of person who would want that or are the person who’s trying to rehabilitate your reputation?
Dave: I think the thing that people don’t understand is we compete with a lot of people and Y Combinator is certainly one of them.
Andrew: But you back their companies too.
Dave: We also invest in probably close to 100 Y Combinator companies. So, we are complementary, I hope, in many ways. It’s flattering that Sam even thinks that I’m a competitor. Hopefully I am at least somewhat of a competitor. But I don’t know. I’m sure I have enemies in the industry. I hope Sam isn’t one of them. I don’t think that’s really our purpose.
I don’t need to have other people lose in order for me to win. I think that part of what you were mentioning, I think, about opening doors, connecting people across countries, that’s really what I enjoy doing. I think that’s hopefully one of the things that 500 takes on as its mission. I think we really want to be aggressive about that. If I can help you come up with some link data, I’m not sure exactly how.
Andrew: That is what I’m asking you. Will you be okay with my link data?
Dave: I think, “Dave McClure says he’s going to destroy the venture capital industry.” I could go with something like that.
Andrew: You’ve got to pick a fight with somebody, not something.
Dave: Oh yeah?
Andrew: I get your point. How about the opposite? “Dave McClure is Going Soft: He’s Being Insulted on Twitter and He Will Not Stand Up.”
Dave: “Dave McClure is Booked for an Hour and Didn’t Swear Once.” Fuck.
Andrew: Oh yes you did. Just in case, I made sure to curse to just to keep you comfortable with it.
Andrew: I’m aware of stuff like that. Alright. I really am grateful to you for doing this interview. I’m less concerned with click bait than I am with the substance of this interview. My hope is that ten years from now or three years from now or even three months from now, someone on their way to a meeting with you will listen to this interview and feel like I had a substantive conversation that I now know what Dave is about and I’m more prepared for it. Thank you so much for doing this.
Dave: Thanks so much, Andrew. I hope you have a great day.
Andrew: You too. Thank you all for being a part of it. Bye everyone.