blog, his Twitter account (which has 15,880 followers as of this writing), or Facebook. Dave is an angel investor who recently joined a VC fund (the Founders Fund).The accepted wisdom today is that angels have buried their wallets and run for the hills. So it seemed like a good time to interview an investor who is very active at the seed level.Dave McClure has fingerprints all over the social media map, so you have probably seen him on his
The bad news: we could not do this interview via Skype, so there is no MP3 audio. The good news: the reason we couldn't do it is that Dave is too busy running around town doing seed level investments. Good news trumps bad news.
Seed Stage Investing
You know that line, "Come back when you have more traction"? It is usually (but not always) VC code for, "We think you and/or your product and/or your market sucks, but in case we're wrong, we want you to come back when all the risk is off the table."
So who invests at this early stage? The answer is usually angels. Actually, there are two types of angels: amateur and professional. The amateur has a day job and puts small amounts into startups. You need a lot of them, and they are busy. When times are tough -- when their investable capital has been decimated by markets and Madoff and their own job might be at risk -- they bury their wallets. That is true today, and may be true for a while.
But as everyone knows, hard times are the best times to invest. Investing and building in hard times and then launching into a recovery and exiting in a boom is a well-proven cycle.
But, sadly, while lots of people talk this game, very few people walk it. When both angels and VCs run from early-stage risk, the wealth-creating engine of innovation stalls.
This is why the second type of angel, the professional angel, is so important. The professional angel is like a one-person VC fund. They do it for a living and love what they're doing. Think Mike Maples, Ron Conway, Paul Graham... and Dave McClure.
In this context, Dave's move to the Founders Fund is significant.
Seed at a VC Fund?
Dave has a mission to invest in the range $50,000 to $250,000 in about 10 deals. He is doing this with the Founders Fund, which has deep pockets for later rounds if needed.
Large VC funds have a problem. They have too much money. Sure, we all want that problem. But it is a real problem. If you have $1 billion to invest, you have to put it to work. That is what you are being paid 2% of funds under management to do; that is why the Limited Partners (LPs) invested in the fund. The General Partners (the guys who entrepreneurs meet with) can live quite well on that 2%. Ahem, 2% of $1 billion is $20 million, which should be enough for a coupla Partner Ferraris. Seriously, though, the next time a VC tells you that you need to pick up the legal tab on a deal, just remember it is because they want you to, not because they need you to.
But getting really big returns on a sum as big as $1 billion is pretty hard. It is the law of big numbers. A 30% return (the minimum needed to give LPs a return commensurate with venture risk after the GPs have taken a 20% performance cut) on $1 million is $300,000. A 30% return on $1 billion is $300 million. Basically, unless you land a Google-like winner, it is very, very hard to get a $300 million return.
Also, the really hot deals, the ones that give those outsized returns, often don't need a lot of money to get to the point where a lot of investors can see that they are hot. So an investor has to get in early, when the venture needs more money, to get a seat at the table.
That is why the Founders Fund has brought in Dave McClure: to do the early seed-stage deals. The Founders Fund is a mid-sized fund ($220 million) that already has a reputation for doing things differently and shaking up the VC status quo.
What is encouraging is seeing the competition for seed-stage deals. Last week we interviewed True Ventures, a small VC startup doing small Series A deals. We are seeing other VCs take different approaches to the same issue.
Dave's Takeaway from PayPal
Question: "You worked at PayPal, one of the all-time great startups. If you had to select one lesson you learned there to pass on to other entrepreneurs, what would it be?"
Dave: "That which does not kill you makes you stronger. Lots of entities wanted to kill PayPal because we threatened the status quo. Just don't give up, iterate, be resourceful."
Dave believes that the culture of PayPal was one reason it could do this: it was a meritocratic and diverse culture where the best ideas got executed. There was a "tolerance for strong voices," because it hired "off-center people" who did not all look at problems the same way.
Staying True to Consumer Markets?
Question: "The Founders Fund is clearly positioned in the consumer markets and has done very well there. But we are now in a deep consumer recession. Does this lead to any change in focus or approach?"
Dave: "This country and the whole world are in recession, but we don't see the Internet consumer market contracting." In Dave's view, more people are going online, and companies that play to that well, like Amazon, are doing well.
When I asked him about eBay's problems, which eBay attributes to the economy, Dave suggested these were execution problems and not market problems. "Look at how Craigslist is doing compared to eBay."
Aligning Investor and Founder Interests
Question: "The Founders Fund has a stated mission to give a better deal to founders and to better align investor and founder interests. Can you give some examples of this in practice?"
Dave: "Look at 'Series FF stock.' This is a new class of stock pioneered by Founders Fund (the 'FF' in Series FF) that sits in the middle between common and preferred. FF stock can convert into preferred under certain circumstances; for example, when the VC wants to take a more aggressive bet and turn down an acquisition offer."
Interestingly, True Ventures, which we interviewed earlier, takes a slightly different approach to the same issue. It is good to see creativity being applied to a problem that has been around for a while.
Talking the Book
Question: Finally, here is a chance to "talk up your book." What one or two ventures do you want to tell our readers about?
Dave told us that he has done four deals, but only one has been announced. Watch this space for news of the other three. The announced one, though, is Twilio. Check it out and tell us what you think. Has Dave got a winner here?
In the Founders Fund portfolio, Dave mentioned Quantcast. At ReadWriteWeb, we know Quantcast well, as does any online publisher that sells advertising.
Question: Are you an angel, VC, or pirate?
Dave: "Pirate." And here is why.