McClure Delivers Harsh Truths, Advice to Begin Denver Startup Week

Dave McClure isn’t interested in being a cheerleader. If you were at his speech that kicked off Denver Startup Week on Monday, you didn’t get a pat on the back, but rather a kick in the ass—and maybe other parts of the anatomy.

“There’s a lot of rainbows and unicorns bullshit that goes on, and I think we have to temper that with some reality,” said McClure, a prominent tech investor and founder of 500 Startups. It was a bracing message to deliver to an audience of several hundred entrepreneurs, investors, and government leaders eager to talk about how exciting their startups are and how great Denver is.

While McClure was blunt, he didn’t seem out to rain on anyone’s parade. He’d probably even call himself an optimist. But he was conveying a truth he’s seen investing and as the founder of 500 Startups, the California-based incubator and seed fund.

“Most entrepreneurs fail,” he said. “Stick with it. I believe in you. At least one-out-of-ten of you.”

Here are some observations from McClure’s speech.

Long odds: McClure kept coming back to an unavoidable truth that entrepreneurs and investors often try to avoid, especially at events celebrating startups: The overwhelming majority of them will fail, and investors repeatedly will lose money backing companies that flounder.

That’s not just an observation from an observer on the sidelines. McClure has invested in several hundred startups at this point, and he expects at least 80 percent of them to fail or at least not return an appreciable exit. And those are the startups that are perceived to be promising enough to catch the attention of a well-known early stage investor or enter a highly regarded incubator.

The long odds have consequences for entrepreneurs.

“Most of you are going to screw it up, but try and learn, fail fast, start again, and start over,” he said.

Also, perhaps paradoxically, don’t be paralyzed by the fear of failure because it happens to almost everyone, including brilliant people.

After all, McClure isn’t afraid, he said. Otherwise he wouldn’t be risking money on all those startups. The chances of finding big winners—even those elusive billion-dollar unicorns—only fall to zero if you never invest or try.

“Most things fail. Ninety percent of everything is crap! Why am I optimistic about this? Because 10 percent kind of works,” McClure said.

Easier than ever: At the same time, it’s easier than ever to create a company, he said.

Several technological and business trends have made it the “age of the lean, little cockroach startup,” instead of “the era of the big fat dinosaur startups” that ended when the dot-com bubble burst. For example, the cloud has ended the need to purchase expensive servers, development cycles are faster than ever, there are more potential customers than ever, and investors are emerging almost everywhere and can be found through AngelList.

“The chances for entrepreneurs are better than ever. They may be only 10 to 20 percent, but they’re better than ever,” McClure said. “It’s easier by a large margin to be able to build startups, reach customers, get capital. All these things are so much easier than ever before…except that most of you are still going to fucking fail.”

The trends mean geography is increasingly irrelevant. McClure said he’s invested in companies on every continent but Antarctica, and he even backed an Egyptian company that was launched during the nation’s recent political upheavals. All this leads him to believe that startups outside Silicon Valley now face a better climate than Silicon Valley startups had during the boom years of the late-1990s.

“The playing field has never been more level for doing startups anywhere in the word, and really, I mean anywhere in the world,” he said.

“Culture of optimism”: It also has helped that startup clusters and ecosystems have emerged around the globe. McClure didn’t address Denver or Boulder at length, but he outlined key factors startup communities need to grow, like access to capital, willing mentors, and an abundance of tech, design, and business talent.

But the key trait is a pervasive, shared willingness to accept risk, confront failure, and help each other out.

“It’s important, in the face of failure, to believe that the opportunity for success is still there,” McClure said. “That minority case [of successful companies] is not going to be encouraged in an environment where people are negative and pessimistic. So it’s actually important to be in a place where people are kind of crazy.”

It’s a feel-good sentiment, although McClure later framed it in a characteristically edgy way.

“Have a culture of optimism. Support your fellow founders, whoever they may be. Yeah, you may think they’re full of shit, you think they’re going to fail, but give them the benefit of the doubt,” he said.

Advice for entrepreneurs: McClure’s talk did have a lot of “news you can use”— pointers for people looking to found or invest in tech companies.

First, he said don’t bother with a business plan. Long-term planning is an outdated concept when startups often have to change within a few weeks.

“What is much more useful is to develop test cases for products and audiences and prove some level of validation,” he said. Entrepreneurs should also ask key questions like: “Does the product work? Do customers use the product? Will they pay? Am I actually making money on a revenue-generating product? How big can I scale that? What are my sources of capital?”

Second, he emphasized the importance of developing and releasing a minimum viable product as fast as possible. That at least demonstrates the idea can be made into something and gives users something to test.

The next step is to develop a business model and show people will use and pay for the product. That proves a market exists. Then you can move on to implementing a monetization strategy that will lead to sustainable revenue and has the potential to show the fast growth investors need to see.

McClure also had a few words about the “lean startup” phenomenon that has been embraced by entrepreneurs and investors. He’s a fan but not an acolyte.

“The lean startup is not a panacea. In many cases, we have worshiped at the church of the lean startup a little too much,” he said. “There are many other ways.”

Lean’s focus on customer validation and testing as early as possible is a very useful idea, according to McClure. But when a startup needs to make the big jump to a dramatically different product idea or market, its principles don’t work as well.

Advice for investors: McClure saved some of his harshest words for angel investors and venture capitalists, saying many acted “like sheep” and deeming the model broken. But he still offered advice and outlined how he and 500 Startups evaluated investments.

The key is to spread money around in many little bets in the $25,000 to $100,000 range. Then investors should check back in to see which companies have traction, which they demonstrate by having a functional product that has some, although not necessarily many, users. Only about 20 percent of the companies that make it into 500 Startups will reach this point, McClure said.

At that point, the startup might merit a check in the $100,000 to $1 million range. The next big questions are: can the company scale its customer base, improve the product, develop and test marketing and revenue generation strategies, show a market exists, and make key hires?

After all that, the key is proving that the revenue model works and focusing on revenue and customer growth. An appropriate investment in those companies could be between $1 million and $10 million.

If investors place enough bets—anywhere from 10 to a few dozen—a few should pay off. In the case of 500 Startups, it could invest in 250 or more companies in a fund. Its conservative model projects that about 10 or 20 percent will have small exits in the 5x range, which would return $5 million to $50 million. Five to 10 percent could have large exits in the 20x range, which would yield $50 million or even more than $100 million.

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