Dave McClure: Inspired by Dr. Seuss and Disrupting Venture Capital

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diligence, McClure contends that the relevant questions for VCs come down to: “Can you build a product? Can you make money? Great! Let’s turn on the faucet.”

As McClure explains in his blog, 500 Startups “is ideologically more focused on being an organization that teaches great hitting & fielding, rather than one that aims to find the best hitters & help them negotiate the best contracts. In other words, we’re happy to discover we have a few black swans, but our MISSION is to groom ugly ducklings.”

McClure also acknowledged during his San Diego visit that one of the central tenets of his strategy is more specifically at odds with the conventional thinking of the VC industry.

Many VCs say there can only be a relatively small number of successful outcomes in any given pool of venture-backed startups. There are economic constraints and other factors that limit the number of home runs, so there are only so many deals with Facebook-scale potential to go around. As a result, the biggest VCs bid up the valuations for certain startups by fighting to get into those deals.

But McClure contends the number of successful outcomes is much more elastic. It might even be unlimited.

Dave McClure

Dave McClure

This contrarian view is based at least partly on his hypothesis that entrepreneurial people—the folks with the ability to start a business that can grow to generate $10 million a year in revenue—represent at least 1 percent of the population. This wouldn’t matter to most VCs, McClure says, because most VCs are focused on finding deals with the potential for many times that sort of value generation.

Yet, he says, a program like 500 Startups that provides decent mentoring and venture support invests much earlier, and can help these businesses grow to bigger market valuations of $50 million and more.

[Corrected to delete specific invested rates of return] “Initially, we were thinking we might screw up the first check, so we were looking to follow up on the second and third checks,” McClure said. In other words, they assumed 500 Startups would generate its … Next Page »

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Bruce V. Bigelow was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Follow @bvbigelow

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