E40: Dave McClure on Delivering a 60x & 40x fund and Founding 500 Startups
Feb 8, 2024
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Dave McClure, founder of 500 Startups, discusses his journey into venture capital, his investment strategy, and the challenges of breaking into the industry. He analyzes his two 40x+ funds, talks about the misalignment between LPs and GPs, and explores the concept of his new firm, Practical Venture Capital. They also discuss competition in the secondary market, the trade-off between unrealized TDPI and realized DPI, and the potential opportunities in emerging markets for international expansion.
Diversification through a large portfolio strategy increases the chances of finding the few big winners in venture capital.
Expanding presence in international markets and emerging economies can uncover significant opportunities for venture capital.
Practical Venture Capital aims to address time horizon and liquidity challenges in the industry through secondary transactions and faster DPI.
Deep dives
The Genesis of 500 Startups and the Strategy of Large Portfolios
Dave McClure shares the story of how he founded 500 Startups and the rationale behind their large portfolio strategy. He explains the need for diversification and the benefits of having a lot of shots on goal in order to have a chance at finding the few big winners. McClure also discusses the challenges he faced in fundraising and the unconventional approach of 500 Startups that went against the prevailing concentration thesis in venture capital.
Venture Capital in Emerging Markets and the Practical Venture Capital Approach
McClure highlights the potential of international markets and emerging economies in venture capital. He explains how 500 Startups expanded its presence globally early on and identified opportunities in markets like Asia, India, Latin America, and Africa. McClure also introduces the concept of practical venture capital, which aims to solve the time horizon and liquidity challenges in the industry. He discusses the need for faster DPI (distribution to paid-in capital) and lower-risk profiles, and how secondary transactions can help achieve these objectives.
Unlocking Liquidity with Secondary Sales and the Role of Practical VC
The discussion delves into secondary sales in the venture capital industry and the role of Practical VC. McClure shares his personal experience of selling a portion of his carry in 500 Startups' early funds and realizing some liquidity. He explains the motivation behind starting a secondary investment firm focused on acquiring LP and GP positions in funds. Practical VC aims to provide an option for non-institutional LPs and emerging GPs to sell positions and generate DPI after around five to seven years, when the power law distribution in funds starts taking off.
The Challenges of Fundraising and Building a Brand
McClure reflects on the difficulties he faced in fundraising for 500 Startups and the brand-building process. He discusses the unconventional strategies employed by 500 Startups, such as large portfolios, international expansion, and accelerator programs, which were not initially popular in the industry. McClure shares his insights on the need for LPs to look beyond traditional indicators and embrace non-consensus developments in order to find alpha in the market.
The Importance of Data and Math in Venture Capital
McClure emphasizes the significance of data and mathematical analysis in venture capital. He discusses the math equation behind diversification, volatility, and portfolio performance. McClure highlights the unpredictability of winners and the need for a large number of shots on goal to increase the chances of finding big winners. He also examines the challenges of measuring and predicting venture capital performance, particularly in detecting outlier success stories.
Dave McClure sits down with David Weisburd to discuss his journey into venture capital, including luck, his investment strategy, and the challenges he faced breaking into the industry. He provides an analysis on his two 40x+ funds, 500 Startups, and the misalignment between LPs and GPs.
(0:00) Introduction to Dave McClure and his journey in Silicon Valley
(4:00) McClure's entry into venture capital and creation of the Start-Up Metrics for Pirates model
(12:14) Dave McClure's investment strategy and the role of luck in venture capital
(20:09) McClure's struggle to break into the venture capital field and his rejection from Sequoia
(23:10) The premise and analysis of 500 Startups' investment outcomes
(27:34) The misalignment between LPs and GPs and the math behind achieving breakout success
(33:07) The aggressive investment pace and international strategy of 500 Startups
(37:16) The concept of practical venture capital and the challenges of long hold times
(44:29) The competition in the secondary market and the trade-off between unrealized TVPI and realized DPI
(47:12) Wrap up and introduction of the 10X Capital Podcast Newsletter
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