E9: Dave Mcclure & Jordan Stein on YC, "Spray and Pray", and Games VCs Play
Mar 30, 2024
auto_awesome
Dave McClure and Jordan Stein discuss YC investing, the role of secondary funds, and betting on outliers in the venture capital industry. They explore entry point evaluation, the rise of capital call requests, and the decision-making process for doubling down on successful startups.
Investing in outliers is crucial for success in venture funds.
Secondary funds play a vital role in mitigating company shutdown risks.
Evaluating fund managers' ability to progress investments is key for fund performance.
Deep dives
Assessing Venture Fund Continuity
Assessing the future of venture funds involves looking at the ability of fund managers to identify the best opportunities and support chosen investments. Recommendations from founders and other investors play a crucial role in evaluating fund managers' track records and reputation. References, community feedback, and discussions with other LPs help in gauging a fund manager's performance and commitment to venture investing.
Identifying Leading Indicators
Leading indicators for evaluating venture funds include assessing if managers have invested in companies before and their performance with prior investments. Talking to founders, GPs, and the broader community helps in understanding a fund manager's execution of their investment strategies. Monitoring fund managers' consistency and ability to build relationships and invest in successful companies are crucial indicators for their future success.
Managing Shutdown Challenges
When considering the shutdown of funds, challenges arise in identifying custodians to wind down the funds and tackling issues related to managing LP expectations and delivering returns. The future of funds that are facing potential shutdown depends on the winners and losers in their portfolios, LP liquidity needs, and the overall support required to maintain the fund. Evaluating fund managers' ability to continue managing troubled funds and handling LP expectations becomes critical.
Evaluating Portfolio Progression
Assessing the progression of a venture fund's portfolio from pre-seed to seed and seed to series B stages is crucial in determining a fund manager's success. Understanding the proportional progression of investments from early to later stages is key. Fund managers aiming for a minimum of 10-15% progression rate through funding rounds show promise, with 20% being a strong indicator of success. Focusing on the ability to pick and support companies to sustainable progress in the early stages is vital for long-term fund performance.
Maximizing Investment Value Through Round-to-Round Valuations and Follow-On Strategies
The podcast episode delves into the significance of maximizing investment value by analyzing round-to-round valuations and designing effective follow-on strategies. The discussion highlights that despite high attrition rates in accelerators, round-to-round valuations often see significant increases, sometimes up to 4X or more. By securing a substantial percentage in early-stage companies with subsequent valuations far exceeding the initial investment, investors can achieve considerable value. Conversely, low valuation follow-on bets might not yield optimal returns, emphasizing the importance of assessing round-to-round value progression to make strategic investment decisions.
Optimizing Investment Opportunities Through Portfolio Strategy and Decision-Making Frameworks
The episode sheds light on optimizing investment opportunities by leveraging portfolio strategy and implementing tailored decision-making frameworks. A key emphasis is placed on evaluating the allocation of capital within a portfolio, considering factors like marginal ownership, breakout potential, and risk mitigation. By strategically analyzing the potential impact of additional investments on overall portfolio performance, investors can align their capital deployment strategies to enhance returns. The discussion also underscores the significance of continuous learning, adaptive strategies, and disciplined investment approaches in navigating the dynamic venture capital landscape.
David Weisburd hosts Dave McClure, Jordan Stein, and Jason Calacanis to discuss the evolution of fund spaces. The discuss investing in the YC ecosystem (00:28), the role of secondary funds today(30:00), and the importance of betting on outliers (55:18).
*
Timestamps:
(0:00) David Weisburd intros Dave McClure, Jordan Stein, and Jason Calacanis
(00:28) Reddit's IPO adds to YC's track record of successful public listings
(10:13) Strategy of investing in YC ecosystem and the importance of entry point evaluation
(15:28) YC's demo day and opportunities for other accelerators
(28:14) Carta’s report the rise of capital call requests
(30:00) The role of secondary funds in the current macroeconomic conditions and the potential for more company shutdowns
(55:18) Betting on outliers and the decision-making process for doubling down
(1:08:49) Lightning round: Top 3 investments from each guest