Huxiu Note: Dave McClure founded 500 Startups in 2010. According to his introduction in mid-2014, 500 Startups is almost half a seed-stage VC and half an incubator. It invests in about 250 companies every year, of which 120- 150 are in Mountain View (the city where Google is headquartered), San Francisco and Mexico, and 100-150 are pure seed investments. Dave McClure's most talked-about point of view is his investment strategy: Spray not pray (diversified portfolio investment). This article starts from the discussion of this strategy, followed by Dave’s 12 thoughts on entrepreneurship, from his personal blog 25iq.com. The original title is: Dave McClure talks about startups, venture capital and business. This article was compiled by Huxiu:
Venture capitalist Dave McClure is a controversial and outspoken figure, so I plan to list what he said below without going into details.
His strategy of spreading (spray not pray) is perhaps the most controversial aspect of his investing approach. His core meaning is to increase the number of investments in each fund, for example, 30-40.
Warren Buffett described "multi-choice betting" in his 1993 letter to investors: "When you make a risky investment, you must spread your resources across several independent and similar cases. Above, although each case may cause losses or injuries, as long as you are sure that the weighted average of the probabilities of each independent case can get you a satisfactory return. "This is how many venture capital investors play. Michael Mauboussin also expressed a similar meaning: "The inherent experience of any random operation is: the number of 'correctness' does not matter, what is really meaningful is how much 'correctness' it is."
I said in a previous article This was further explained:
Venture capital and value investment have some things in common, but fundamentally the two systems are based on different "pricing errors." This is a crucial question for investors to understand. If an asset is not mispriced, it is nearly impossible for investors to achieve performance. Different reasons can lead to “mispricing” – this is also important to understand.
In venture capital, "mispricing" occurs because many investors and asset owners do not understand options. This gives VCs the opportunity to buy what are essentially forward, "deep out-of-the-money call options" from the company at very cheap prices. By buying these options, a VC who understands options and makes the right trades can significantly outperform the market. For the top, top 5% VCs, this is a very simple formula.
If a fund invests in 30 companies, the results can reflect a powerful law - one to three companies invested by a VC will bring the vast majority of returns to the fund, while almost half of the companies will It will bring almost all losses.
The following is Dave McClure's opinion:
1 A startup will be confused by questions such as: 1) what is the product; 2) who are the users, and; 3) how to make money. Once stops thinking about these three things, it is no longer a startup but a real business. This is true in most cases.
2 What we are looking for is a working product that already has some early adopters and even some revenue. We will bet on these projects earlier than other investors. Typically, we're not just looking for great ideas, but successful products that people actually want. We need to understand whether the project has achieved a clear match between product functionality and user needs. The best time to invest in is when the company has already prototyped its product and has proven that it has the potential to grow on a large scale and make profits.
When a product earns 10,000 yuan a month, it is usually not an accident. It must have run through something, and then we will start investing. If the company continues to grow on this basis, and if other investors come in at this time, we may double down on the seed stage or Series A and write a third check to try to get into the Series B.
We look at three core indicators of the product: user growth and retention, revenue growth and the economic effect of each user, as well as other downstream decisions about investment. If we can confirm two, preferably three, of these three factors, we will be very happy. If we can only confirm one, then we know easily: this cannot be cast.
Your first impression will not always be correct. It usually takes you 6 to 18 months to figure something out. I mean, we often try to understand things that don't show results in six months. Genius often emerges slowly.
3 When entrepreneurs "sell" their business plans to investors, 80% of most effective speeches will focus on the "problem" and 20% will be their "solution". Users don't actually care about the solution you give them, they care about their problems.
4 I think a lot of companies don't need more than $1 million or $2 million in their first few years. Normally, their cost should be minimal. But many VCs write checks there for $5 million, $10 million or even $20 million. I think this is a good thing. Once a company finds a business focus and a growth strategy, it is a good thing that it has so much capital as fuel.
5 If you have a choice between being a founder and a VC, choose VC. This is an opportunity to perform better. If the Sequoias were the New York Yankees, then we were the Oakland A’s.
We are more open to business and we are not trying to hit home runs every time. We like to hit singles, doubles, and on rare occasions, we hit home runs. People are very interested in billion-dollar company stories, but our interest is not just in billion-dollar companies, but in diversifying our investments. We will invest in companies that are considered successful if their value exceeds US$100 million. Even if we exit when their market capitalization exceeds 100 million, it will be meaningful to the founders and a good return for us.
Unicorn companies are very rare and not very predictable. Centaurs are much more likely and predictable, while ponies are everywhere - in fact, we can make money from all three of them. It’s time to shift the focus from the unicorn craze to all the small companies that make sense. Overall, we think we will exit 15-30% of the companies we invest in, and 5-10% will be a great return. We are optimistic that 100 of the 1,000 companies we invest in will win. In fact, some companies have already won.
6 Diversified investment, this is what we call a "crazy" methodology. We got in earlier than most - at the acceleration or seed stage of the company. The earlier you cast, the higher the attrition rate. So we have a more scientific investment method.
We like to think of ourselves as scientists in front of a petri dish in a laboratory rather than as gamblers at a roulette table. We were like MIT students playing games in Las Vegas, except we applied our strategies to Internet startups. What we do is predict whether these companies will fail. My strategy was considered gambling or hunting when I was actually a fucking mathematician.
7 The feedback loop in the venture capital industry is very slow. If you are in it and you are smart enough, it may take four or five years before you see something conclusive. If you try to look into the future by looking back at a map, you'll see nothing but your own ass.
8 Saying you want to invest in a company but not investing in it is a breach of contract. It doesn't surprise us in the least when we make bad investments. This is normal. Most investors are trapped in what they call "FOMO" - the "fear of missing out". Most of us worry about whether we are belittling or rejecting something that will grow in our future, and this often leads us to make poor decisions. This is almost an irrational worry. needs to understand: you cannot grab all investment opportunities.
But it still hurts when you think that you missed out on perhaps the best investment opportunity of the past decade. I often fail to vote and later regret it. The most famous example is when I missed taking an Uber, which was a multi-million dollar mistake.
9 Find investors who are using the products and services they invest in, or talking/writing about these products and services. They understand these products and services.
10 Entrepreneurs usually don’t like to take orders from others. You have to trust that they can do their job. Remember, when you invest, you need to understand that this project will probably fail.
11 It may not be a bubble right now, but what is certain is that the rent is too damn high. What I always criticize is companies that have raised too much money without coming up with a growth strategy.
12 Silicon Valley is a magical place, but in fact people here come from all over the world. So Silicon Valley is more of an attitude than a geographical concept.
Follow the WeChat public account Huxiu.com (huxiu_com) for regular push notifications and exciting welfare interactions
