“Don’t write business plans,” warns venture capitalist and angel investor, Dave McClure, of 500 Startups. Headquartered in Silicon Valley, McClure and many of his colleagues has a pedigree from Facebook and PayPal. His firm employs a "cast a wide net" approach, with a particular focus on emerging markets.
I sat down with McClure in Berlin recently at a conference bringing together Iranian entrepreneurs and business leaders. During our interview, McClure dispensed his best advice for startups. He also spoke about how much easier it is to start a company today than ever before, and explained 500 Startups’ investment philosophy.
Amy Guttman: What is your investment strategy?
Dave McClure: We assume a very high failure rate – about 80%. We expect a few exits in 3-7 years, but we place lots of little bets. We filter out the failures and small wins and double-down on stuff that looks like it’s working. Three-hundred of the companies we’ve invested in in the last five years have been outside the US.
Guttman: What does an entrepreneur have to demonstrate to convince you to write a check?
McClure: I want to invest in a functional product that people are using. We look for functional prototypes and customer development and most importantly, scalability. Can you scale customer acquisition cheaply and measurably?
Guttman: What do you look for in both emerging and established markets?
McClure: Its pretty nuts and bolts for us - certainly a lot of commerce plays, mobile apps, video-based businesses, food delivery and services businesses, probably SAS (software as service) as well. Most of what we do is software, internet and mobile. A fair amount of that is transactional.
Guttman: How do you view the startup potential in Iran?
McClure: I think if and when the market opens up we’d be interested in taking a look at it. If you look at the other investments we’ve made in the region Iran definitely fits in. It’s a good market size.
Guttman: How does the risk of investing in Iran, once sanctions are lifted, compare with other emerging markets?
McClure: The risk is probably a bit less because of higher internet penetration than in other markets. There are lots of places people don’t think of as risky, but they are because of fraud rates or labor taxes and laws. Everyone has a different definition of risk. Sometimes that creates opportunities as well.
Guttman: What parts of the globe are on 500 Startups’ horizon?
McClure: We’re in seven or eight regions. We’re in Mexico, Brazil, and Southeast Asia. We launched a fund for Thailand. India’s a huge market, China, Japan, and Korea. The Arabic and Spanish-speaking markets represent two large, multi-language geographies we’re paying attention to. Europe is kind of fragmented. Africa is nascent, we’ve made a few investments, including four in Egypt. I visit 50-60 cities and 20-25 countries a year. The intent is to be a global fund, which takes time and prioritization.
Guttman: What can governments do to improve entrepreneurial ecosystems?
McClure: There are a lot of things government can do to encourage entrepreneurs. I think it tends to be more on the investor side than the entrepreneurial side. They tend to focus too much on people with financial backgrounds running big funds. I think it would make a lot more sense to get some entrepreneurs to run a lot more small funds, say 50-100 funds valued at $5-10m each and stipulate that those investments be made in early stage companies.
Guttman: Is it easier or harder to build a tech startup these days?
McClure: It’s easier to start a business anywhere in the world right now, than it was in Silicon Valley twenty years ago. Even in Iran. The internet today is a dramatically simpler beast. There’s social media, e-commerce, funding and 5-10 global platforms with hundreds of millions, if not billions of people who talk to each other.
Guttman: Finally, what’s your best advice for startups?
McClure:
1. Don't write business plans; instead build prototypes & test them with customers.
2. Don't create five-year revenue projections; create 12-month expense projections.
3. Do create marketing plans, but focus on unit economics and metrics/analytics of:
a. what customers cost to acquire, b. what products cost to build/deliver, c. how much customers generate in revenue and when
4. Test and iterate on your assumptions -- turn your business plan into a business metrics dashboard of KPIs, and continue to measure and improve every week.
5. Don't run out of cash. Check your monthly burn rate, cash in the bank; figure out your remaining runway and try not to get below six months of cash.
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