ACA Report 1: Dave McClure “Write a small cheques & spend time”

The AANZ’s role includes curating intel from the rest of the world for the use and benefit of New Zealand’s Angel Investors. The recent 2014 Angel Capital Association Summit (www.angelcapitalassociation.org/2014summit/) in Washington, DC, was a great opportunity to do just that.

Billed as the largest gathering of angels in the world it bought together top insights into this rapidly changing environment. Features included how social media is affecting the early-stage landscape, investment best practices, innovations in deal terms, exits – and how rules and legislation from Washington is affecting our world (and what we can do to change it). 

A highlight of the event were words of wisdom from one of its headlining presenters Dave McClure of 500 Startups.

Dave’s session was fascinating.  He is the founder of 500 Startups; a seed fund and accelerator based in Mountain View, California and one extremely colourful character. Everyone was rather wide-eyed with anticipation about how many times he would, to quote many of them, “drop the F-bomb”. He visited New Zealand in 2013 with his international Geeks on a Plane.

What follows here, and in my other report posts are notes written while attending the ACA presentations.

Dave started with $300k when he first began investing in startups

He invested very small amounts. And was very much learning on the fly. He made 13-15 investments and had 3 exits.

This took place over 4-5 years and he learned that “most of the time you’re wrong”! Getting something back is good.

But doing a lot of little investments was a good strategy. It allowed him to explore ideas and companies he pretty much stumbled into.

Then the Founders Fund gave him $2m and two companies have delivered 100x.

Dave is firmly of the view that the minimum portfolio size must be at least 20. And you must be prepared to admit you’re wrong… A LOT.

“Diversification is the one and only message I would leave you with.”

If you have $200k to invest, then invest the first $100k in $5k amounts into 20 companies.

Save the second $100k to identify the ones kicking on and do some follow on in slightly larger amounts.

He’s had lots of small exits and learned that valuations matter a lot. So keep them as low as possible.

Don’t play for ownership play for valuation.

Dave had a interesting DD tip which he’s learned makes a a great deal of sense – there is more to be gained from looking for upside opportunity than looking for downside risk. So don’t spend too much time looking what can go wrong.  Explore the extent to which this deal can genuinely disrupt a market and make lots of money from it.

In his view Dave figures if the founding team can make a product, sell it and manage costs you’re onto something.
Even when “we might lose a dollar but might make ten” still looking at upside… this means even if the DD shows its dodgy, do it!

Dave believes the angel and startup industry is getting easier to work with. Lots more visibility on deals and investors.
And “we are getting smarter… not much, but a little”. There is so much more information out there now and this helps

Customer acquisition is getting easier.

Dave also recommended his fellow American Investors look closer at potential in international markets and gave Africa as an example – which has 20 of the world’s fastest growing countries. In next 5-10 years the whole world will have access to Internet.

Other bullet point gems of wisdom included:

Companies are going to fail on smaller and smaller budgets.

Syndicates are easier to get started. Much easier to organise and pull together than raising an investment fund.

Dave suggested most of problem is with the angels. But we are also the solution. We should be investing smaller cheques earlier and let the ones not making it fail and follow the ones kicking on

He lamented the fact that there are “lots of people with money who aren’t giving it to entrepreneurs”!

Angels and investors are part of the solution… write a small cheque and spend some time with the founder he urged us.

This next point is a good one… and bears reading carefully. Dave made it well.

“Ownership matters on a relative basis from the first cheque to the second cheque. At the first cheque you are investing without much information about the likelihood of success. You want more ownership when the perception of value is increasing but the price is not. So you are looking for where the risk has reduced but the rest of the market does not know this. You go hard here and go for ownership rather than valuation. You get to arbitrage that gap.”

Dave said you should look for product data which is backward looking to validate its quality and the market. If the product is good then the team should be too. If product is fucked up then the team probably is too.  (F-bomb dropped at last!)

Angels should be the Henry Ford for investment. There is a lot of talent out there and we should be giving it money.

– Suse Reynolds, from Washington, DC, USA

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