Photo: Joi via Flickr
We had a chance to talk to angel investor Dave McClure earlier this week, prior to the announcement of 500 Startups’ new accelerator program.We met in the company’s 12th-floor offices high over downtown Mountain View, with a view of San Francisco 20 miles to the north. It seems like an amazing location for an individual entrepreneur or small team to spend a few months getting a product ready for a big investor to take a look. It’s certainly a lot more comfortable than Susan Wojcicki’s garage.
Here’s what we talked about:
Matt Rosoff, SAI: I was talking to a CEO the other day who complained his hardest problem was finding good people. He didn’t blame the big companies like Facebook and Google — he complained his biggest competition came from what he called a bubble in early-stage funding. Everybody wants to be Mark Zuckerberg.
Dave McClure, 500 Startups: Not everybody wants to be Mark Zuckerberg, but everybody wants to create a little piece of the American dream, the Silicon Valley version. I don’t think that’s a bad thing. Talent pool may be an issue here and there, but that’s not a big long-term problem.
SAI: Do you think there is a bubble in early stage funding?
DM: Maybe, but what’s the big issue with that? A bubble in early stage funding means maybe there’s $300 million at work when maybe there should be $150, as opposed to a bubble in late stage funding which means there’s $20 billion at work when there should be $3. The Valley’s not going to explode because there’s a bubble in early stage funding. Some people won’t make money. A lot of interesting ideas will be explored. I don’t think it’s incredibly irrational. It’s a little irrational.
What I think is dramatically irrational is really exorbitant prices being paid for Series A and Series B, or stuff that should be Series A but it’s valued at $100 million post-money. Basically, big VC funds with way too much capital, at least for the consumer Internet model.
SAI: What do you think is driving all those high valuations? Technology and real opportunity or cheap money?
DM: There’s money to be made. There’s going to be a Google or a Facebook or a Zynga every three to five years. Those are really big ideas that do return substantial amounts of money.
But if you look at the asset class overall it’s never a great bet. Particularly the last 10 years it’s been a really shitty bet. There were never as many big businesses as people were piling money into in the late 90s or early 2000s. This is really a lesson to institutional investors about how much capital the market can absorb, and it’s a 10-year adjustment cycle, and we’re only beginning to wake up to that.
SAI: What’s the psychology of the limited partner who invests in a tech or Internet fund today? What are they looking for?
DM: They took a huge hit in the public markets two or three years ago. A lot of people lost a third of their portfolio. Typically people invest in private equity or venture capital on a percentage allocation basis, so they were then overweighted in an asset class that wasn’t valued very frequently. So they had to reduce their exposure to that asset class, they didn’t have liquidity to make new investments, and the overall performance of that asset class in the last few years looked like shit. So those are three big reasons for people to be pulling back from those asset classes.
SAI: Microsoft, Google, and Apple all have massive cash on their books, and they’re not doing much with it. What’s holding them back? Do you see a wave of acquisition coming?
DM: If I were a shareholder, I’d say they’re not doing a very good job managing their acquisition strategy. All of these companies could take a small company earning money from Internet users today and apply that to their huge online audience, and they should be billion-dollar revenue streams. These don’t have to be hundred million dollar acquisitions — they can be small acquisitions applied to a large audience.
Otherwise, I’d say they should be returning money to investors and doing share buybacks — Microsoft has done that. As far as Apple goes, if you’re creating new product lines that throw off billions in revenue, you don’t need to be doing acquisitions.
SAI: A couple months ago, you said in a speech that you think non-tech companies might start buying more Web startups. Why?
DM: These would be acquisitions for distribution, not for technology.
Right now, about 5% to 15% of retail purchases are done online. That will grow to between 10% and 30% in the next couple of years. Most offline retailers have a pretty bad online experience right now. As more people look to buy online, they’re going to look at their e-commerce side and need to fix it. They can either hire a bunch of really expensive people and take a couple years, or they can buy a company for $50 or $100 million and integrate it with a few of their own people.
SAI: What types of tech startups do you think are underappreciated or underfunded?
DM: Parent and kid services. That’s because of the demographics of people working at startups — none of them have kids. But there’s a huge opportunity — things like the iPad are expanding the audience — my daughter loves it. Parents want to keep kids educated, hopefully, and entertained. Parents spend money on this.
SAI: What areas are overhyped?
DM: Location-based services. Real-time: what does that even mean? I’m not sure. A lot of us in the Valley get obsessed with the technology and don’t spend enough time thinking about the user.
One company I don’t think is overhyped or overvalued is Facebook. They’ve already got the users, all they have to do is earn more from each one. I think there’s a really good chance they will be earning $10 billion a year in two or three years. (Profit, not revenue.)
SAI: Later this month you’re sponsoring a conference on email startups and the future of email called Inbox Love. Why email?
DM: Because we still spend most of our time in email. I spend half my day there and could easily spend more.