I recently had the pleasure of speaking with Dave McClure, founding partner of Practical VC and former founding partner of 500 Startups, on my podcast.
Dave has been an active angel investor since the early 2000s and has invested in over 2000 startups during his venture career. Given his contrarian approaches and evolution from early to later stage investing, I was excited to pick Dave's brain on everything from the state of Silicon Valley to his lessons learned over the past two decades.
1. The State of Silicon Valley
Seeing positive momentum in AI startups and events
Issues around crime, homeless, drugs being addressed
VC industry went through tough period but starting to rebound
2. Early Days of 500 Startups
Named company 500 Startups despite skeptics
Contrarian strategies - large portfolios, global, accelerators
Difficulty fundraising with non-traditional approaches
Power law results validated broad portfolio thesis
3. Investment Decision Making Then vs Now
Early stage - some traction and progress
Later stage - established growth and path to near term exit
Earlier - 200+ investments, minimal data
Now - concentrated 20-30 investments, all data-driven
4. The Evolution of 500's Investment Strategies
Realized best value was in funds around years 6-8
Winners emerged and overtook fund performance
Now buying secondary fund stakes, not early stage
5. How Fund Secondaries Work
Buying partial stakes from LPs or GPs
Not single companies, but whole fund slices
Underwriting based on unicorns, exits, write-downs
Anchoring on big winners, calculating total value
6. Advantages of the Skip the J-Curve Approach
Faster returns than traditional VC funds
Condensed 3-5 year timeline
Discounted proven growth assets
Target 3-5x return vs 10-15 years
7. How the Secondary Market is Evolving
Growing but constrained buyer demand
Many doing large transactions above Practical VC
Focus on funds, not just companies
Little competition for Practical VC's smaller deals
8. Risks and Rewards in Secondary Investing
Assuming continuation of growth trajectory
High probability of exit in 3-5 years
Avoiding early stage uncertainty
Giving up 100x potential of early bets
9. Advice to Emerging Managers
Differentiate your strategy to attract LPs
Deploying capital is easier than raising it
Have a unique niche and value-add
10. Parting Thoughts on Technology
AI, robotics, climate tech most exciting
Still lots of runway in traditional spaces
Find progression of success vs earliest innovation
Dave shared so many valuable insights from his investing journey, spanning early home runs like Canva to his current secondary fund strategy.
Some key takeaways for me were the power of differentiated strategies, maintaining discipline during downturns, and continually evaluating new approaches as the market evolves.
Dave McClure on Investing Evolution