Q&A: 500 Startups’ Dave McClure on China’s tempting but ruthless market
Maybe it’s the jet lag. When I sit down with Dave McClure, founding partner of 500 Startups, he’s surprisingly mellow. The swashbuckling and infamously swearing seed investor – whose experience in Silicon Valley pre-dates the PayPal mafia – is understated as we chat at the Global Mobile Internet Conference (GMIC) in Beijing.
“Not too many people want to do what I do. Sometimes I don’t want to do what I do,” he tells Tech in Asia. “But I think it comes out that we have a general fascination and interest in learning about other people and markets.”
“That is why I’ve spent a good bit of the last six, seven years on a plane,” he says.
Since launching in 2010, 500 Startups has spread its footprint across 60 countries around the world by investing in more than 1,600 startups, including Credit Karma, Grab, and Twilio. Unlike many VC firms in the Valley, 500 Startups has pursued an aggressive, high-volume investment strategy, where a large portfolio is used to offset the low probability of a return.
The venture capital firm now has about 150 employees based in 20 countries, with accelerator programs in Mountain View, San Francisco, and Mexico City. Having hired a new COO in March to lead its long-term growth plans, 500 Startups has ambitions to scale up its already prolific investment operations.
“I think we are going to increase our presence in probably 10 to 20 metros globally,” says Dave, citing New York, Los Angeles, Berlin, Dubai, Jakarta, Tel Aviv, and other cities as potential locations for accelerator programs. “Easily there’s 20 to 50 cities in my mind that, over the next ten years, we could probably have a five to 20 person team in each of those places.”
At GMIC in Beijing last week, I was able to catch up with Dave, where we picked his brain on China’s “wacky” valuations, corporate accelerators, and more. Below is an edited excerpt of our conversation.
A lot of startup ecosystems in Asia use Silicon Valley culture as a reference or model – do you see anything that gets “lost in translation” here?
I think some people just copy the wrong shit. […] There’s always an over fascination with new trends, and some people get hyped up on the new trends before they understand really what the potential is. You could argue the whole AI, AR, VR craze is – I don’t know if they’re going crazy because of their own markets or things they see in other markets – but I generally see that insanity happening in the US and also over here, but maybe I’m the one that’s wrong.
I think sometimes there’s an emphasis on hiring people and scaling up just for scaling up’s sake before there’s a real sense whether there’s a real product market fit and whether the unit economics are working. That can lead to a lot of wasted capital and negative cash flow businesses, a lot of competition where the margins are slim to none.
I think some people just copy the wrong shit.
I generally don’t want to be investing in that type of environment, so we’re generally looking for differentiation and not just try and beat people out on cash. I think you saw an incredible amount of companies that came out in the group buying sector four, five years ago, and then there’s decimation that happened after that.
So I wonder if that cycle’s happening again with AR, VR content and not companies.
What kind of changes have you seen among startup entrepreneurs over the years?
There’s always going to be people who are newcomers who need to learn the lessons themselves the hard way. Whether that’s taking too long to get a product out the door, making too many hires, not managing cash flow, […] you can’t always learn everything just from reading about it. You have to experience it.
On the flip side, […] the investor ecosystem and structure is still pretty imperfect. Like we really don’t have a great understanding – how did Silicon Valley get built? Well, it kind of just happened.
But along the way there was defense department spending on R&D, there was subsidized funding for venture capital out of [Voice of Small Businesses in America] programs, a small business association. There were a lot of different infrastructure components that came from semiconductor companies, hardware companies, software companies. These days you have huge companies like Facebook and Google and Amazon and others.
People tend to put Silicon Valley up on this pedestal
Now I think you’re seeing the BAT [Baidu, Alibaba, Tencent] equivalent of those companies. You certainly see a lot of funds in China. I think you’re starting to see more and more acquisitions. China’s kind of done what the US has done probably in a third of the time. But still, looking at other parts of the world, that’s not really there all the way yet.
People tend to put Silicon Valley up on this pedestal like everything’s awesome and perfect, but I would still say we don’t always understand what we did. So trying to recreate that ecosystem in other places, particularly other emerging markets that aren’t as big as China and the US – that’s still very imperfect.
What gaps in financing and access to capital do you see?
We tend to see a gap in financing between say 100,000 on the low end, maybe up to 2 to 5 million. I think there’s plenty of series A actors in China and the US, but there’s not that many in other places. There’s probably lots of seed funds in China and the US, but again there’s not that many in other places.
Most companies still fail. Their asset class is still very risky and imperfect.
Outside Silicon Valley, even in other parts of the US, there’s not always access to capital. […] We are just not that great at getting companies to large wins. Most companies still fail. Their asset class is still very risky and imperfect. And because of that, it’s not very big.
People think that okay, there’s a lot of capital going on in the US and China, but in total there’s probably US$100 billion in venture every year. There are entire PE funds that are bigger than that. So venture capital is still pretty small and a pretty imperfect asset class. But I think we’ve seen improvements in the last five to 10 years and that’s why we’re starting to see more growth.
How can startups compete against more established tech giants – not just traditional brick-and-mortar incumbents – like Google, Amazon, Alibaba, etc.?
I don’t think there’s any solution to that. I just think you have to be good at execution and realize that other people are gonna try and copy. Hopefully if you’ve got an angle that you understand better than most, that might give you a better opportunity.
Over [in China] you have a lot of fast followers so even if you discover something interesting and different to the market you’re going to be watching other people jump on your tail quickly. Again, one of the reasons we’ve been cautious in this market is I think it’s a more competitive market.
If you come up with an interesting market concept, there’s going to be 20 other competitors in the next year. Over here, it might be a 100 or 200 or competitors.
What’s your opinion on corporate accelerators?
I think those do have some utility but I also feel like that’s more PR bullshit in a lot of ways. We have a lot of familiarity with accelerators and the numbers. There’s really high attrition rates and probably no more than 10 percent of our accelerator companies really end up being materially large outcomes. Maybe only five to 10 percent.
I feel like corporate accelerators are more PR bullshit in a lot of ways.
You have to do a lot of accelerator companies and you have to wait awhile to see those results. […] Most corporates are not operating at volume – they’re not very patient. They’ll usually kill those programs within one or two years. The people running them don’t usually have a vested interest in them. They’re usually people that get appointed to do innovation.
The economics of running an accelerator are just very challenging. Any kind of venture capital is challenging because it’s a long cycle business but particularly at accelerators, you’re probably talking about five to 10 years before you see the larger outcomes.
[…] If corporates wake up, they’ll probably realize they have an advantage over VC firms if they’re acquiring companies at below 100 million.
What are some challenges to investing in the Chinese market?
The scale and opportunity in China is tremendous. I’m torn because the opportunities here are huge and endless but also the competitive environment is tough and the structural visibility five to 10 years out is very, very fuzzy.
It just makes it hard when you’re a long-term investor. Do you want to jump into this market that you know you’re buying at really high prices? I think there are smart people here who make that choice, and so far they’ve done reasonably well, but I would say that’s pretty scary for someone who doesn’t know the market as well.
[…] In fact, we’ve had some negative experiences with companies trying to bring products to manufacturers in [China]. Sometimes it’s not clear whether there’s intellectual property that’s being appropriated and I know that happens to other Chinese, not just to non-Chinese.
I think that whole manufacturing area needs to make a decision about whether they’re just gonna continue to rip people off who are not very knowledgeable or whether they want to raise their level of service to something that’s more trustworthy.
It’s not clear whether there’s intellectual property that’s being appropriated.
I’ve heard stories from other Chinese entrepreneurs where they couldn’t find the molds for their original designs. This person actually had to impersonate a kind of military group in order to get their designs back. I’m like, if this is happening to other Chinese entrepreneurs, why do I want to try and have any kind of – I mean I’ll pay for the higher cost structure in Mexico or some place else.
But that’s growing pains. I’m sure that’ll work itself out over time.
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