Dave McClure's Investment Thesis

I’ve been a fan of Dave McClure since I met him some time ago. He has strong opinions, he shares them liberally, spices them up with foul language, and finds himself involved with a lot of interesting entrepreneurs and companies. In a nutshell, he’s my kind of investor.

Yesterday he outlined his investment thesis on his blog. I’ve heard this thesis verbally from him a few times now, but I am so happy to see him write it all down for everyone to see. If you are a web/mobile entrepreneur, go read it.

Dave clearly articulates the new realities of tech investing. Here is the way he puts it:

Fast Forward to Twenty-Ten, and let's take a look at these fundamentals, with a specific lens on the consumer market & internet startups:

•    PRODUCT now typically means a website or service, run on low-/no-cost open source software, hosted in the cloud on low-cost servers, developed in a few months (or a WEEKEND!) by a small team of 1-5 developers, who continuously test & iterate in real-time with online customers

•    MARKETing now typically means using a variety of online distribution channels via paid & organic search (SEM/SEO) on Google, viral/social amplification on new media platforms & social networks like Facebook, Twitter, & YouTube, and the quickly-growing mobile platforms of Apple iPhone & Google Android. With the exception of search, most of these distribution channels didn't exist 5 years ago, yet they now easily reach over 100M-500M+ users, with very low cost and measurable marketing campaigns such that even a small team can reach billions of people globally.

•    REVENUE can now be collected easily via a variety of online payment, transactional e-commerce, digital goods, subscription billing, lead generation, CPM/CPC/CPA advertising.  Many people buy things online now, and many companies are even bought for usage & users ahead of revenue.  

Longtime readers of this blog will recognize all of these themes but even so, I like the way Dave lays them out. The world has changed a lot for tech entrepreneurs and VCs are adapting to the new realities. Some VCs will adapt. Others will decide not to raise another fund, spend the next five to ten years winding up their older funds, and then retire.

Dave’s thesis is different in some ways than our thesis at Union Square Ventures. We are not as interested in smaller revenue focused companies that aim to be sold for $25mm to $50mm. We’d like to see our portfolio companies aim a bit higher than that. Even so, we will certainly end up with more than a few companies that will sell in that range. That is a successful outcome for us too if we can own 15-20% of the business and have less than $5mm invested, which is the case for many of our companies.

We tend to favor big networks of scale, like Etsy, Meetup, StackOverflow, Twitter, Zynga, Foursquare, Indeed, Tumblr, Disqus, among others. We believe that there are going to be a lot more opportunities like these that we can invest in.

But regardless of whether you are Dave McClure or Union Square Ventures, you need an investment thesis and you need to stick to it. And I believe that you need to make it public, articulate it well, and make sure everyone, particularly your target entrepreneurs, know what it is and why.

Dave did that yesterday and he did it well. Kudos to him. I think it will serve him very well.

#VC & Technology

Comments (Archived):

  1. Julien

    Dave is definetely an awesome guy! I’m always scared though that his attention has some limits. He is everywhere, all the time, how could he be also 100% focus on helping all the companies he invests in?

    1. daryn

      It depends on how much attention you need. Dave can’t sit and hold your hand all day (neither can most investors), but part of the beauty of him being everywhere all the time is that he’s always talking to lots of people and he’s happy to make introductions and make sure everyone knows about everyone.Dave’s on our board and has always provided as much help and advice as we’ve needed and asked for, plus some.

      1. Julien

        Agreed, the gigantic amount of intros he can make is definitely worth the potential lack of attention/time. But as you said, it really depends on what you’re looking for. I like hands on investors =)

        1. ShanaC

          VC is a personality match as much as any other business. Dave is not for everyone, nor is USV (no offense to either) I’m sure they both find appropriate matches. Publicizing what they want probably both helps clarify for them (and companies) what they want to invest in. Reguarly going through that list helps clarify even more so. So what if the list is controversial? At least you know. Now you can’t complain.

        2. dlifson

          My strategy has been to have a “portfolio” of investors. Dave (who is an investor in us) is amazing – our go-to guy for intros who spent an hour with us a few months ago analyzing our product. But I’ve also got David Cohen, Chris Yeh, Gary Vaynerchuk, Kal Vepuri, Thomas Korte and others… each one has different skillsets and can offer different perspectives. All of them are busy, and most will leave you alone unless you come to them asking for help. And that’s how I like it.

  2. Satish Mummareddy

    As an entrepreneur aim to build the next Craigslist: 15 people building & running a $100million per year revenue business. 🙂

    1. Alex Murphy

      Not such a bad business if you can stomach where the usage and revenues seem to come from.

      1. CJ

        What, advertising? Yeah…I’m not a big fan of ads either…

        1. Alex Murphy

          LOL. Here is a quick write up in Mashable on 30% of the revenues coming from “exotic” sources … http://ow.ly/2jq4B …There is no question that a considerable amount of the revenue is legit, but there is a ton of work at home scams, fake postings etc that are used to generate leads, ring tone revenue etc. Whereas Google polices the ads on their site and takes great care in the end user, CL seems to be on the other end of the spectrum.

  3. David King

    Fred, can you outline the Union Square thesis a bit more? I understand you favor big networks of scale — me too, in fact! 🙂 Do you believe that something fundamental about Dave’s starting point (possibly focus on early revenue) will almost always miss out on the large networks of scale?Just to spice up the conversation, as I understand it Facebook was breakeven from the early days by just running ads — they certainly could have sold early. It now has a massive scale network. Is Facebook an example where there really is a unification of these two investment thesis?

    1. fredwilson

      i linked to a page on the USV blog that outlines much of our investment thesisi’ll put it here as wellhttp://www.unionsquareventu…i don’t think that focusing on revenue early on will limit the size of the businessbut Dave explains in his post that he is happy to invest in businesses that will sell for $25mm or morethat is not our starting point. it may be our ending point on some investments, but we don’t try to make those kinds of investments

      1. Max

        From what I get of Dave’s post. He is saying that he is willing to take more risk and get in much earlier than other vcs by investing pre-traction (business still trying to figure out product/market fit) at a lower valuation, so even a $25M exit makes his return worthwhile.

      2. kenberger

        FWIW: Ron Conway vehemently stated that “just getting your money back is not a bad outcome– we put it in the “Win” category.” (At the TechCrunch event at Stanford on Friday).Different strokes for different folks, eh?

  4. Allen Barteld

    It was the right time to do it. With a new $30 million fund and a thesis that he is willing to invest early, during the client discovery (problem/solution fit) phase, he will garner many entrepreneurs.

  5. Alex Murphy

    Fred – it seems to me that USV and McClure have the same philosophy, just a different scale. Dave’s main goal is get in early and double down on deals when they need to scale. From what I have read about your investments you are looking to get in early then double down as well but on larger deals. As you put it, platform deals. I believe in Lean and the movement that Steve Blank and Eric Reis have been pushing but it is a little different when you are talking about “product centric” business as opposed to new “ecosystems”.

    1. Harry DeMott

      I’ve always thought that most of these consumer internet investors – be it McClure – Maples – USV – Sacca – First Round Capital etc… are all sort of after the same thing. The issue is one of scale. Fred has 3 partners total and a new fund of what, $100M – $150M? $30M – $50M per partner. McClure has a new fund – $30M – looks like one guy. Maples raised $73M for his Thunder Lizard fund on top of his earlier $33M fund – and I believe he has 2 partners including himself – $50M per partner. It is all pretty simple economics. At 2% and 20% – this works out to $1M per partner in fees (of course you need to pay overhead etc…) – more than enough for any reasonable human being to live on – and the goal of tripling their investments through great investments. $50M tripled is $150M or $100M in profits and a $20M carried interest. Pretty good deal if you can execute.In almost all investment areas, capital chases returns – usually to the point where capital bids down returns to a negative comp – and capital leaves the sector. Capital is leaving the traditional VC area and going into VC 2.0 – smaller, leaner, quicker, perhaps more engaged in the building of the businesses. However, what will be fascinating to watch is how returns are generated with so many people getting into the area fairly quickly.

      1. ShanaC

        Harry, the thing with the Dave McClure, Seed Fund, Et Al posts is that this all goes back to yesterday’s post and the seed fund phenoma.I’ve got a general question using that classic theoretical chart (http://bit.ly/dDkrG2): If we know that we need theoretical x to get to y point and theoretical a to get to b point, but everyone is loading up to fund x, how do we make sure there are funding shops around to get to b? what if x doesn’t generate z returns the way it is supposed to because of the frontload issues? Are we going to go the way of having the russians fund because we’re having weird exit problems? How are we going to resolve our exit problems?

        1. Harry DeMott

          At this point in time exists are certainly a problem. There used to be a whole class of investors in the public market – growth investors – that gobbled up late stage companies the way DST and Elevation are doing right now. Even smaller companies that showed great growth got funded in the public market – till there was madness – followed by a bubble – then a giant sucking sound that was the end of web 1.0.No different today.If everyone funds X to get to Y – and Y does not produce return Z – then not only will X not get funded – neither will anything looking like X for a very long time.In the meantime – I figure that great ideas pretty much will always get funded – so if you need funds to get from A to B – you will probably get them if the idea is worthy.While there is a ton written on all of these subjects – from the point of view of someone in the capital markets – it is completely natural. One of the great lessons of web 1.0 investing was to get in early – get in late in the game and you got run over because you had no winners to absorb the losses that occurred at the end. So those getting in early on these sees/angel/thunder lizard sort of vehicles are making a rational decision.However, only in hindsight will we know if the decision was both rational and profitable – as opposed to just being rational.I fear exists will be a problem as the public market just doesn’t have the vehicles for dealing with these companies tight now – and it will take a while to build them back up.That said, and I’ve written this before, the only way for an entrepreneur to guarantee a good exit is for the business he or she founds to be cash flow positive and self funding. Once you reach that point – and sustain it – you control your own fate.So when you hear about funding dipshit companies – my version of that is a company with no business plan that is built to hopefully sell to Google/Apple/Microsoft etc… That’s crazy. Those businesses that can stand on their own – those are the ones that ultimately will be successful – Russians or no.

      2. fredwilson

        crisp, succinct, and correct – as usual Harry

    2. fredwilson

      yes, you’ve got it exactly right

  6. Dan Ramsden

    I love this thesis, I think it’s right on. Finally a recognition that it isn’t only the start-up costs that have changed in the sector, but that the exit environment and interim business profile have also changed. So many people act as though the opportunity and environment are essentially the same now as these were 5 or even 10 years ago… excepting the cost of entry, which everyone agrees has diminished. But in fact, everything is different… the economy, capital markets, and the industry itself… which continues to mature every day.What’s interesting about McClure’s thesis is that it describes a funding cycle that, in a sense, goes from seed-stage straight to private equity (as opposed to VC), reflecting the faster progression to revenues and cash flows. The risk-reward, based on smaller amounts invested and earlier/faster exits, also reflects this. It will be interesting to see if the LP community goes along, though, because that is always the origin of financing trends.

  7. Dmitry

    Thanks for the post Fred. Well, seems like we figured it out right when started Goodzer. Exactly our 3 bullet points. Just need to execute it right :).

  8. Jason

    invest early, then double-down.and Fuck. That. Noise.

    1. jonathanjaeger

      If you read that out loud, it would make for a great infomercial type chant/call-and-response

  9. basil

    I would add to his list of investors ( Jeff Clavier, First Round Capital, Y-Combinator, TechStars, Betaworks, & Founder Collective) people like Eric Reis, 37Signals and yourself (of course) drivingthis change. I really don’t mind his foul language, I think it is shocking initially but Sand Hill Roadis going to more shocked when they realized VC 1.0 is over. There is still room for large VC in the alternative energy arena but in the consumer internet space the direction is clear. I think there might be even be a bubble in this space but I am not certain.

  10. Senith @ MBA tutor

    A key point that Fred makes is that a small team can take on a giant thanks to the internet and allied developments. Most of these businesses would be non existent without this.

  11. William Mougayar

    Why is everybody so focused on the consumer market and not enterprise?Point #3 re: valuations based on usage and users ahead of revenue could be treacherous if usage/users cannot be monetized past the initial hockey stick ramp-up. With enterprises, if they see value, they pay for it from day 1. With consumers, the more you give them, the more they want for free.

    1. giffc

      I don’t think they are. I think there are quite a few investors who lean enterprise, and I’m betting 6 months from now we’ll be talking about how noisy the startup scene has become in enterprise again. Consumer definitely gets more *media* attention but that has always been the case.

      1. William Mougayar

        You’re right that the consumer segment is more vocal about themselves, and gets more coverage by the media. I’ve talked to VC’s that won’t touch consumer, and others that won’t touch enterprise. Few cross the two boundaries.

        1. ShanaC

          That’s more curious- some sort of logic dictates that that has got to change as work/life blends starts happening (don’t believe me, more companies let workers choose their phones as phones become a sort of personal/work hybrid- expect weird overtime and use of objects cases to hit courts eventually) I sort of wonder about the era when enterprise looks like consumer and consumer looks like enterprise, and why no one is looking at the internet that way yet. Something’s gotta give as people become more people-ish and less automata in the face of technological change. And someone will invest in that. But if that divide stands, who is gonna invest in it?

          1. William Mougayar

            There is definitely a blurring of b2b and b2c and I’ve mentioned this previously here. Not just because of blending of personal/business but because b2c is where the innovation is starting and it’s rubbing off b2b due to ease of adoption.

    2. fredwilson

      did you see the founder of box.net’s post about “enterprise is sexy again”?

  12. Aviah Laor

    Traditionally a “free” service was actually one of the best competitive advantages of VC’s backed startups. Interesting how a VC is going to give up on it.

  13. WayneMulligan

    Fred,Semi-related to this post, what do you guys do when one of your investments doesn’t work out?In this particular instance I’m thinking of Wesabe.com.Do you guys have a funeral for it? Do you have some type of postmortem with the entrepreneur you originally backed?How does this usually go?Just curious,Wayne

    1. fredwilson

      we decided over a year ago that Wesabe wasn’t going to be what we all had hoped it could bewe put some additional capital into the business and tried to sell it for about 6-9 monthswhen we did not get any takers, Marc (founder and CEO) cut almost all the team and tried to maintain the service with a two person crew. that lasted close to a year.finally this summer, Marc decided it was time to let it go.i think that is ideal, it was a long slow wind down process and the investors were as supportive of it as we could be and still be financially responsiblei hope Marc does write a post mortem. i think it would be a very interesting and useful story for many to hear

    2. David Semeria

      Do you guys have a funeral for it?In some cultures it’s traditional to print out the whois entry for the domain and then cremate it.Polynesians, however, are known to be less morose. They all sit at their PCs and do one last coordinated denial of service attack, whilst sharing fond memories of the site via Skype chat.The key thing is to be remembered – old web sites don’t die, they just fade away.

  14. Zvi

    Dave McClure mistaken on one simple thing, that every CS student, which took Software Engineering at college knows: R&D for the first version of product is only 10% of total costs, maintenance & support – 90%.In case of Web2.0 startups they building only working prototypes / alphas, so it ~ 3-5% of total costs.

    1. fredwilson

      yes, totally correctthat is why i think the total cost to build a web company hasn’t changed much, but the timing of the cash flows havei’ve posted on this a bunch of times

  15. Jan Schultink

    The foundation of a tech startup can now basically be achieved as a university graduation project (5 people, 5 months). Time to re-think the curriculum of relevant graduation disciplines.

    1. Tereza

      That’s clever and I agree.But it can’t start and end there.What about all the people in our economy with worthwhile experience, no job, deep knowledge of a real market-based need.Apply your 5×5 model to those too, configuring off-the-shelf existing tech into these market-based mashups which could do our economy lots of good.May not be venture-worthy but some maybe yes?

      1. Jan Schultink

        Yes, good suggestion. It will be harder to get these people to “take the plunge” though than graduating students with “nothing to lose”

  16. Venkat

    Like many manifestos, Dave’s is about what has changed. That’s good, but I always find that unsatisfying. I always like to ask: what HASN’T changed? (I think I first heard Jeff Bezos ask that question somewhere).In the case of this new lean investment philosophy, I think what hasn’t changed is the total attention bandwidth available in the market. There may be more, cheaper, and more accessible channels all over the place, but still the same number of people at the other end. So I think the true cost of say “1 minute of quality, full attention” from the right customer has remained the same.What else?

    1. fredwilson

      yes, so true. my partner brad reminds of that every day (that attention isnot infinite)the other thing that hasn’t changed that much is the total capitalrequirements to build a large scale web businessbut the timing of those cash flows has changed a lot

    2. kagilandam

      I believe the 1-minute has not changed. But number of 1-minutes have changed and changing every minute…like more people coming on to net…the number of minutes each spend on the net … new geographies … it is not infinite … but can improve more and more and i don’t think we are even 5% of what it is actually.

  17. Andy Schroepfer

    Nice of you to give him props. Both of you are doing great things for the next generation of leaders and creators.I mentioned the following in the comment section of Dave’s post, but wanted to ask it of you as well. If you are free October 7th, I invite you to be a judge on our business applications (as a service) session that we are calling FundMyApp. The session will be streamed on Building43.com. Daniel Pink will be keynoting the evening dinner relating his knowledge of small businesses to the long-tail of applications that all sizes of businesses are embracing. Thanks for considering the invitation, and if you are able to accept, please contact me at Andy.schroepfer [at] rackspace [dot] com.For any readers here who are interested in attending our event (it is free) in san antonio…and have an early stage application for businesses delivered as a service, please contact me about being one of the companies to pitch in the FundMyApp session.

  18. kenberger

    What most people don’t know is Dave’s extraordinary path, and the bumps in the road that would cause *anyone* to cuss a lot.Dave and I were recounting them yesterday: he interviewed for a couple VC firms and got rejected, also rejected from a top business school, and the mighty Google (in their prime). He also busted his ass for Meg Whitman for a few years. Now it’s Dave’s turn to give the world the proverbial Finger, and do things his way.If that’s not the most poetic success path around, I don’t know what is. Can’t wait to see where he goes with this, and help him out too!

  19. kagilandam

    Here is an investment statement (thesis) i read about Delicious founder “Joshua Schachter “… interesting.“Even if the company fails, someone will buy it just to get Schachter. There’s no way we lose our money.”

  20. Chris Frost

    For sure the most important part is to stick to your thesis and investment theory, a clouded thesis will only cause rash investment decisions. Disclipine is key.