500 Startups: A Continuing Work in Progress

[ Dave McClure at the LAUNCH Conference in February 2011. Photo (cc) Kenneth Yeung - www.snapfoc.us ]

In a recent post on Quora, entrepreneur/investor Dave McClure reviewed the progress his accelerator 500 Startups has made since launching and explained why he thinks the "little bets" approach has worked. Syndicated with permission [ original here ].

By Dave McClure

ok, it's been over a year since http://500startups.com has been up & running (altho almost two years we've been working on deals, and about 9 months we've been running the incubator/accelerator). in any case, while we may still be rookie VCs (see http://500.co/about), we aren't exactly the newest kid on the block anymore. so it's useful to take a breather and look back at what we've done so far, as well as review some things that haven't gone exactly as planned.

we've been pretty aggressive since our opening -- arguably we are the most active investor on the planet, having put money into 180+ companies (see http://500.co/startups) to date / $13m+ in deployed capital, ~20 of which are located outside the US across 4 other continents. this is not necessarily anything to brag about -- any dumbass can write a check that sends money out the door; it's the money that comes back IN the door that counts. we have had ~10 small exits to date (sold companies to Google, Twitter, LinkedIn, Cisco, DemandForce, etc), but most of those returns have been modest thus far. still, we think we've found some very interesting companies (notable: Twilio, Wildfire, SendGrid), and more often than not have managed to wiggle our way into a lot of great deals, even though our available capital has often been constrained (wow is that an understatement).

we have used hustle, guile, wit, humor, tweets, creativity, and occasional interpretive dance par excellence to get into deals most wouldn't dare to try for. we've also lost deals because we were too arrogant, too shy, too cute, or too indecisive; because we tried juggling too many, because we pissed someone off, because we didn't have the money, or even more foolishly because we forgot or overlooked returning an email or a phone call. it's obvious we haven't been perfect, but we will learn to live with our mistakes (& apologize to founders when we screwed the pooch, and ask for their forgiveness if possible).

in other words: we are learning... we hope.

2 things we certainly have NOT been 1) gun-shy, or 2) greedy... by this I mean we have been willing to pull the trigger quickly and often ("lots of little bets"), under the assumption that being active in the market is good for deal flow as well as for learning, and that by maintaining discipline around valuation & small bet size, we can be more risk-oriented while we improve in numerous areas (generating dealflow, review & selection, deal structure, docs & execution, metrics / monitoring / guidance, product / market mentoring, investor intros, pitch prep, follow-on investment, etc).

in fact, I would suggest the "Little Bets" approach (see Peter Sims book at http://petersims.com/book/) as an excellent way to get up to speed quickly. not only has 500 been able to learn / fail / improve quickly, but we have also been able to decentralize decision-making since each initial bet is not a huge % of capital under mgmt (relative to overall portfolio). our team has been able to make individual decisions and learn quickly what profile of company / founders / product are likely to succeed or fail, and many of our over 160+ mentors have been instrumental in making strong investment recommendations which led to a new member of the 500 family.

while it is perhaps true that a portfolio of larger, more concentrated bets could have higher (or lower) returns, we feel the little bets strategy helps accelerate our learning, and reduces likelihood of big early losses. and, as we learn more about our process and portfolio, we can focus & concentrate our subsequent follow-on investment in the companies which seem to have the best prospects for success (or perhaps, the ones with the highest potential relative to value).

none of this has been easy, nor without risk... as a young firm with limited track record, fundraising has taken time and patience. building our team, our office, our programs, our reputation, our content & brand, our community of mentors & founders, and all the other efforts we make have been nothing short of Herculean -- some might say even Sisyphean. and yet, that which does not kill us makes us stronger... and bolder.

one secret to our success that most people don't really understand is that we are a very large FAMILY. while not even 2 years old, we have been able to attract and connect a very strong and committed community of over 250-300 founders and over 170 mentors (seehttp://500.co/mentors). while our team is slightly less than 10 people -- still rather large for a small $25m fund -- we have a community of over 500 people all over the world that functions as a loose but loyal support network for all of our companies. largely, this network has been built from strong personal relationships with friends and colleagues Christine and I and have gotten to know from working in Silicon Valley over the past 10-20 years, from companies like Google, PayPal, Yahoo, Microsoft, Intel, eBay, Facebook, LinkedIn, Twitter, YouTube, Zynga, AOL, Living Social, Groupon, & more. they also come from expanding our connections outside Silicon Valley, to places like Seattle, Boston, NYC, LA, Chicago, DC & Austin in the US, and even globally to places such as London, Tokyo, Sao Paulo, Beijing, Paris, Bangalore, Vancouver, Singapore, Estonia, Sydney, Russia, Israel, Croatia, etc.

This family cannot be described by a single color, gender, belief, geography, or skill. We are a global village, a gang of founders, who all got each other's back... and you *better* believe we are #500STRONG.

well anyway, we still have a lot to learn, but it's been a helluva year, and I would trade it for anything. thanks to EVERYONE who has helped along the way -- our team, our investors, our mentors, our founders, our partners and sponsors, and our friends and family. we couldn't have done it without you, and we still need you to help us get where we are going tomorrow.

peace out.