Dave McClure on Investing Evolution

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.