Startup investors have become “lazy” and need to innovate in order to keep up the pace with founders and entrepreneurs, 500 Startups founder Dave McClure says.
Speaking at a tech event recently, McClure said venture capital has failed to develop with time and is no longer relevant.
“Most venture capitalists are lazy and not innovative,” McClure said.
“They take meetings, play golf and make two investments a year. We are surrounded by entrepreneurs who are innovating and we are this shitty little asset class that is not changing.”
500 Startups is one of the world’s most renown startup investment firms and seed fund. With $250 million in assets, the group makes around 500 small investments in startups per year, rather than the more traditional method of providing a large amount of funding to a small amount of promising companies.
In a revealing interview with LinkedIn new economy editor Caroline Fairchild, McClure outlines the reasoning behind this tactic, and why he thinks it’ll pay off in the long run.
“What is maybe the myth is that venture capital is doing fine, but it is actually pretty shitty in its level of maturity and expansion, and there is going to be a lot of disruption in venture as people scale other models faster and better,” he says.
“It is a structural problem around how people think about building portfolios and structuring VC. There are better ways to structure the asset class that will perform better – we are getting there but it will take some time to scale.”
Hedging their bets
McClure says most investment firms’ portfolios are “too concentrated” and believe that 30 investments is the perfect amount.
“They are absolutely wrong,” he says.
“Just because some outliers are successful does not mean that the rest of the industry is full of shit. If you increase portfolio size by five to 10 times your portfolio will perform better.
“In five to 10 years we will realise that we are right.”
While the 500 Startups model is at times criticised for being a “spray and pray” technique, McClure says it will be vindicated with time.
“People saying that is kind of funny and crazy,” he says.
“It is mathematically quantitative. You are the losers who are doing the non-mathematical model, but they haven’t realised it yet.”
According to the prominent Silicon Valley investor, 2-3% of investments will become “really big” and 5-7% will be “modestly big”, so it’s “basic math” to fund a whole bunch of different companies.
“If I only find the unicorns 2% of the time, the portfolio should be a minimum of 50 to 100 companies,” McClure says.
“For more statistically significant results, the portfolio should have 200 to 500 companies.”
Diversity as a numbers game
McClure also discussed his focus on diversity in all aspects of doing business, and why this is a purely financial decision.
“I am a greedy bastard,” he says.
“We are arbitraging racism and sexism for our own selfish benefit everywhere we possibly can. We have to solve these problems out of greed, not guild.
“I want to do the right thing too but that is not my strategy for building the fund. It is stupidly basic. It is an opportunity for us.
“If the rest of the market takes their time figuring it out, great, I am going to take more of that market before they realise it.”
You can read the full interview with McClure here.
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