How I Invest with David Weisburd - E40: Dave McClure on Delivering a 60x & 40x fund and Founding 500 Startups

Episode Date: February 8, 2024

Dave McClure sits down with David Weisburd to discuss his journey into venture capital, including luck, his investment strategy, and the challenges he faced breaking into the industry. He provides an analysis on his two 40x+ funds, 500 Startups, and the misalignment between LPs and GPs.

Plagiarism was on everybody's mind these days, and I'm always like, plagiarize yourself, like, you know, as much as you can. So, like, something that I try and remember to do is, like, if you actually have a good story or post, just keep telling that story, because a lot of people have never heard it, even though you've heard it, you know, millions of times. And probably all the people you think you've talked to have heard it millions of times. A lot of people have never heard it. Well, Dave McClure, this has been a long time coming. I met you in 2009 when you were going around Silicon Valley with your startup metrics and the whole pirates thing. So it's a pleasure to finally get you on the podcast. Welcome to Limited Partner Podcast.

Thanks, man. Appreciate you having me on. You guys have been doing some great episodes. Thank you, Dave. Thank you for listening. And thank you for sharing and tweeting about it as well. So there's a lot of ground to cover. We have 2009 to 2024. So let's start, you know, when you came to Silicon Valley, and it was before I came, I came January 2009. So tell me about how you broke in. How did you break into VC? Well, I don't think we want to cover everything, but I came out after graduating from Hopkins.

I guess I stayed in DC or Baltimore East Coast for about a year. But I graduated in 88 and then came out in 89. Originally, I was planning to head to Japan because that was actually where things were seemingly really exciting in the late 80s. And then Japan sort of blew up in the early 90s to some extent. And I really fell in love with California and just ended up staying here. So originally when I came out, I was a software engineer, client server development, and was always interested in finance, but I didn't really have a traditional education in finance

or business. But just being in Silicon Valley, kind of you know the whole area is about entrepreneurship that leads into you know finance and venture capital as well as the tech side and so I probably spent the first five ten years of my career just really figuring out you know the work environment and kind of morphing transitioning maybe away from being an engineer or geek into being more business marketing side, particularly when I started my first company kind of in the early early 90s. And, you know, a lot to learn, made a ton of mistakes about running my own company, but certainly a great lesson about how to learn, you know, managing people, sales,

customer service, accounting, all kinds of shit that, you know, probably, I guess you could learn in school, but it's certainly more meaningful when you learn it on the job and you have to, you know, figure that shit out. Otherwise, you know, the company will hit a ditch. Anyway, so I went through that period of like that on the fly, school of hard doc. And we ended up getting acquired for a small amount in 98, I think. And I stayed with the company maybe for another year and a half through subsequent acquisition. But that sort of five to seven year period was a lot of the business finance learning for me, particularly really getting understanding customers and sales and marketing and accounting was like a lot of

things that I really kind of figured out there. Which one of those things is critical for zero to one? So, you know, MBAs always ask me when they should join a startup. I say, either you have to found a startup or be 50th employee. What do you think about that? And what skill sets do you actually need to run a startup from a finance, a sales and accounting standpoint? The core things that you really want to understand in doing startups is building product, doing sales or managing people and those and finance is kind of like on top of all that, I guess. So, but it's, it's, you know, it's critical to measure and it's critical to understand,

you know, how you communicate that to other folks, particularly investors. I guess I became interested as a student of venture capital in the 90s and then sort of became an angel investor in the early 2000s and then gradually got into venture really later around 2008-9 when I was working with Peter and Sean at Founders Fund. So let's talk. You had one of the most creative ways to get into venture. And I always tell people there's no two ways to get into venture unless you're already in the space. Oh, but there are two ways. The two ways to get into venture is go to one of three schools, which is like Stanford,

Harvard, or Penn. I guess maybe throw a few more into there. Or make a fucking million dollars and then people ask you to be VCs. Or I guess the other one is a celebrity entertainer or athlete. That's also popular. First become a famous DJ and then you might be able to raise a rolling fund. Or these days a retired general. That's another way to get into the show now.

You're a C to Series A celebrity. And you would go around and give the same presentation. Tell me about that. Tell me about the genesis and how that helped propel your career. Yeah. It was interesting because, it was interesting because originally it was me trying to figure shit out as a product manager, product marketer

with a few startups. And there's some of which I had sort of been thinking about when I was still at PayPal between 2001 and 2004. And that was obviously an amazing ride. And I got there just before the IPO and through the acquisition by eBay and got to meet a ton of amazing people at PayPal. But really, I started trying to think about like as a startup founder or employee, you know, what do you do?

How do you how do you figure out your daily set of tasks and priorities? And it's really hard because when you're running a startup, there's like 20 different things you're trying to figure out. And, you know, it's just very, very difficult to figure out what's the most important thing. And when I was working with a few companies, probably particularly, I guess, mint.com and maybe SlideShare and Mashery, I was trying to figure out how do you make decisions about product features and marketing and revenue

and maybe viral campaigns. At a high level, I think it's really the conversation about do you build features? Do you do marketing, scaling? Do you optimize for profit? And so those are pretty big questions for entrepreneurs, particularly folks in the product team and the CEO, about how do you decide what features to build, whether to scale, and whether to focus on profitability? And very, very difficult sets of questions to answer, particularly when you're trying to tweak all of that at the same time.

And there are a bunch of us who are sort of working on those ideas, Eric Ries most notably with the lead startup, but several other folks, Stephen Shaw, Gizmetrix, Steve with Steps to the Epiphany, I guess. You know, there's a bunch of people who are really trying to like, how do you make startups more scientific or more process oriented? And we're all kind of struggling with like, what's the best way to think about that?

And for me, it was like, well, let me just put this one idea on a single sheet of paper, which was really around four or five topics. And I was playing around with how to come up with a marketing angle or strategy of that. And I came up with this idea of like, well, let's use these five words and these acronyms, AARRR, acquisition, activation, retention, referral, revenue, which spells R, and that sounds like you're a pirate. And I was like, oh, okay, startup ventures from pirates.

And that sort of stuck. I just kind of kept using it as a one-trick pony and pretty much beat it to death for probably at least two or three years, maybe five or more. And other people started using it. Several other people. I think probably one of the most notable ones was Drew Houston. Houston at Dropbox gave me a nod at one point. So I think Sean Parker had somehow seen my stuff in several decks and

presentations that he'd been seeing he's like who the fuck is this mcclure character you know let's try and get him in for some marketing and so he was looking to hire me to work at founders fund for marketing and i of course wanted the job in dc not marketing i was like yeah fuck off i'm gonna raise my own fund um and then the market blew up in you know summer 2008 i kind of came crawling back and said, hey, Sean, is that job still available? And can we horse trade? Can we get some money to do a little bit of investing?

We kind of wheeled a deal. He allocated about $2 million out of Founders from 2, which I think was $220 million. So basically, like, here, take 1% of our fund, do some angel investing, do some marketing for us, try not to hurt yourself and go off and, you know, have fun, which, which was an amazing opportunity at the time. This was Q4, 2008, when nobody, you know, was getting hired to venture and people were basically

like in shock. You know, I think Sequoia did that, you know, tombstone post or something about, you know, nuclear startups. RIP startups. RIP startups, right, right. RIP good times. RIP good times, that was it, right. So they were like, the world is ending, or nobody was getting hired to venture. I didn't have a traditional venture background.

Somehow I got this gig because Sean saw my stuff in a bunch of pitch decks, and I guess I worked with Peter and some of the other folks at PayPal. So it was just a tremendous opportunity to get into a venture with a really amazing firm and brand for someone who didn't have a traditional background in either business or finance and hadn't made a bunch of money. That was just a great opportunity. Some would say you got lucky, but I would say the harder you work,

the luckier you get. Somewhat of a trite thing, but I think over and over what I see people that have opportunities in venture put themselves in that opportunity absolutely i mean i mean there's a lot of people producing content for venture these days in multiple forms um and yourself included uh but i but i do think you know not just in venture but at any con any industry you know when you're trying to establish yourself and become known you know you have to try a lot of different things um and i always tell people like an easy way to get started is just write every week for a year like if you did a yourself and become known, you have to try a lot of different things. And I always tell people, like, an easy way to get started is just write every week for a year. Like, if you did a blog post every week for a year, you'll produce 50 pieces of crap. 10 of them will be okay. And

maybe two or three of them will be really interesting. You know, it's sort of like portfolio theory is, you know, just be consistently out there writing your thoughts and ideas and a couple of them will hit. But it's challenging for people to write weekly for a year. It's not an easy task for anyone if you haven't been doing that. Those are kind of the same numbers I usually think about for venture portfolio. But if you're consistently putting stuff out there, even if it's not very long, probably once or twice you'll figure out something magical or something will connect with people. And often times I found, even though I did a lot of writing earlier in my career, not

so much these days, there were really only one or two or three things you sort of need to catch people's attention with, and then you'll stick in their head. And so for me, at least in the beginning, that was started with Metro Troop Pirates. So now I say that I've been giving talks for like 15, 20 years, but there's probably only three original thoughts that I ever came up with in my life. But I said those three original thoughts a hundred different ways, right? And, you know, sometimes it doesn't always catch people until you get the right, you know, version of that. Peter Walker of Carta just did a post on December 31st, going up through his yearly posts. And how many, what percentage of all his views came from one

post a month the power laws of social media which i thought was pretty fascinating plagiarism was on everybody's mind these days and i'm always like plagiarize yourself like you know as much as you can so like something that i try to remember to do is like if you actually have a good story or post and just keep keep telling that story because a lot of people have never heard it even though you've heard it you know millions of times and probably all the people you think you've talked to have heard it millions of times. A lot of people have never heard it. Well, as a reminder, it's not plagiarism if you cite, so it's totally legit. In this case, so you had Sean Parker saw you in a bunch of decks and I'm sure he saw you in

multiple decks before he even reached out to you. So got you got the two million you got less than one percent of the fund what did you do with that two million uh well i tried to stretch it out and make it last as long as i could and so i did about 20 investments that were average ticket size 100k they varied between 50 to 250k uh i kind of got really lucky i got into twilio super early i got into credit karma super early got into send grid super early um and then and later i also you know grabbed the facebook fund budget and got into credit karma super early got into centigrade super early um and then and later i also you know grabbed the facebook fund budget and got into lyft and a few other things but uh the two million that i invested on them returned i think 180 million so you know pretty pretty crazy i think it's two and a half million so probably closer to like 60x uh but that took

like 10 years so like nobody knew at the time and fact, they didn't think Ift was close to 300x. Twilio and Senwin were around 200x. So pretty amazing. I mean, I don't take credit for all of that. I was in the right place at the right time in a very low valuation environment. But I didn't completely fuck it up either. And it wasn't just one big win. It was like four big wins out of 40, which is a really unusually high hit rate.

Statistically speaking, it's highly unlikely that was luck. But among those four, so how would you categorize those four in terms of, did you think that they were top quartile of your portfolio? Were they completely random? What inkling did you get that they would be your breakouts? I didn't. I mean, well, I kind of knew with Jeff and Twilio that he was a rock star and that was going to be a big opportunity. With the other ones, I think I had some intuition, but I didn't know they were going to be as big as they were. And definitely there were other companies that I thought were going to be big that weren't,

other ones that I didn't think were going to be big that weren't. And so there's errors on both sides and expectations, which was, again, a lot of the philosophy behind why I started 500 and why we went large portfolios. I just generally feel like most people's stock picking intuition is wrong. There is survival bias for people who do very well and they think that they are smart and other people think they are smart because maybe they just got lucky. And probably for some people, I think they are able to identify really good bets and potentially that payoff. But I think it's just very difficult to understand that

seed stage, whether things are going to be really, really large. And I generally think that people are full of shit when they're saying that they can tell that. I think it's probably detectable to determine good from bad, but great from good is really hard without a lot of time. Nobody thought that portfolio was amazing a year in, even two or three years in. It wasn't until eight years later that it was like, oh, okay, this is obviously a really fucking amazing portfolio. And yeah, we got a 60X return on a two and a half, $3 million portfolio with more than one big win. On a pure multiple basis, that's likely a top 10 vintage of all time. Now, it's two and a half million.

I'm pretty sure it's more like top 2%. I'm not sure. No, top 10, period. I've seen 100X. I've seen 140X. I've seen 200X. But I haven't seen that many over 50. Harry Stebbings, all credit goes to him.

He's been organizing the top performers, but 60X is fairly exceptional. So then you went to- But what's interesting about that is also looking at the underlying drivers for those portfolios and was it just one company or not? So I don't think that's as impressive.

Like Keith Reboys and Chris Sacka were also really large. I think they were both in the 100x or so category, but they both had more than one big winner. It's not as impressive when you talk to somebody who's like, oh, I had 100x or something. If it was just one company, I'm like, whatever, maybe you're just fucking lucky. If it's two,

like, okay, that's interesting. We started like three or four big wins. You're like, okay, there's something going on. Extreme absolute performance on an individual company basis is not so notable. It's more like getting 20X winners more than once is more impressive than 100X winner. And so really looking at the absolute portfolio return isn't as interesting as what's the construction of that. Is it one big outlier or is it multiple companies? Everything sort of ends up being a power distribution at

some point, but it's interesting if you get more than a few 20, 50 X sort of outcomes. Certainly a predict of future results. Well, but that takes 10 years. That takes 10 years to happen and the market conditions have changed. And so now you're chasing an environment that was 10 years ago. Is that really going to happen again? That person's already super fucking rich. They're not going to work as hard, or maybe they are. So it's really hard to connect those conditions to the amount of timeframe that is required to detect success or really outlier success in venture.

It's just a super long lag time. And market conditions change within just a couple of years. So it's hard to say what really drives a lot of that. So let's move on to the FB fund. So you went from the FF fund to the FB fund. This was with Facebook. So tell me about that. Well, all of that really happened around the same time.

I was still working for Founders Fund. The reason was I was kind of running out of that $2 million budget. So I didn't have a lot of money left. I was looking around for other budgets. And Founders Fund and Excel had already done this joint venture that was like, I think it was like five million each, it was like $10 million for this FB fund, which was originally administered by Facebook employees. And it was originally a grant-based program. And they'd started that a couple of years before me. So it was really like they deployed about 4 million of the 10, and then it kind of

lost interest because Facebook was doing really well anyway. And I was like, hey, can I take over that program and can I have some of that budget? And so really, really amazing opportunity to, you know, do sort of a corporate led accelerator program, but, you know, with some amount of capital. And as a result of that, you that, sort of flipped it from a grant based program to a convertible note structure, which was great because we ended up getting this huge... I think we invested a million, but we returned like 30 or 40, mostly because of Lyft, but also because of Wildfire and Life360. So you glossed over that. You invested a

million dollars and you returned 30 to 40X again? Yeah. So this one we were doing, I think, roughly 25 to 100K checks. And so about 20 companies, roughly 50K each. The big driver for that was 100K check into Lyft, which at the time was called Zimride, after John Zimmer, I think, was one of the co-founders there. And it wasn't really the same model at the time. It was more of a ride-share program for universities and corporates. And they were using Facebook Connect as kind of one of the angles. And in fact, they'd already gone through the GrantMace program before I had been running it.

And I sort of seen it a little bit and said, hey, would you like some more money? And they kind of agreed to go through the accelerator program sort of again. But really I think they were just looking for capital at the time. And so we got a hundred K check into the formula cap in Lyft, which obviously turned out to be a great investment. And so that was the big win. But then we had two or three other pretty decent sized wins. Wildfire was a company that was acquired by Google for about 300 million or so a few years after we had put money in at, I think again, maybe around a 5 million valuation. We also put some money into a company called Life360, which later went public on the Australian

stock market. Again, took a long time, 10 later but eventually we can be unicorn uh and i think for us it was maybe under 20 to 40x sort of outcome i think wildfire was similar was 20 or 40x and we also had some small early exits uh you know not super huge but a couple of you know five to ten million dollar exits that came out of them so so you have a 60x you have a 40x well but yes but but we didn't know those at the time. Like nobody knew this portfolio was going to be fantastic. And I bet you if you asked Peter and Sean,

they both thought I was a fucking idiot and didn't really hire me to continue working at Founders Fund. And that wasn't really what I was going for anyway. I was wanting to run my own fund rather than a large portfolio strategy, which was very different than what they were doing. But it only became obvious over probably six, seven, eight years that that was

going to be a really amazing portfolio. So I was still hustling to find a job, even though I had worked at Founders Fund and done these two programs with Facebook and sort of this in-house FF. I was still building my career adventure. And so I really had to start 500 if I wanted to get a job in venture. I still wasn't hireable in venture. When people complain about nobody's giving me a chance, this is the story I'm going to use. Yeah, totally, man. In 2008, I tried to raise a fund.

Fucking impossible time to get a job. I got lucky. I got into the Founders Fund. I got lucky in getting the opportunity to run the FB Fund. Still wasn't going to be a job for me, even after running those programs for a year, year and a half. And so I still pretty much had to start my own fund. I mean, if Josh Kaplan had given me a job at First Round Capital,

I would have jumped at that. Like, you know, I thought Josh was great. I really wanted to work for Josh. He didn't hire me. He was kind enough to write me a check into my fund, but I think it was more like because I was annoying and he was like, stop calling me, sending me emails. Here's 100K, shut the fuck up.

So it really did take, you know, four or five years of angel investing and other two years of, you know, working with Founders Fund and the Facebook Fund as a VC before I even had a shot at doing things. And even then it was like I still had to kind of raise my own fund. I wasn't going to get hired by anybody else. I can tell you, this was probably a story I didn't tell. I remember asking for Rulof Botha for some advice. I had worked with him at PayPal and he was at Sequoia and he'd obviously done some amazing shit at Sequoia. I think YouTube was pretty much his first investment. But I don't remember what it was. I had asked him about, hey, is there an opportunity at Sequoia? And he pretty much like totally sent me the most humbling email ever which is like not to put it too um crisply but like you have no fucking shot dude and he was trying to be kind and polite about it but he was very clear about like dude you have no chance

coming to sequoia. What was the rationale? I hadn't gone to Stanford. I hadn't gone to MIT or Harvard. I hadn't started a billion-dollar company. I, you know, I was old. I was in my 40s at that point, maybe 30s or something. You know, he's like, dude, you are so over the hill and not, you know, you're asking about joining the major leagues

and you barely can make division one, you know. And it wasn't wrong it was you know harsh feedback but you know probably accurate feedback and made me realize okay that's not the path that i'm going to be able to access i need to figure out a different path and and so it was useful feedback it sounds like it wasn't it wasn't written in a mean-spirited way it was tough no the fact that he replied was great. He occasionally had a coffee or lunch, and he was telling me about his investment in YouTube,

and why that didn't make his career either, which was flabbergasting. He walked me through the venture math on that deal. But I knew all these amazing people at PayPal. It didn't mean that I was going to get a job in venture. So it took a while. It took a while, and you had to really keep at it. So I agree with people who are like, oh shit, I don't, you know, somebody didn't have my check or something. Yeah,

good luck, man. It took me 10 years to even like get into the fucking field, you know. And I'm a white guy who did go to a good school, worked at PayPal, you know, has his capital. And even, it's hard to even sure, you know, someone privileged like me to get in. Super fucking hard for anybody who isn't isn't you know white or male or didn't come from right you know background well ultimately dpi is a great equalizer so dpi always catches up dpi is great

so so moving on to 500 startups what was the original premise for 500 startups uh i wasn't a great stock picker and i better have a lot of companies if I want to have a few winners. And I think that was sort of just my general analysis when I'd been doing the research for Venture One and when I'd been talking to other investors. It was pretty clear that most big wins are infrequent. Most wins are infrequent and big wins are really infrequent. And so you had to kind of balance this story between people who had concentrated portfolios

and had success and you're like, was that just luck and survivorship bias? What's the real path to sort of having a safe portfolio? And at least for my analysis, it was like, well, you're going to have a lot of failures. You might have a few winners, but you really need lots of shots on goal to have any chance at those winners. And later I wrote about this, you know, and I think I would say I don't really feel comfortable doing early stage investing, seed stage investing, unless you have 100 or more investments. At least when I look back at the numbers that we had from 500, 50 to 70% fail completely, 20, 30% maybe have some positive outcome. 8% to 10% have sort of 20x or better sort of significant outcomes.

Those are probably 100 million plus size exits. And maybe only 2% or 3% can get to IPO size billion dollar outcomes that are 50% more. 2% breakout. Yeah. And so the math is sort of like, okay, well billion dollar outcomes that are 50% more. Yeah. And so the math is sort of like, okay, well, 2% do 50 to 100 X. That's really what drives most of your term, maybe another five to 10% drive a 10 or 20 X, you know, and then you have a long tail of shit. Right. And so it's really those very small number of outliers, which for most people is like one or

zero, right? Like if, if the number of times you get a big outcome is 2%, you know, unless you have 50 companies, you probably don't even have a 50-50 chance of getting one of those. And it's sort of true that whether you're smart or just lucky, if you have a concentrated portfolio and you do have a winner, you're going to have a better outcome than if you have a larger portfolio and winners. But I think it's safer as a large portfolio investor that you're not likely to lose money, or at least you'll probably do worse than 2X. Yeah. I think there's a couple of things at play here. One is the very top LPs, the one that approach it as a business, they already have exposure, right? So they might have 10 managers that have 20 positions,

so they already have a 200 portfolio company. They want you to be taking these large- They want you to have concentrated risk, right? Which for them is fine, but for you, it's sort of the same thing that a VC does to entrepreneurs. They want you to take a lot of risk, but it might result in the entrepreneur flaming out and they don't, I don't want to say they don't care, but they have a diversified strategy. And the same thing is true for fund to funds. They also have a diversified strategy.

And so as an individual VC, I was like, well, fuck, I don't want to take the risk of having a shitty portfolio, a shitty return. But it might have been in opposition to what a more traditional LP from a fund of funds might be looking at. This is actually a math equation. So you mentioned the 2% to 3% breakout. Typically, 2% is kind of like the median. I think for us, it looked like the data was three percent right i think i was i was better than average but only

by a little bit and even sequoia and other people i think are only doing like five percent so they're not like way out yeah and other other pockets of excellence like early yc teal fellows are also roughly around five percent when you look at it a math equation, when you look at the odds of something being a non-breakout, it's 0.98. So it's 0.98 to the 30th. If you have a 30 company portfolio, that's a 54%. That means there's a 54%, a 50-50 shot that you hit a breakout or not, if you have a 2%. Right, which is like too risky. Like you want a 50% chance of failure? Yeah. Once you take it to 50, it's 36. And once you take it to 75, it's 22. The nice thing about it is if you do have those professional investors backing you, they will typically back you for

minimum of two vintages, usually three, if you're doing okay. And you have some markups. I think the idea that you don't completely know anything, you don't have any markups is, is a little bit of a misnomer. It depends on your own self-confidence. Like, do you think you're a 2% hitter? Do you think you're a 3% hitter? Do you think you're a 4% hitter? You're probably not a 4% hitter. So you're probably somewhere between a one and three. So it's a lot of it is a math equation, but there is a misalignment between LPs and GPs that doesn't go explicitly talked about. Most VCs are not good mathematicians. And, you know, that's not even the thought process for people. It's like, am I a good stock picker or not? It was like, oh yes. You know, ask any person like, hey, are you a good

driver? Like 90% of US drivers probably think they're above average. I think that's true of VCs as well, which is everybody thinks they're a great stock picker, but do you have data that really shows that you are a good stock picker? And so I was definitely afraid that I was not a good stock picker in my previous five years of angel investing and even the Founders Fund. I was like, well, it doesn't look like more than 10% to 15% of my companies are successful, so I need more shots on goal. I wanted to have three to five outliers per portfolio and that with 2%, if you're only

getting one out of 50 and you want three to five, now you're talking about, I don't know, 150 to 250 companies per portfolio. And so that was really what we were going for. You know, no secret, the name of the company fund was 500 Startups. It wasn't five or 50 startups. It was 500 startups. How many vintage? Was that second vintage or third vintage?

When did you hit 500? By the second fund. So first fund was 265 companies. Second fund was 325. So we had 500 companies, I think roughly four years in. Okay. I'm getting excited. I smell some data coming. So let's see what the data revealed. So I'll make my own predictions here. I imagine you did, based on your tracker, I imagine you probably had 3% breakout

and probably first fund did somewhere between a 7 to 10x. We're still in the game because that fund is now 14 years old and it's 3x DPI and another 4 or 5x unrealized. So we'll see where it ends up. I don't think it'll be any worse than 5 or 6 net and hopefully it'll be more like 6, 7, 8x net. We'll see, which is already really, really good. I think it's probably high teens or low 20s. Largely that result was because of TalkDesk. So a lot of people thought Twilio was going to be our big win. And it was when I was managing the Founders Fund portfolio, because the entry valuation there was basically three and a half, maybe half a million. And I did a personal investment in the company before I started 500. It was around seven or

eight. I rolled that into the fund. But our bets on Twilio in 500 fund one were actually really done at the series B and C rounds. So there were much higher valuations. Still good bets, but probably only 20X returns overall on that one. So Toctest was the really big win. Still not public. I think recently raised at a $10 billion valuation a couple of years ago. It's probably not a 10 these days, but still it's going to be a thousand X or better return and it's probably not you know 10 these days but still it's going to be a thousand x or better return and it's already you know partially realized from some secondaires on a tvpi basis how how much is that one is top desk uh again partially realized partially unrealized so it's probably one 1.2 of the existing 3x maybe 1.5 of the existing 3x dpi but it's probably most of the unrealized dpi if i do my math roughly four to 4 to 5x on a TVPI basis of the entire fund.

I think that's probably about right. And if we had maybe not done the partial secondary sales earlier, we might've gotten more out of that. If we held on to some of the Twilio position after it IPO'd, we might've gotten a little bit more out of that. But we probably got one X before any of the talk desk happened. And then we got another one X from some partial secondary and talk desk. And I think now there's been another one X from a few other things like maybe painy and camera, what the other stuff was, but you know, so when you were going out to raise vintage to what, where were you with vintage one? Oh, I don't think there's,

I don't think there was any measurable performance. Other than that, we had had some, you know, I was still riding the Twilio, SendGrid, Credit Karma, you know, vibe from really from Founders Fund when we were raising Fund 2. And I think we were known for doing a very different strategy that was large portfolio. Probably at that point, we'd started to do some of the global stuff. And, you you know we were competing for attention with other seed firms and other accelerator firms at the time but it was still a very difficult things didn't get easy on fundraising ever and i would say really not until fund three that we start having some is that because you were you were contrarian to the general yeah the concentration thesis right yeah i mean i always say I mean, I always say that, you know, 500 as a strategy was great for our returns,

but terrible for fundraising. Just made it really, really hard. Because we were doing everything that people thought was wrong. Like we were doing large portfolio, we were doing accelerator, we were doing the international stuff. I was, you know, swearing and walking around in shorts and t-shirts and flip-flops and, you know, just didn't look or smell like any successful VC, at least at that point. And even at the time, I think for reference, like YC wasn't viewed as such a great strategy, I would say probably until 2012 or 13 or later. Like I can't remember when Dropbox and maybe Airbnb were getting to a certain larger scale. That's when people started thinking YC was a good idea.

But there was still a lot of controversy about YC even five years in. And so when we started, which was around 2010, YC was already five years old. I think Textiles was four years old. And so nobody thought those strategies were necessarily great ideas. So as LPs and as somebody who wants to find alpha in the market, how do LPs find kind of front run non-consensus developments in the industry? What would be your advice? I think most LPs are traditional. And so they buy brands and success.

They don't buy contrarian. They buy lagging indicators, not leading indicators. Were you inside, like like were you very confident or were you still like holy shit it still might not work like oh yeah i was fucking scared shitless i was scared shitless it wasn't gonna work i was like i don't know i obviously you want to put out you know the confident front and i i didn't think there was a lot of you know uh good reasoning for large portfolios good reasoning for international portfolios good reasoning for large portfolios, good reasoning for international portfolios, good reasoning for an accelerator program,

at least a good accelerator program. And so it wasn't like I wasn't a believer in my own strategy, but I was sure as hell not perfectly confident it was going to work. And just knowing how long venture takes, it's going to be five years before you really can

assess whether you're even on target or not. And we were racing. I don't remember if I told this part of the story. When we did our first close, we were late by three or four months during our first close. I had a ton of deals stacked up that I'd made commitments to and was trying to hang on to them so I could get the check written. The day that we did our first close, I wrote three checks on blank checks. They were like starter checks. I wrote a down payment for our accelerator, the lease on our accelerator building the next day for like, I think it was like 300,000 or something on a starter check.

We did 30 deals in six days when we first got started. And I remember talking to Gunnarsson, hadn't seen anybody do 30 deals in a month, much less in a week. And we did 30 deals right out of the gate. I think we did 75 deals in the first half year. And then we did another 150 in the fall next year, which is just an insane fucking pace that nobody, I don't think anybody had done that pace at that time. Sam Altman took over from Paul Graham running YC. And I know Sam had been checking on a couple of things. We were chasing YC. YC was way out in front of everybody else, but I know he had been checking on our female founders, our international founders, and I know he started increasing batch size. So for whatever reason, it seemed like YC thought what we were doing did make sense and started to increase batch size, started to do more international, started to do

more investment in women, uh, and maybe minorities as well. Those are the things we were trying to differentiate from YC and Techstars when we got started was investing in underdogs, investing in more women, investing in more international, investing in minorities and, and increasing batch size like more international minorities, and increased the match size like crazy. And then you started to do the international. So tell me a little bit about the brand expansions. If you want to go back for where the international stuff came from, it was a long time back when I was still at PayPal.

I'd been doing research on sort of international markets and growth. And it was pretty clear to me then, it was probably 2003 or 2004, that there was big opportunities in international markets, particularly, I think, what I noticed was Asia was a huge opportunity, not just China, but Southeast Asia as well. India was a big opportunity. Spanish-speaking markets were a big opportunity. Arabic-speaking markets were a big opportunity, and Africa eventually.

And so, for me, kind of like this concept of global south and those emerging markets was clearly, if you just look at the math, you know, we looked at the population growth, the internet penetration, smartphone adoption, you know, growth rates in those GMPs. There was going to be a point in time when those markets became maybe not as big, but very big and meaningful. And so, when we started, it was those markets became maybe not as big, but very big and meaningful. And so when we started, it was only about 20% of our strategy, but we already were making bets in India, in Brazil and Mexico, to some extent in Europe, even in other places like India and Africa on a limited basis. And we were hiring people in those markets as well.

And we started these geographic funds in a bunch of countries, Southeast Asia as a region, Thailand and Vietnam, individual countries, Japan and Korea, Mexico for the Latin American team, primarily Canada, which isn't really that international, I guess. And then a few other places in Europe and Middle East as well. Fast forward to 2020. So you went into the market, you saw an opportunity to do secondaries, LP, GP interest. So tell me a little bit about that opportunity set and what is practical venture capital? Venture capital isn't practical is really the joke about that.

So we're trying to make it more practical. And I guess if you look at 500 startups as an exercise in solving diversification and volatility, solving volatility, unpredictability with diversification and large portfolios, which I think we were successful at, practical venture capital or really secondaries are an attempt to solve the time horizon liquidity problem and trying to get faster DPI and hopefully also lower risk profile as well. And it's really started from our exercises and running multiple funds under 500 startups.

We sort of built, in a way, this internal fund-to-funds program starting around 2013, 14 or so. And we had started roughly 20 or so small funds in about 10 different geographies. And some of those funds were breakout. So probably at least I would say a third of them really did quite well. And we came into really big opportunities as a result of those funds.

And so I started looking at a fund-to-funds approach to solve some of the diversification issues. But you still needed to figure out how do you cut the hold time? Because the hold time for all these things was taking 10 or 15 years, right? Individual companies were taking nine, 10, 11, 12 years or more to IPO, and funds were certainly taking more like 15 years to get to meaningful overall returns.

And so we had done some secondary sales at the company level when I was at 500. And I personally had thought about, hey, I have a fair amount of money on the table with my carry in 500 fund one and two, and I was looking for some ways to get liquidity and diversification out of that. Long story short, I ended up figuring out a way

to sell a portion of my carry and my first two funds. Of your carry, not of your GP commit. My carry, but at the time, you know, this 500 fund one was already in carry and 500 fund two had Canva and was headed, you know, pretty good situation. But, you know, I had a fair amount of money on the table,

you know, eight figures certainly, but all unrealized. And I wanted to realize some of that. And so I started looking around for how do I do that? And selling a position in a fund is much harder than selling it in an individual company. And selling a position in carry is much harder than even just that normal fund asset. And so it took a while. I probably spent four or five months trying to figure out who to sell to, how to sell, what was the structure. And in a good market, in a very strong market in 2020, I still had to effectively sell about 30% or more discount, had to make some guarantees on returns, had to deal with a larger maybe sale size than I was originally thinking about.

And that whole process just made me realize how complicated it was. And I was pretty sure I wasn't the only person who had this problem. And so like, well, there's clearly a need in the market for other GPs, for other, you know, at least by hopefully around year four or five, you're still trying to figure shit out. And so what I noticed was a lot of these funds kind of have this, you know, outperformance that happens between year five to 10. And if you think about it mathematically, when you're making investments in a fund, most of your investments are wrong. And most of your winners, at least in the beginning are still

small and they don't start getting to meaningful size until maybe you know series b or c whether maybe 10 20 x the original size and so what we kind of noticed was you know the power loss starts taking off around year seven eight and you know clearly by year 10 12 you know those companies become most of the value of their fund. But maybe around year five, it's not quite so obvious that those things are going to be big. And so a lot of funds don't look that great around year five, six, but by year eight, nine, 10, they start being a lot better, at least some of them.

And so that was really what we were trying to figure out was like, okay, there's clearly some kind of power law thing that takes off by year 10. And so this was basically like showing the trajectory of a fund over 10 or more years, and we'll get to series A. So you might have 10 companies that get to series A out of 30 or 40, and then maybe half of those get to series B, and then maybe half of those get to series C, right? And so somewhere around B and C, probably that takes about five years or so to go from seed or pre-seed to series B. And maybe by series C, you have possibly three to five bigger wins out of that initial 30, 40, 50, like the top 10%. And you're still around an IPO, but at least you've got some number of companies that get to that series B or C or later stage. And so we were like, well, that's probably interesting. Maybe like one out of three

funds has that level of success that's detectable. And so if we could sort of just buy positions in those funds after five years, maybe around year seven, that would be great. We'd cut off that initial J curve, that initial depressed performance in the first five years while you're still waiting for your losers to fail and while you're still waiting for your winners to get big. We're like, oh, that's great. That's brilliant. We can jump in and buy that position where the IRA is accelerating. Then they were like, well, wait, who's going to sell? Who's going to sell positions at a good fund? Well, institutional investors aren't going to sell, generally speaking, their long-term patient capital. The fund managers, if they're established,

Sequoia is not selling their GP positions or anything, usually. And so really what we realized it was non-institutional LPs and smaller emerging GPs that might take that trade. This was me running 500 when we were in the first five or six years. And so they might be sitting on a 2, 3, 4X markup after seven years, and maybe they'd sell that for maybe just their cash back or maybe ideally more like 1.5 to 2X back. And for emerging managers,

people who are VCs in their first 10 years, first two or three funds, they might sell a piece of their performance, either their carry or their overall fund in order to generate DPI. And I think that's exactly the problem we are facing today in the industry. It's a ton of fund managers who are in their first 10 years of their career, maybe even the first five years of their career, and they have a lot of paper markups, but not a lot of DPI.

For funds maybe up to five years, people don't necessarily care about DPI, but starting around year five and certainly by year seven to 10, people do start caring about DPI and helping certainly care about it. And so you kind of have to have an eye for how you're going to make this trade-off between unrealized TDPI and realized DPI around year seven. And particularly when you look at funds that are sitting at 3, 4, 5x TDPI, but zero or less than 0.5x DPI, people start to ask him questions like, well, how about this great performance? Why hasn't it been realized? And everybody's like, well,

it takes a long time for these companies to get public. I'm like, okay, yes, but are you doing any hedging and other diversification strategies to make sure that you realize some of that? And what they're really talking about is, can you take some money off the table? Essentially, you're also trying to, obviously there's the Lexingtons and the RDNs

and the industries of the world. You're trying to right-size it and go not directly compete with those players. Definitely not. I mean, I think if you look at like Blackstone, Lexington, Collar Capital, others that are very, very large in private equity, they've been around for 20 years. They're dealing with huge multi-billion dollar funds, in some cases multi-ten, 20-billion dollar funds. And they're making really, really large secondary transactions, $1 billion individual transactions sometimes in private equity portfolios. In venture, folks like Industry Ventures and Stepstone, which acquired Greenspring

and a few others are pretty large. They're managing multi-billion dollar portfolios. I think, I'm not quite sure, but I think Industry raised recently one of the half billion dollar fund. I think StepStone has a $2 billion secondaries fund. So their check sizes are probably 30, 40, 50 million. Maybe they do a few things that are smaller than that, but not much smaller than 10 million. And we're really typically doing one to $5 million checks, at least in most cases. You've gone from deploying one to $2 million pockets, returning 60X, returning 40X, then starting 500 startups, returning somewhere between a six to 10X

when all of a sudden done on the first fund and building a lot of interesting franchises. And now kind of you've developed a product that kind of dog fooded your own product on the secondary side. Now you want to bring it to the funds. What would you like our audience to know about you and about Practical VC?

We're a secondary investor in venture capital funds and companies. So we buy positions, LP and GP interests in funds as well as in companies, mostly at the fund level, but also at the company level. Typically looking for portfolios that already have winners, at least at series B or C or later. So for us, the sweet spot is probably not necessarily multi-billion dollar companies, although that's obviously great. But usually what we're looking for are companies that are doing at least, let's say 20, 30, 40 million in revenue and up. So probably on the low end, those are companies valued at a couple of hundred million, maybe the high end are valued at single digit billions. But sweet spots probably, I would say

between 200 million to 2 billion. And those are companies that are probably doing, you know, a minimum of 20 million in revenue. I think we're going to see a massive expansion in the secondary market as a result of this downturn, but that typically happens every time there's a big downturn. The secondary market, people realize, oh yeah, we need liquidity. We need secondary. And usually there's not enough secondary whenever you have the downturn. It takes a while for people to see the writing on the wall. It's a painful, painful realization process. Well, Dave, as I mentioned, I first went to your talk in 2009. I wish I knew where it was. It was probably somewhere around Palo Alto. It was one of those

meetups. Those used to be the main information dissemination areas. But I did use your pirate metrics in my startup to different degrees of success, but definitely not your fault. Appreciate it. Thank you, Dave. By popular demand, the 10X Capital Podcast has officially launched our newsletter

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