Twenty Years of Investing and Geeking Out In Silicon Valley

Dave McClure, Founding Partner at 500 Startups

The soapbox talk with Dave McClure, the man who calls himself a greedy venture capitalist who has been geeking out in Silicon Valley for over 20 years, had tons of great takeaways for entrepreneurs who are out there looking for angel funding.

We delved into how Dave evaluates startup ideas and entrepreneurs, his investment strategy and the takeaways from some of the failures he has dealt with throughout his investment career.

Feel free to listen to the podcast as you check out the summary of takeaways below. The full transcript of the talk is below if you’d like to read through our conversation.

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Numbers: Failures and Successes

Dave had a great definition for what he considers failures, mediocre successes and real successes. Here are the four categories Dave uses to classify his investment outcomes:

1. Company runs out of money (really bad)
2. Company can’t return capital for a while (better)
3. Company returns capital at a small scale (pretty good)
4. Company returns capital at a large scale (awesome)

When asked how his investments are split among these buckets he mentioned that:

  • 50-75% run our of money without having any material outcome
  • 20-30% don’t run out of money but don’t have major outcomes
  • 10%-15% do well, result in some money, usually about $5M-$15M acquisition
  • 5% do insanely well, resulting $100M+ outcomes

How to avoid that 50%-70% failure bucket

Dave had one piece of advice: Make something that people need and would pay for? Most of the time the entrepreneurs who run out of money make something people might want but do not need.

Example of a failure in your portfolio

When asked about an example of a company Dave invested in that couldn't return the money, he gave us a great example. 500startups put in $100,000 into a company targeting the small business segment, offering some text services in the mobile area. The company discovered that their acquisition costs were higher than the price for their service. Training and educating their customers cost more then they thought. Their business model was upside down.

They tried two different iterations of their product, decided it was not working and recently decided to pivot into a different business model. They are still trying to monetize the idea.

How to avoid investing into failures

Dave mentioned that he likes to focus on entrepreneurs that have a customer in mind vs. investing in technology. The entrepreneur might get the problem wrong, might get the solution wrong, but if their target customer is "moms with kids age 0 to 3," there is a range of problems and challenges they could try to address.

Dave is not a big fan of entrepreneurs that focus on technology. If an entrepreneurs says they have a great video compression technology, they might have defendable IP in that area and a great team of PhDs, but that does not mean there are customers that have a need for the technology.

Dave likes to focus on capital efficient businesses with clear customer focus and a problem definition he can understand. Finding a great nanny for a kid is a pretty big pain point that many have and would pay for. Ideas like these speak to Dave more than technology patents.

Here are a few questions Dave mentioned that he tends to ask entrepreneurs before writing out the initial small check for the first 3-4 months:

1. Do you have a viable product idea; is there a need for it?
2. Do you have the engineering skill to build this product?
3. Is there a simple monetization/conversion model?

The discussion continued as we asked Dave more questions about projections, due diligence and advising startups, as well as his thoughts on the famous AngelGate meeting back in 2010. The full transcript of the talk is below.

We’d like to thank Dave McClure for such an insightful discussion with tons of insights behind what it takes to raise funding from investors.

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Soapbox transcript

Interviewer: I'm super-excited to introduce Mr. Dave McClure. He is the engineer, marketer, greedy investor all in one. Right? A pirate, as well. Has worked for, helped run Founders Fund, has helped run Facebook Fund. Has invested and consulted in over 100 companies – SlideShare, Twilio, Twitter, tons and tons.

Dave McClure: Not Twitter. Just friends with them.

Interviewer: Not Twitter, you're just friends?

Dave McClure: I wish. That would be great.

Interviewer: With that, one more time, let's welcome Dave McClure. So Dave, awesome to have you here.

Dave McClure: Thank you.

Interviewer: You've got tons of gadgets.

Dave McClure: I just like to have my gadgets with me. Security blanket.

Interviewer: All right. I'd like to start with the bio, and I'll kind of talk through the bio. We'll get to your experience. I just want everybody to be on the same page as where Dave is coming from.

You came out from John Hopkins University. Is that right?

Dave McClure: Yes.

Interviewer: Came out here about 20 years ago or so?

Dave McClure: 20 years ago, 1989.

Interviewer: Then you were a programmer, so you worked in the software development type of role?

Dave McClure: Yes, I was a programmer and database developer for probably five or six years. I had trouble keeping a job, so kind of bounced around from people I didn't want to work for until I finally worked for myself. Started a small consulting company . . .

Interviewer: Right, and you worked on Netscape, Microsoft . . .

Dave McClure: I did some consulting work, yes, for Netscape and for Microsoft.

Interviewer: Got acquired?

Dave McClure: We got acquired. I wouldn't say it was a huge deal. It was my first business, but it worked out all right I guess. I probably learned a lot of lessons about what not to do more than what to do. It was my first legal business, anyway. I probably ran a few other ones that weren't legal before that.

Interviewer: Oh, nice.

Dave McClure: No comment.

Interviewer: That was '98?

Dave McClure: That was '94 through '98 or so, and then I stayed with the acquiring company for about another year and a half or so.

Interviewer: Then excited about dot-com bubble?

Dave McClure: Yes, I was trying to jump back in. I worked for a couple different start-ups. Some that were bootstraps, some that were venture-backed. Ended up with PayPal in 2001.

Interviewer: That was pretty early. They were still 200 people?

Dave McClure: I wasn't like the first guy in the door, but yeah, it was about 200 people.

Interviewer: Before IPO.

Dave McClure: Just before IPO, which was nice.

Interviewer: Nice. Good timing. What's your goal there?

Dave McClure: After the Russians were stealing money from PayPal, I guess from our customers.

Interviewer: What?

Dave McClure: There was a period of time when PayPal was still working out the business model, and I guess they had had a series of times when certain folks in Eastern Europe and beyond were getting money out of the company through a variety of means. They've figured out how to stop that from happening.

Interviewer: Your role there was Director of Marketing, but you gave yourself a different role?

Dave McClure: Yeah, I wasn't sure that title really had any street cred.

Interviewer: Because you're an engineer, right?

Dave McClure: So I changed that to Director of Geek Marketing. I was mostly doing evangelism and education on PayPal e-commerce products for developers and designers, people that weren't developers but were trying to make money.

Interviewer: I wasn't sure what "geek evangelism," what that really meant.

Dave McClure: Oh, I don't know. Just something to take the edge off being in marketing. I think when you start out in engineering, you don't trust people in marketing and sales. I've gradually come around to that world now that I am in marketing and sales.

Interviewer: I totally agree. I used to be an engineer, now I'm a marketer.

Dave McClure: Those evil sales people . . .

Interviewer: Sean Parker pulled you into Founders Fund?

Dave McClure: Yes. The infamous Mr. Parker. I'd been trying to work on setting up my own venture fund in 2008. Of course, my timing was impeccable, right as the market was shitting itself. I was trying to set up a venture capital fund.

Sean had been trying to recruit me to help with marketing, and I'd said no a couple times, and then I kind of came crawling back and said, "Hey, you still got that gig?" He was kind enough to give me a shot. I think I was the only person hired in venture capital in December or November of 2008.

They gave me a shot, gave me a little bit of money to invest and play around with, which was really pretty cool. I'd been doing angel investing when I left PayPal, put about maybe $300,000 into about 12 or 13 companies. Small checks, but I didn't really understand the real estate market, so I figured I'd probably invest in companies.

That was less crazy than putting money in the real estate market, which turned out to be a good decision, I think.

Interviewer: Then Facebook Fund?

Dave McClure: Yeah. I was at Founders Fund running their early stage program, which was called FF Angel. We did about 21 investments, about $100,000 each, over a period of a year or so. Asked if I could take over the Facebook Fund program, and ran that for the summer of 2009. We did about 22 investments. Those were maybe a little bit smaller, $30,000 or $40,000 each.

Interviewer: Then you decided to finally raise your fund, the timing was right . . .

Dave McClure: I hope so. We'll see. We got 500 start-ups off the ground last summer. Been working on it. Founders Fund was kind enough to help us get started with that. They're one of our investors, along with a few funds and folks in the Valley.

I'm not sure why I'm beeping. Some folks are wanting to send a text or something.

Interviewer: Wanting to get a hold of you?

Dave McClure: Yeah. It's been a hell of a journey. I think raising money, learning how to run a fund, dropping devices all over the place . . . We were trying to pursue a strategy of doing a lot of little investments, and that's kind of the basic philosophy of the fund.

I think if you look at major changes in the tech industry, at least for consumer, small business Internet services, the two large changes . . . About ten years ago, really significant drop in production costs based on not having to pay for hardware, software and bandwidth. At least we don't really pay very much for that these days.

That really started reducing costs for start-ups to get off the ground, where previously you might have needed $3 or $5 million to pay for a bunch of Sun hardware, Oracle software and big pipes. Nowadays most of that stuff is open source software, pay as you go in the cloud.

Then the second big change, really, was a dramatic increase in access to customers in online platforms. Not just Google and other search platforms, but starting maybe five or six years ago with Facebook and Twitter. Now more recently with Apple and Android. You might throw in LinkedIn and YouTube and a few others there.

There are probably six, between five and maybe seven or eight major platforms for customer acquisition that are hundreds of millions of users or more.

That's really reduced cost and increased access to customers. Those two things, really big decrease in product development costs, really increased access to customers, those kind of change, in our opinion, the dynamics for investing.

Interviewer: Question on 500 Startups.

Dave McClure: Yeah?

Interviewer: How is it different than, say, SV Angel? I had Ron Conway here last month. We talked a lot about his investing strategy, how his firm operates. How is 500 Startups different, then?

Dave McClure: I think the world of Ron, although occasionally in the press he is not always given us . . . anyway, I don't want to get into that.

We've done a lot of investments with Ron. Ron's invested in several companies that I've worked at as well as invested in. I think we both ascribe to the philosophy of doing a large number of investments, so that part is similar.

What's different is, so we are both a seed fund and an incubator. We run an accelerator incubator program. We have companies, about half of our portfolio investments, or at least half of them going forward now, are physically located with us.

We do about between 25 to 30 companies every four months. Right now the batch is a little bit larger. We have 34 companies in the current batch. That's different.

I think probably a difference in what types of mentorship or guidance we offer. I think Ron's really great in connecting people with downstream investors and really has a Rolodex that's pretty much unparalleled in industry.

The two problems that we wanted to go after, in my experience as an engineer and working with people is the hardest things for engineers are not necessarily building product but understanding design and usability issues or finding people who can do that. Then trying to come up with a customer acquisition strategy or a way to get customers.

The two things that we really tried to emphasize was, how can we help mostly engineering based founders connect with designers, as other team members or founders. Work with them on usability. Enrique here, Allen, actually, was in the class I taught at Stanford on Facebook apps, and also helped me run the Facebook Fund program for 2009.

He's put together something called the Designer Fund, and also helped us put together a network of designers and folks to help with usability testing. We found that's really useful for at least a software engineering type of founder who's getting off the ground.

Then emphasizing primarily online distribution, but generally all kinds of customer acquisition. How do you help founders understand not just building a great product and making it usable, but really growing the customer base and thinking about the cost of customer acquisition and revenue generating?

Interviewer: Since we're talking about Ron, I've got to ask this question. Angelgate 2010, there's lots of press that came out. Michael Arrington wrote that article on that meeting, the famous meeting. Collusion, price fixing, saw your articles.

Dave McClure: We are just bad, bad people. We're just evil.

Interviewer: Saw your article about ten F-bombs in it. What do you have to say about that? Nothing was going on, right?

Dave McClure: No, that's not true. Obviously we were there to talk about something. The question was whether the things we were talking about were evil or criminal, which I basically denied, and still deny. And whether we were there to think about, how can we make the overall industry better, how can we figure out how to improve things for entrepreneurs.

I think Mike took a relatively negative perspective on that shit, and I vehemently disagree with him. I think he went to print without any commentary from me, which I would have gone on record, and actually did go on my own blog, to state what I thought occurred.

Interviewer: Okay.

Dave McClure: Talk to ten different people and you'll get ten different perspectives on what went on that evening. We were not in any hidden room. We were in an area that was quite visible to other people. I didn't invite my mom, I didn't invite Mike, and sorry.

I'm not going to tell the press exactly what I'm thinking about for investment strategy, but it doesn't mean we were doing anything illegal.

Interviewer: I had to get that off of my chest. I had to ask that, since you're here.

All right. Coming back to 500 Startups. We talked a little bit about how it's different . . .

Dave McClure: The dark side of the Force is so much more interesting.

Interviewer: It is, it is, isn't it?

Let's talk about failures. 500 Startups, let's talk first about some numbers, all right? How many companies do you invest in, how many of them actually fail, how many succeed, how many return your money? Ballpark.

Dave McClure: Okay. Let's try to define some of those terms a little bit. Failure is pretty binary, but I think there's a range of outcomes. Companies can one, run out of money; two, not return capital for a while, they can return capital at small scale, they can return capital at large scale. Those would probably be the areas I would talk about.

A lot of companies run out of money. I would guess that probably in our overall portfolio, it's still pretty young, but our expectations are probably anywhere from 50% to 75% of companies run out of money without having any material outcome for us. Or for themselves.

I would probably guess there's another 25% that are operating, but not clear whether they're going to make a lot of money in the long run. Then maybe somewhere between 5 to 20% of portfolios that we think will make some money.

In other words, they'll get acquired, might go IPO although I think that's not likely, or they might find another way to sell our ownership stake that would generate some return for our investors. In general, the model that we lay out is about 5% of those stories are wins, that are north of $100 million, and then 10 to 15% are wins that are south of $100 million.

That's kind of the trajectory I think we're looking at. Probably it's around 50% to 70% run out of money. Another 20 to 30% don't run out of money, but don't ever get to major outcomes. Maybe 10 or 15% result in some money, that would probably be between a $5 million to $50 million, maybe up to $100 million, acquisition.

Then maybe 5% of overall portfolio result in a mid-sized outcome that's north of $100 million but probably not quite at the billion dollar exits of most venture capitalists.

Interviewer: Let's dig into the people that are running out of money. What's going on there? Is it because they didn't raise enough, is it talent issues, is it the strategies in there?

Dave McClure: Usually it's because they built something people don't want.

Interviewer: Okay.

Dave McClure: To use Paul Graham parlance, "Make something people need or want." I always modify that to say, "Make something people will pay for," which is a stronger indication than need.

Interviewer: Then how do you figure out if they're building something people want when they're pitching it to you?

Dave McClure: Well, we try and de-risk on product side as much as possible, and on business model as much as possible. Although we are a very early investor, we don't very often invest in napkin business concepts. We like to see prototypes, at least of some sort.

It actually is not that expensive, either in time or in money, to put together basic prototypes for most of the things that we're seeing these days. There are definitely a few areas where there's much more intensive IP, but for a lot of consumer and small business problems and services, the basic framework of what the people are interested in can probably be built between weeks to months, usually on sweat equity.

That initial prototype, most of the time we're investing in something where there's at least a rough outline of what's being built. We particularly like to focus on simple business models, either transactional, subscription or maybe lead gen or affiliate if it's in rep.

We don't typically go after a lot of advertising driven models, which usually require scale. We don't typically invest in a lot of companies that are growth for growth's sake, without business model concepts. We do a little bit of that.

A much more common thing is somebody's got a piece of a cover story, Small Business Monthly subscription story, or maybe lead gen or affiliate model where you're qualifying customer profile data and offering that to a third party in exchange for some value or services.

Interviewer: Can you give an example of a company that has run out of money, or has failed, in any one of those ways and what . . .

Dave McClure: Tons.

Interviewer: Yeah, that you were related to?

Dave McClure: I don't want to really name any particular folks, but yeah, there are lots.

Interviewer: Talk about the problems that they were facing, and the issues, and how you tried to help them or not.

Dave McClure: Case in point, just this morning without naming names, there's a company that we funded, we put in about $100,000, I think they raised $500 to $700,000 overall. This was in probably Q4 of last year or early Q1. They were targeting the small business segments. They were offering some services around text and mobile areas.

They found the initial model had some interest, but wasn't monetizing as well as they thought. Their customer acquisition costs were much higher. Training and educating small businesses was more expensive than they thought. Overall the business model was a little bit upside down in terms of customer acquisition costs versus revenue generated.

As a result of that, they tried two different iterations of product, one I think in February or March, one in April or May. Decided that wasn't working and basically pivoted into a different model, and we'll see if that works or not. They may be able to do it, they may not be able to do it.

Interviewer: When somebody comes to you and pitches an idea, how do you look forward and see if something like this is going to happen or not? There are different methodologies that people use. AshtonKutcher in Startup School talked about the fact that an entrepreneur needs to solve a problem, despite how much money they're going to get from it.

If they don't earn a cent from it at all, they need to just solve a problem. Those are the types of people you want to target, versus the people who say, "I want to be like Finkus, Zuckerberg, Allen and I build a $1 billion company." Don't invest in those kind of guys. Invest in the people that, and I even used Carl Fischer as an example there.

Is that something you can relate to?

Dave McClure: I don't think Zuck started out thinking, "I want to build a billion dollar company." I think Zuck started out with, "I want to get laid."

Dave McClure: Which is a problem for many geeks.

Interviewer: He solved a problem, right?

Dave McClure: He solved a very real problem. Anyway. I think whether or not it's a problem or a strong desire, I think we like to focus on entrepreneurs who have a customer in mind. A lot of times you might get the problem wrong, you might get the solution wrong, but if your customer is moms with kids zero to three, there's a range of problems and challenges that parents have with their kids, and working on that set of problems, it's easy to move around within that circle and identify what you're working on.

Whereas if you start out with, I've got this great video compression technology and I need to go find a customer for that, it might take you a little while to figure out how to find that. You might have a much more defensible IP area. You might have a lot of great PhDs, but it's not how we're going after problem solving or funding entrepreneurs.

We like to focus on relatively capital efficient businesses, somewhat clear customer focus, and usually there's a problem definition where we understand, "Okay. If you help me find a great nanny for my kid, there's probably a pain point there and a certain amount of money that is relatively obvious."

If you solve that problem, we think there's a pretty good opportunity to go after more of those customers and scale that up. That's more just our philosophy as a small investor. There's other philosophies to go after, but it de-risks a couple of things for us that we think are important when we don't have huge amounts of capital to throw at entrepreneurs.

Interviewer: Is there a company you wished you invested in?

Dave McClure: Oh, shit, yeah. Any of the LivingSocial founders when they were four guys. Travis Kalanick and Garrett pitched me on Uber multiple times, and I was an idiot for not doing that, although Travis wasn't running the company at the time. I keep saying, "If I knew you were going to become CEO, I would have put the money in."

Interviewer: Invest in people.

Dave McClure: What else did I fuck up . . . I knew the Airbnb guys. I was sort of thrown off by the cereal box shit.

Dave McClure: Was sort of like, "That's kind of weird." They're great.

Interviewer: Can you go now, after they raise a round, go in and say, "Hey, I want in, guys, can I?"

Dave McClure: You can try and do that. Occasionally we have done something like that, although that's more likely for larger, more well-respected investors than I, to be able to pull that off. I think our new strategy is when we totally fuck up on something and we see them really successful, is we try to get them to invest in our fund.

That's been our new strategy. Got one of the LivingSocial guys to put some money in with us.

I think it's very common that you're going to miss big things. Part of our fundamental philosophy with 500 Startups is that we're not that smart. I think there's a myth of pre-investment due diligence and stock picking.

Most investors think they're awesome at finding and collecting great companies before anybody else does, and it's easy to in hindsight say, "I was awesome about finding Mint," or "I was awesome about finding Twilio or SlideShare."

Usually when you make the investments . . . with Mint, I was pretty sure there was a really amazing opportunity. Aaron is a really amazing guy. Same thing with Jeff Lawson at Twilio. A lot of those, I don't think you're anywhere near as sure when you make the investment as you are a year later.

I think the historical model for venture is they write big checks after a significant amount of due diligence, which might be as much as three or four weeks of meetings. I generally think that you're a lot more aware of your investment decision six to 12 months after you've made it than three to four weeks before you've made it.

The philosophy of writing a big ass check after you've done a lot of due diligence, which might be 20 to 40 hours of meetings, maybe in some cases they've known the entrepreneur for a while. I kind of find that ass backwards.

Our general philosophy is, we're not sure, and particularly with early stage investments there's just not much to go on other than looking at the product. Maybe a little bit of customer usage.

We generally try to simplify for, "do you have good engineering skills? Have you been able to build a product? Is there a customer in mind? Is the revenue model simple? Decent team structure?Okay, great. We'll write a small check."

Then we'll wait three to six months, maybe up to 12 months, and see if you make progress either on users, or retention or revenue or other conversion metrics. If it looks like you're making progress, we'll probably write you another check, assuming you're interested in raising more capital.

Interviewer: Do you steer them towards something you think they should be doing? Like, "Don't add so many features."

Dave McClure: Generally I have lots of opinions, but . . .

Interviewer: What happens when you go out there and state your opinions? Do they take it, or . . .

Dave McClure: Sometimes they do, sometimes they don't. I think I've developed a reputation for being an investor who has some sensibility around product and marketing, but I think that's probably overstated. The best entrepreneurs are the ones who probably do well just by leaving them alone.

For the incubation problem that we're running, we think there's a period probably between three to 12 months, early on in the lifecycle of a company, where there's several milestones that you're trying to de-risk. One is getting the product and customer fit reasonably close. Here's a customer with some type of problem or desire, he's a product that solves that in some way, and that fits, hopefully.

If you get that right, we think that's an interesting milestone. Hopefully, at that point the customer comes back and uses the product more, and they tell other people about it. Hopefully, they pay you for it.

Another milestone is tuning user experience in a way that allows people to either understand the product better, or use it longer, or reach their goal better, because that matters a lot. That's why we emphasize design a lot with a team structure.

Interviewer: You guys have a whole staff, right? Designers?

Dave McClure: I wish we had more. We have had designers on staff, and we have a lot of designers as mentors as well.

Interviewer: How does that work? I've got a team, my two or three people, and we can go and ask these designers that service everybody?

Dave McClure: Usually we do, for the companies that are coming in on our accelerator program and sometimes direct to portfolio, we do design reviews, usually when they first come in the door. That's probably about an hour or two session, to just take a look at the product, take a look at workflow.

Try to understand what's going on and what the user goals and business goals are. If there's a rational framework for that. We're not always better than the team, but a lot of times we have more expertise or experience around that part of the process.

The last step of that is usually trying to figure out the scalable model for customer acquisition. Really, I don't think we worry too much about the problem and engineering component of that. Hopefully we're like, "Okay. Here's the customer definition. The problem is relatively obvious, and we think you can write basic enough code to solve that problem."

I'm sure there are efforts in diving into other code walk-throughs, and pair programming and other things that will help improve that process. Usually the larger, more critical path issues are, do you have a designer on staff, and does the workflow work for the user? Do you get activation and do you get attention? Those are our initial core issues.

If you get past that set, then it's how do you scale that up, and are you paying less for customer acquisition than you're generating on a revenue basis? If we can get past that, getting them to some downstream investor who sees that promise and is willing to help put in more money. Unless they've already gotten to profitability.

The way we tend to think about it is product market revenue. Somewhere in that product is the engineering design process, and the market pieces. How do you scale that up to people on the revenue side is, how do you have a sustainable business and a profitable business? So if you grow more customers, it generates more profit.

Simplifying it to that framework, there's stepping stone points where: okay, we've solved one of these, at least at some level and we're willing to put a higher valuation on the company, put more money in. Hopefully other people are as well.

There are plenty of people who don't get past those points, and that's usually where either the company doesn't find users or customers for their product, or they can't get a design or usability model that makes it easy for people to understand.

Interviewer: Because they thought the made something people wanted, and it turns out . . .

Dave McClure: It turns out they didn't, or they didn't find it meaningful enough. Or the other part of it is really just understanding competitive market. You may solve a problem, but if there's also other people who are also solving the problem, perhaps better than you or you're not solving it better than them, that may be more challenging.

On the flip side, if you solve a problem in a really crappy, minimalist way but there's nobody else out there solving that problem, often you can charge a lot of money for a relatively crappy product that solves the product in a much better way than other available alternatives.

Interviewer: Well, I'd like to open it up to folks. We have about ten minutes or so. Questions, go ahead.

Audience question: I saw this last week on ABC News. There was a great entrepreneur who created jobs, and then USCIS kicked him out of the country. They didn't give him a visa. If you're at this incubator startup, do you run into these problems with visa issues? How do you tackle them?

Interviewer: The question was visa issues and startups.

Dave McClure: Unfortunately, I think the U.S. government and/or really the U.S. voters do not have a very informed opinion about immigrant entrepreneurship and job creation.

I've spent a little bit of time working with Brad Feld and Shervin Pishevar and Eric Ries on startup visa project. Brad's really done some great work, and we've got some movement on that in Congress. There have been at least some bills that are proposed, and actually the administration's re-interpreted existing legislation, so it's a little bit better now.

We've funded a lot of international companies. Probably out of the 220 or 230 or so we've funded, about 30 of them are officially outside of the country in terms of incorporation. A larger number are also international founders who happen to be here, under U.S. subsidiary.

It varies from country to country. For our incubator program right now, we have about 12 or 13 of the 34 companies that come from other geographies. We've been able to work around most of those issues, but we did have a team last time from the Netherlands that was having trouble. They did get in, most of the team members, this time.

It's much harder for certain countries like India and Philippines and certain others than it is for Canada or other places.

I don't know. There's no easy solution there. We're trying to change the structure around EB5 and introduce this EB6 classification. If you're able to bring in at least $250,000 worth of capital and/or create five jobs in a period of time, we're trying to make that the bar.

There are different views on that. If you make the limits too easy, there are a lot of folks in Congress who think that's going to open the doors to all sorts of people who are going to steal jobs. It's very difficult process to get moving forward.

That said, I think entrepreneurs by nature tend to solve problems, so people who are determined more often than not will find a way around that. If we don't solve that, then the jobs will move to other places. I think you're seeing already, there are a lot of folks particularly in China and India, possibly in Brazil now, who are staying at home or returning back to those geographies if they've been educated here, because there are great opportunities in those countries.

We actually do agree with that, and we're investing in those countries as well.

Interviewer: All right. Here, and then we'll do . . .

Audience question: This new startup act that's going through right now, how do you see that going to effect next year, and in the future and things to that effect?

Dave McClure: There are a couple different ones. Which one are you talking about?

Audience question: It essentially allows a marketplace that's been . . . Kickstart . . .

Dave McClure: This is crowdsourcing fundraising up to $100,000 or something like that. Obviously, Kickstart has already been successful in helping get a lot of businesses off the ground. Having additional sources of capital is probably a good thing. It might put more pressure on us as investors to make sure we're adding value. We already suck in a lot of ways, so we've got to improve that overall anyway.

Audience question: You were with Mint early on. What was the biggest hurdle that you found in partnering with financial firms and overcoming all the financial regulations that refer to that?

Interviewer: Biggest hurdle,, financial regulations.

Dave McClure: Right. I did a little bit of work. I was there for about one or two days a week for the first six months of 2007. Aaron was just getting off the ground. There was about five people at the time.

Biggest challenges, getting a relationship in place with Yodlee was a big challenge. Trying to negotiate the terms. Yodlee is an account aggregation service for managing bank accounts and people's credit card, financial information.

Getting that, Anton was the primary person working on that. Anton Commissaris was the guy running Bizdev who was negotiating that relationship.

I don't know. That was a very specific arrangement. At the time I think Yodlee didn't really know how big an opportunity was there, so we got a usable deal in place for access to their services for our customers. I think working on the UI, and Jason Putorti and particularly with Aaron, coming up with a different look and feel . . .

There are other services. Yodlee itself had a native service for doing account aggregation, which I had been a user of since 2001 or '02. But it was a different look and feel, different level of trust and understanding with the kind of UI that Jason worked on to put on top of that.

I think the biggest issue was a more subtle one. I think a lot of investors who were skeptical about Mint initially thought that asking people for their account password information was never going to fly as a business. They were very negative and skeptical on the business at the time.

I think because I'd worked at PayPal, I at least had some insight into the world of people who cared less about that particular item than they did about convenience issues and saving money. I always said, "Don't worry about the people who won't give you their password. They're never going to be customers anyway. We're worrying about people who are trying to save money or trying to organize their finances. Their need make overcome the concerns about security."

I think understanding the customer framework and which customers to go after, and not getting caught up too much in absolutes about customers. It's not the case that all customers care about security equally.

Segmenting into people who absolutely care about security a lot and will never give you their password, people who are fuzzy on it and might do it for certain needs, and people who are like, "I've got to save money, I've got to pay rent, fuck the security issues, I don't have any money anyway."

Understanding that that's your customer base and focusing on them, and not worrying about the others, or at least that flexible framework between security and other customer needs and not having it be this absolute that's set in stone.

Interviewer: All right. Right back there, in the black shirt?

Audience question: Particularly currently, what are the attributes you most enjoy seeing in a team, and what are the attributes you avoid the most?

Interviewer: Attributes you enjoy seeing in a team, attributes you want to avoid most?

Dave McClure: Great question. Actually, I hate when people say, "Great question," because usually it's not.

Actually that is a great question. I think it's probably overstated, but the hacker-hustler-designer combo is the one we like to see a lot. That's one or more engineers, usually a half head to a full head on design, and usability is part of that is possible.

Then somebody who's customer focused, and that's usually not a traditional marketing person. Usually that's someone who's more analytically driven around customer acquisition techniques and may even be a shared head on the engineering or product design side.

That framework generally works out to someone who's technically sophisticated, who can write code and build stuff, whether that's front end or back end. Someone who can design things, and that does not mean pretty. It means converting. Whatever your target goals or actions are, if it's pretty and that works, that's great. If it's ugly and that works, that's also great.

A lot of times, people who come from traditional print and other design schools tend to focus on what their perspective of the aesthetic is, not what the numbers are telling them in terms of customer usage.

We really try and look for designers who are not prima donnas, and actually look at numbers and think holistically about that process, and also try to think dynamically about design, not statically. Statically, that's terrible. Have some concept of programmatic ability to change the UX over time.

I've worked with designers who are a pain in the ass, and that's really frustrating as shit. I can't tell you how painful it is to work with designers who think they know . . . maybe they do know better, I don't know.

I don't really want to argue with you. I want to look at numbers, and look at customer use case, and figure out what's working. Whether you think it's awesomely pretty or not, what's the use?

I think it was very clear with a lot of stuff at eBay that shittier design actually converted better. Probably because customers from the eBay world, who are usually there to save money, if it looked too pretty they probably thought it was too expensive.

There's this alignment around the house looking a little disheveled that made them feel like it was a better value. At least that's my intuition on that.

That's really important, not just that you have a designer, but somebody who is usability focused and conversion focused, and can work with the product and work with the programmer to come up with those concepts.

Then on the marketing, customer acquisition side, this one's the hardest to define because the ground is moving so fast and changing so fast. I think channels for customer acquisition, whether they're offline or online, are so vast and changing so frequently.

You want somebody who's creative, and coming up with campaigns, but also humble and looking at the numbers and trying to figure out these scalable ways to go after customers. Then looking at the timing of cost and revenue so it's a feasible structure.

Those are sort of the roles. I think as you get a little bit further in the maturity of the company, customer support and operations become more of an issue also. Initially, where we're really trying to get past the "don't die" scenario, usually it's building a product that customers want enough to pay for, figuring out usability so they actually use it, and then trying to figure out ways to scale that up to customers.

Interviewer: One more question, time for one more. Over there.

Audience question: What is the application process for 500startups?

Dave McClure: Right. So we don't have an application process, at least not right now. You have to pretty much come through a referral through either one of our existing founders or mentors, or please don't fucking bum rush me at the end of this.

I think if we get better at it we might go to an application process at some point in the future. We'll probably still be referral based through a mentor or references. The reason is because we get plenty of deal flow that's already qualified, and my history on that, adding another 90%, or really 900%, more applications in order to get 10% more actual . . . the return on that investment or effort is usually not worth it in our opinion. Now, we haven't found our Dropbox or BB yet, so I might be clueless as shit on that.

It requires a lot more effort to manage an open application process, and saying no gracefully, and giving people a reason why you reject them is often part of what I think is important for maintaining a brand. If you open up this application process and you don't tell them why you rejected, they tend to think you're an asshole.

I think we've found a lot of great companies through our existing folks. I also think it drives a different process. I have tremendous respect for Paul, and I think a lot of the process right now has been through [Harge] and Paul and other folks there filtering and selecting.

They obviously have done a great job. In our world, we've tended to try and build more of an open sourced community for that. A lot more of our decision process is coming through an extended network of mentors and folks that are referring. I like that. I feel like that's a model that works well for us.

We have at least one or two, particularly if we have two or three or more mentors or founders who said, "Yeah, I think these guys know what they're doing," or "I've spent time with them," or even in a few cases, "I put money into them," makes our decision process very easy.

On the other hand, lightweight referrals, where you're like, hey, somebody just introduces someone and we don't really know them that well, we try to lock down on that a lot. We always tell our existing mentors and founders, when you refer a company to us, we want you to refer them because you would put time or money into them yourself.

That tends to clarify signal to us. It also makes our decision process a lot easier. If they're willing to say, "Hey, I'm an adviser and put time into this company, or I put even just $5,000 into the company," that makes it a lot easier for us to decide, okay, we'll do that too.

Interviewer: Well, we're out of time, but I'd like to thank Dave for such an awesome talk.