Dave McClure talks about paypal, the paypal mafia, VC investing, internet marketing, and how to raise capital yourself.
Dave McClure

I met Dave about 10 years ago when I lived in Silicon Valley. He’s now with the Founders Fund, a VC fund put together by some of the top entrepreneurs in Silicon Valley. In this interview we talk about paypal, the paypal mafia, VC investing, internet marketing in Silicon Valley and how you can raise capital yourself.

In fact, right now I’m travelling with Dave on his trip http://GeeksOnAPlane.com, a trip through Japan and China to learn about local internet industry.


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Personal Info

Hobbies and Interests: Frisbee, Music, Microfinance.

Favourite Sports Teams: Closet Kobe Bryant Fan.

Favourite Books:

Favourite Entrepreneurs: Marc Andreesen, Guys from the Paypal Mafia, Rashmi Sinha from SlideShare, Aaron Patzer at mint.com, Amazon People.

Twitter URL: http://twitter.com/davemcclure

Personal Blog: http://500hats.typepad.com

Company Website: http://www.foundersfund.com

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Fast Track Interview

Adrian Bye: Today I’m talking with Dave McClure who’s with the Founders Fund. Dave has really taken off in the Silicon Valley as one of the big networking guys. He is on Twitter and Facebook constantly and puts out a lot of interesting content. Dave, thanks for joining us. Can you tell us a little bit of what you’ve done in the past and where you’re at today?

Dave McClure: Thanks, Adrian. I came to the Silicon Valley in 1989 as a database developer and programmer. Along the way I made a transition and started an internet/e-commerce consulting company where I was doing some work for Intel and Microsoft and gradually added a few friends to that company. Subsequent to that, I had a great opportunity to be at PayPal for a few years and run a developer network program that was also a technology education and a technology marketing function.

After that, I ran marketing at Simply Hired and also became an investor there. Over the last five years, I started doing angel investing on a personal basis and was involved in about twelve or thirteen deals. About a year ago, I started talking to the Founder Fund guys, who were some ex-PayPal people I used to work with, and I jumped into investing more formally.

Founders FundI have now been working with the Founders Fund for six months and have been running a number of different programs such as the internal seed-stage investment program. I have also been doing some investments as well as education and outreach evangelism programs for entrepreneurship. That’s the last twenty years in a very short order.

Adrian Bye: You’ve raised a very interesting point about the PayPal mafia. Tell us a little bit about what that actually is and what that means.

Dave McClure: Well, first of all I’d have to say I’m really just a very low level henchman in the PayPal mafia. There have been a disproportionate number of entrepreneurially-focused people who came out of PayPal: Reid Hoffman who started LinkedIn, Jawed Karim, Steve Chen and Chad Hurley who started YouTube, Jeremy Stoppelman and Russell Simmons who started Yelp, David Sacks who has done Geni and Yammer and has produced some very cool movies. Max Levchin, who is the co-founder of PayPal, ended up founding Slide. Peter Thiel, the former CEO and founder of PayPal, started doing hedge funds at Clarium Capital. Then Peter started the Founders Fund as the private equity side of that. Roelof Botha, also of Sequoia, is one of the youngest partners of Sequoia.

Adrian Bye: With the PayPal guys, aside from Peter, have any of the big shining guys done a start-up that’s not related to viral marketing?

Dave McClure: A lot of the businesses were definitely based on some amount of consumer Internet focus. In some cases that was viral marketing. In some cases that was search engine optimization. A couple of different trends were definitely common to many of those businesses, but probably the most surprising is the sheer number of people that came out of PayPal and ended up starting some form of business that became relatively well-known.

At PayPal, pretty much everybody was really trying to be as focused as they could on surviving. That made a lot people who came out of PayPal very focused on how to get things up and off the ground, viral marketing being one of them, but it also made them incredibly conservative on customer acquisition strategies.

There is an interesting footnote to the PayPal mafia story, which is that people there might have felt they didn’t really get back as much of the benefit as they had put into it, or that they may have left a lot of money on the table for the investors as opposed to themselves. As a result, many of them wanted to go back to prove that out. It’s possible that because people were so driven and still a little bit hungry after the PayPal payday that many of them went on to start their own businesses too.

Adrian Bye: That makes sense. They’d seen viral acquisition work. They knew how to get things done. They had the contacts. They had a reputation because it was PayPal. And out of that came a certain little enterprise called the Founders Fund?

Dave's photoDave McClure: Yes, and that was started around 2004. Originally it was a fifty million dollar fund that was really stage funds. Then a couple of years ago, Sean Parker joined Ken Howery, Luke Nosek and Peter Thiel out of Facebook, and they raised a slightly larger fund of about two hundred and twenty million dollars. That is the fund they have been in operation on for the last couple of years.

Adrian Bye: As I understand it, one of the tenets of the Founders Fund is about taking care of Founders and making sure they get well compensated for starting up companies. Is that accurate?

Dave McClure: Yes. The one difference we try to make known is that most of the people involved in investing in the Founders Fund had been involved in running their own companies at least at some time or other. It’s not really the most traditional VC approach to investing.

Adrian Bye: To me it would seem like given the amount of attention and the network you have built up there, it would have been a tremendous catalyst for the Founders Fund. Have you been getting a lot of interests and potential deals?

Dave McClure: It was a really good match. I’ve enjoyed doing a lot of entrepreneurship, education and technology along with the investing side. For many years, I had been doing a number of user groups and conferences around Internet marketing, Facebook, and social networking platforms, and then around start-up techniques, metrics, and analytics.

It’s a little bit unusual to combine investing with the type of events and conferences approach that I’ve been doing, but one of the things the Founders Fund was looking for was a way to combine a role in both entrepreneurial outreach and marketing evangelism as well as be able to identify early-stage companies a little bit earlier than the traditional series-A type of focus.

Adrian Bye: People who are listening to the interview or reading this are going to want to know how they can get funded.

Dave McClure: As an early stage investor, you probably get more inquiries than any other type of later stage investor. You have less capital to work with, but you get more in-bound requests than anyone. The one thing that has been really cool for me is that you truly source deals through your network and people you know.

Part of the reason I use a lot of social networking tools and environments like Facebook, Twitter and LinkedIn is that it allows you to extend your reach in very interesting ways. There is no way that I can keep up with the level of volume at most traditional VC firms. The logic there is that they look at a thousand deals, talk to a hundred and do ten per year.

I have a pretty extensive network of friends who are either engineering types or marketing types. In a lot of ways I use them as a proxy. I probably look at maybe a hundred or two hundred deals a year. My extended network probably looks at ten thousand deals a year and then recommends and filters stuff to me.

When I get a deal or a company name that’s recommended independently from two trusted sources, in many cases three is the magic number, I wake up and pay attention. Certainly part of the process is getting to know someone that I know and convince them that you have a cool company.

The other thing that made the difference for me is that I started giving talks and presentations around start-up metrics a couple of years ago. One presentation I did in Seattle was a five-minute video that I ended up calling "Start-up Metrics for Pirates." It was a slide presentation with this five-step methodology for analyzing how your different stages in business work and how to break-up the products and marketing efforts into those areas.

This presentation has given people a language I’m familiar with to use when talking about their business. It also gives me a sense that they understand my perspective and how I think about their businesses. For a lot of reasons, that has given me an extended presence on the web.

When people come to me, the first thing I says is "Have you looked at any of my presentations and do you understand what the approach is?" If they say no, I say "Check out those presentations. If you don’t think I’m crazy, then come back to me after you’ve read them." These days, a lot of people that I talk to understand the framework that I’ve laid out, and it just makes it a lot easier and quicker for me to evaluate how those businesses might operate.

More recently I did a presentation on "How to Pitch a VC." A lot of people have started to use that as a template pitch act. Between "Start-up Metrics for Pirates" and the standard "How to Pitch a VC," it makes it easier for me to consume more information quickly from these start-ups.

Adrian Bye: There is obviously the term vulture investors; it can be like the PayPal situation where the investors end up making a lot of money and not the entrepreneurs. What are your thoughts on the reluctant share and the value there, especially in today’s environment where things are changing?

Dave McClure: I have a different philosophy about how venture capital is changing and what the philosophy should be there. People talk about the downturn in the financial market and how that’s affected things. People presume that there is this downturn in the Internet market. Actually, I am aggressively optimistic there.

I don’t really think that much of the financial downturn that’s happening in the mortgage markets and financial services areas as rather huge. I don’t really think there’s been a huge impact on Internet businesses. The reason I say that is because for the most part, Internet businesses are not capital intensive. Internet businesses don’t have a lot of debt, which is what caused a lot of problems in many of the other more traditional markets.

Dave's photoThe one thing that has been a big issue for the VC community is that the people who invest in VC funds have had a pretty substantial upheaval in their world. A lot of pension funds and institutions that invest in VCs have found their net worth or their fund values have gone down by a third if not more over the last year.

That has resulted in a different outlook on how venture capital is performing as well as changes in asset allocations and philosophy about how much risk one should be taking in these other markets. As a result of that, we’re in quite a bit of an upheaval in the VC world. I don’t think it’s actually any overstatement to say that maybe one third of the existing VC community today won’t be around in two or three years.

Adrian Bye: How do you fit into that environment where the cost of barriers to entry for starting Internet companies is now so low? Do we need you?

Dave McClure: No. I don’t think that most VCs are relevant as investors in the Internet space. I don’t think there needs to be as much investment in any company. Previously a lot of software companies were marketing intensive or production intensive or there were large CAPEX costs in either hardware or chip companies.

If you could track that to Internet companies these days, certainly in the last five or ten years, the cost of a lot of open source software has come down dramatically. You’re not paying a lot for database software. You’re not paying a lot for web server software and other free or close-to-free components. For the most part, your cost structure is really head count, and to a lesser extent Internet marketing cost for acquisition. You can build a lot of companies these days for fewer than two to five million in capital, and you can certainly get the product built for a lot less than that.

It’s actually rather challenging in many ways to put more than ten million dollars to work for a lot of these Internet businesses. Once they take off, a lot of businesses could use more than that, but it’s really changed how the VCs are relevant to the start-up community.

What I would argue is that if you’re a start-up looking for an investor, you don’t need a lot of money. The angel investor community has magnified itself in value as there’s a lot more people from the angel investment community in the market. More importantly, it’s not just the capital that’s really the critical factor for start-ups to decide, but what type of skills are coming into the table with those investors.

It’s just like Jeff Clavier in First Round Capital and maybe Ron Conway in Baseline and a few others have all had a lot of experience doing Internet marketing businesses. As a start-up, you are probably going to get better terms from an angel investor or a small VC and you’re going to get better expertise from somebody who’s come out of one of these Internet marketing businesses.

Adrian Bye: Dave, there’s an important topic that we haven’t covered yet and that’s GeeksOnAPlane. By the time people are looking at this interview, we’re going to be on the plane because I’m flying from the Caribbean to go to Japan and China with you. You want to talk a little bit about the trip and the idea behind it?

Dave McClure: Sure. An independent dream of mine was to get a bunch of people together who were all sort of geeky and go on a trip to places that we don’t normally go to. My wife is Japanese, and I have the opportunity to go over to Tokyo and visit our family there pretty much every year. It is always fascinating to me when I get the chance to meet some start-ups and entrepreneurs in Tokyo.

People are always coming from their local environment to the Valley as this kind of Mecca place where they get to learn how Silicon Valley software start-ups and Internet businesses are run. I’ve always thought it would be interesting to go to other geographies and see what the entrepreneurship culture, the funding environments, and the actual successful businesses are like over there.

This whole idea for GeeksOnAPlane was really like a traveling road show of sorts where we could talk a little bit about the types of businesses, Internet platforms, and social networking platforms that have been successful in the States as well as the funding environment and models that have come out of Silicon Valley.

We could also learn about what’s happening in Japan, China, and in the future, maybe Korea and other geographies as well. It would allow us to get a survey of the investment climate, a survey of the start-up opportunity and markets, and to hear from some successful entrepreneurs in those geographies. It’s really more of a cultural exchange opportunity around entrepreneurship. I’ve already started thinking about doing a trip to Europe in the fall and probably Southeast Asia and India next spring.

Adrian Bye: Anything you want to add in closing?

Dave McClure: Just a couple of things that we didn’t cover: the "Start-up to Start-up" events that I’ve been putting together this last year and a new effort that we’re putting together called Finance for Founders. Both of these are attempts to use the existing knowledge of the start-up community in terms of product and technology ideas, business and marketing ideas, and then maybe finance and legal structure.

It will involve a more regular process for the new folks who are building their businesses to get to know each other. The "Start-up Metrics for Pirates" talk and the other conferences that we’ve been putting together are also really around building the craft of entrepreneurship and making that a business and an education in itself.