Aug 15, 2016 · 27m · 20vc
20VC: 500 Startups' Dave McClure on Whether Unicorns Are Necessary For Venture Returns & Why Ownership Is Not The Math To Think About When Investing
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of The 20 Minute VC, host Harry Stebbings interviews 500 Startups co-founder Dave McClure to discuss venture capital portfolio math, early-stage investment strategies, startup accelerator dynamics, and key operational lessons learned from the PayPal Mafia.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 23.5% of the talking time here. How this is scored →
Harry as informed peer 3.1 Guest teaching 4.6 Guest disagreement 3.1 Harry pushing back 2.4
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 16:50 Dave Slams Sam Altman's Accelerator Advice
Dave forcefully criticizes Sam Altman's advice to entrepreneurs regarding accelerators, labeling it laughable, poor advice, and selfishly directed toward YC's interests.
Hardest push from Harry ▶ 11:12 Harry Presses Dave on Follow-On Round RejectionHarry presses Dave on the uncomfortable dynamic of being squeezed out of follow-on rounds by larger VCs, explicitly challenging Dave to explain why founders or big firms leave them out.
Biggest teaching moment ▶ 8:28 Dave Re-educates on Portfolio Venture MathDave reframes Harry's premise about ownership stakes by demonstrating that portfolio volume and outcome probability distributions dictate venture returns far more than initial equity percentages.
Harry holds his own ▶ 16:06 Harry Quotes Sam Altman's YC PolicyHarry demonstrates keen industry insight by directly citing Sam Altman's blog post on accelerator double-dipping, putting Dave on the spot to defend 500 Startups' position.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Welcome Dave McClure & Career Journey | 1 | 2 | 1 | 0 | Harry introduces Dave and asks him to summarize his 25-year career in a few minutes. Dave delivers an uninterrupted chronological summary of his path from programmer to PayPal, angel investing, Founders Fund, and launching 500 Startups. | |
| Spotting Winners and Hot Investment Rounds | 2 | 4 | 1 | 2 | Harry asks a crowdsourced question regarding whether iconic investments like Mint, Twilio, and Lyft were hot rounds when Dave backed them. Dave reframes the narrative, explaining that most of those deals were actually non-competitive during tough economic periods. | |
| Venture Math, Unicorns, and Portfolio Strategy | 4 | 7 | 3 | 3 | Harry brings up Dave's Twitter debate with Michael Kim regarding venture returns and ownership stakes. Dave corrects conventional VC wisdom by detailing portfolio math, showing how probability distribution across 200 to 500 startups matters far more than initial ownership percentages. | |
| Follow-On Investment Strategy and Signaling Risk | 5 | 6 | 4 | 5 | Harry probes directly on whether larger VCs squeeze 500 Startups out of follow-on rounds and asks about signaling risk. Dave dismisses industry anxiety around signaling, explaining that company metrics dictate success far more than investor follow-on behavior. | |
| Debating Accelerators and Sam Altman's YC Advice | 5 | 6 | 8 | 4 | Harry raises criticisms about accelerator adverse selection and quotes Sam Altman's post about YC taking repeat accelerator founders. Dave forcefully rejects the adverse selection premise as 'bullshit' and slams Altman's advice as laughable and selfishly motivated. | |
| Lessons from the PayPal Mafia | 2 | 4 | 1 | 1 | Harry asks about Dave's time at PayPal working alongside high-profile founders. Dave humbly outlines how PayPal's operational stress and threat environment forged highly resilient entrepreneurs compared to companies with easy initial growth. | |
| Quick Fire Round | 3 | 3 | 4 | 2 | Harry conducts a quick-fire round touching on global VC funding gaps, diversity, book recommendations, and missed deals. Dave responds candidly, calling out capital scarcity outside major tech hubs and admitting to missing Uber multiple times. |
Statements from this episode (14)
McClure turned $300K across 13 angel deals into three $100M+ exits
“Started doing angel investing as I was leaving PayPal in 2004, kind of doing that part-time recreationally, I guess, but invested in about, I guess, about 13 companies over the next four years, put about 300,000, maybe total, and got a few wins out of that, I …”
SlideShare and Mashery seed rounds were not competitive
“SlideShare and Mashree certainly were not, like, super competitive rounds although, you know, strong team and capable founders.”
McClure invested $25,000 into Mint.com's Series A round
“Mint.com, I guess, was probably a little bit competitive Certainly by the time the A round happened, I put about 25 K into the A round, but I'd already been, you know, helping the company here and there a little bit.”
Early rounds for Lyft, Credit Karma, and Twilio were uncompetitive
“When we invested in Lyft out of FB Fund, I guess it was called Zimride at the time, and when we invested in Credit Karma and Twilio they were not really that competitive rounds, even though, you know, the founders were compelling most of the time.”
McClure's angel portfolio returned 3x without any unicorn exits
“So in my angel investment portfolio, I made about 13 investments. I did some advisory work for a few other companies, but let's say it's maybe 15 companies. There were no unicorns in that group of companies, but I had three What we would call centaurs or a hun…”
Predictably hitting unicorns requires investing in 200 to 500 startups
“If we find, you know, unicorn only two percent of the time, or heaven forbid, one percent of the time, our portfolio size needs to be a minimum of 50 to a hundred to really have a shot at that, and I would argue, actually, we are aiming for more than one unico…”
500 Startups targets 1% to 5% ownership in seed rounds
“The typical ownership that we hold in most of our seed round investments is probably between one to five percent. Maybe a little bit higher in some of the international geographies where valuations are lower. For Accelerator, it might start at around five to s…”
Venture math should focus on probability distributions, not ownership percentages
“But the point that I was making with Michael is that ownership really isn't the math that we use to kind of think about how we invest. We really think more in terms of number of investments and the likely probability distribution of finding large outcomes. And…”
500 Startups accelerator terms include a $500K follow-on option
“With our accelerator companies, we have a kind of fixed structure that we invest into and we ask for a 500 K option to invest in the follow on round where we don't exceed 20% of the round.”
Overemphasis on venture signaling indicates underlying company performance issues
“My perspective on this is typically that if the founder or other investors are more worried about my investment decision than the baseline performance of the company, there's already likely some kind of problem there.”
Sam Altman's advice to wait for YC is selfish and poor
“I think that's kind of laughable and actually probably really poor advice for entrepreneurs. Usually I think Sam and YC in general is an amazing program, and they offer lots of benefits and advice. In this particular case, I think they were being a little bit …”
500 Startups has invested in over 100 Y Combinator companies
“We've been investors through our seed investment program in a bunch of YC companies, over a hundred. I think we're actually one of the top three or four investors in YC companies over the years.”
McClure passed on investing in Uber multiple times, starting at seed
“Clearly Uber was the deal that I totally fucked up. Travis gave me the opportunity to invest in June of... The reality is I didn't invest multiple times, not just in the seed realm, so it's probably my mistake multiple times over.”