At #Startupfest in Montreal, the founder of 500 Startups, an early investor in now publicly traded Twilio, said less than 10% of the VC firm’s investments will have a “meaningful economic return.”
The sobering words from Dave McClure, a respected voice among VCs, helped bring perspective to Startupfest attendees on the challenges facing startups aiming for Twilio-like success.
Less than 10% of @500startups investments will have a meaningful economic return, says @davemcclure at #Startupfest pic.twitter.com/1aL0oYSUSe
— TechPortfolio (@TechPortfolio) July 14, 2016
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Still, McClure’s comments about Twilio, a cloud communications platform used by Uber and many other widely used apps, were one of the most popular tweets from yesterday’s sessions in Montreal. 500 Startups invested in Twilio’s series B funding, along with Bessemer Venture Partners, in 2010, according to Crunchbase.
The cloud communications platform debuted on the New York Stock Exchange last month, and saw the value of its shares jump 92% above its IPO prospectus price of $15 per share.
Why Most Startup Investments Don’t Pay Off
McClure’s figure sounds bleak, but it’s how early-stage venture capital is designed to work. Investors like 500 Startups put relatively small amounts into a very large number of young companies, knowing most of them will fail or return little. The fund makes its money from a small handful of breakout successes, whose gains have to cover all the losses and still leave a profit.
That’s often called a power law: returns aren’t spread evenly, and a few winners matter far more than everything else combined. It’s also why a single company like Twilio can define a fund’s track record, and why investors look so hard for signs that a startup could become one of those few.
McClure is modest about the success.
VCs should never take credit for their companies’ success, @davemcclure says about recent exit @Twilio #Startupfest pic.twitter.com/hRtZCM1uYd
— IBM Cloud Canada (@IBMCloudCA) July 14, 2016
What McClure Looks For
So how do you get McClure or 500 Startups’ attention? A functional product, early customer usage, and a good team, said McClure.
“Show me objective, quantifiable evidence of your product,” he told the audience.
Twilio is the first IPO for 500 Startups. It’s also the first US venture-backed tech IPO of 2016. Since its launch in 2010, 500 Startups has made 1,200 investments across 60 countries. VC investments in communications and networking companies reached $968.4 million in the year ended March 30, according to Dow Jones VentureSource data.
500 Startups has seen other exits mainly in the form of acquisitions, including:
- $403M acquisition of Makerbot by Stratasys
- $350M acquisition of Wildfire by Google
- $200M acquisition of Viki by Rakuten
- $117M acquisition of Simple by BBVA
What Happened Next
Twilio kept growing after its IPO. In October 2020, it agreed to buy customer data startup Segment for $3.2 billion in an all-stock deal, adding tools that help companies pull customer data together across apps.
McClure’s own story took a very different turn. In 2017, he stepped down as CEO of 500 Startups after harassment allegations, and in July of that year he resigned as a general partner as well. TechCrunch reported that co-founder Christine Tsai asked for his resignation after the firm became aware of another sexual harassment report against him, which it investigated and determined was unacceptable behaviour.
The firm carried on under Tsai’s leadership. In September 2021, it rebranded as 500 Global and closed a $140 million flagship fund, its largest to date, bringing assets under management to $1.8 billion. The firm said it had backed more than 6,000 entrepreneurs across 77 countries, with 33 portfolio companies valued at more than $1 billion.
What It Means for Founders
McClure’s numbers are worth remembering when pitching any early-stage investor. They expect most of their bets to fail, so they aren’t just asking whether a startup will survive. They’re asking whether it could be one of the rare companies big enough to return the fund.
That’s why his checklist is so practical. A working product, early customers actually using it, and a capable team are the clearest evidence a founder can offer, and “objective, quantifiable evidence” beats a polished story every time.
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Frequently Asked Questions
What did Dave McClure say about 500 Startups' returns at Startupfest 2016?
At Startupfest in Montreal in July 2016, Dave McClure said less than 10% of 500 Startups' investments would have a meaningful economic return.
Why do most early-stage startup investments not pay off?
Early-stage investors put small amounts into many young companies, knowing most will fail. A few breakout successes have to cover all the losses, which is often called a power law.
What does Dave McClure look for in a startup?
McClure said he looks for a functional product, early customer usage and a good team, and asked founders to show objective, quantifiable evidence of their product.
What happened to Dave McClure at 500 Startups?
In 2017 McClure stepped down as CEO after harassment allegations and, in July 2017, resigned as a general partner. TechCrunch reported co-founder Christine Tsai asked for his resignation.
What is 500 Startups called now?
In September 2021 the firm rebranded as 500 Global and closed a $140 million flagship fund, bringing its assets under management to $1.8 billion.