
VC Evolution: Physician, Scale Thyself - Dave McClure - playhard
http://500hats.com/VC-evolution-geeks-got-next
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webwright
I think most investors would agree with this entire post... EXCEPT for one
point. I think if you asked the top Valley investors what they thought of the
"Scale up and out" point (tl;dr Dave is contending that the valley is getting
comparatively less important, geographically speaking), I think they'd almost
universally disagree. This is a big bet from Dave/500s. As someone who doesn't
necessarily love living in the Valley, I hope he's right. :-)

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davemc500hats
we are still allocated 50-25-25 valley-restofUS-RestOfWorld, so at the moment
1/2 our deals are in California. but due to prices being somewhat overvalued
here, as well as comparatively inexpensive in other places, along with
potential for growth in emerging markets, yes we are planting seeds for the
future we think will reap benefits 3-5+ years out. we think it's a pretty
decent strategy, but only time will tell.

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BerislavLopac
Dave, looking forward to see you soon in Croatia -- good to see that you're
practising your own preaching! ;-)

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tryitnow
I think this is an excellent summary of the past few years and if you're Dave
McClure or one of the other visionaries of this new model then you should run
with it.

However, now that great success has been achieved the herd is following. Herds
are contrary indicators. Folks who want to be part of the next set of
visionaries need to figure out the deficiencies in McClure's model and create
new models of VC/entrepreneurship that address those deficiencies just as
McClure, pg, and others created new models to address the deficiencies of the
old VC models.

This isn't saying that this new model is bad, it's just that it's becoming
saturated with people following it and there's definitely a degree of myopia
setting in. Again, not a bad thing, it's just human nature to try to replicate
success based on past successes. The problem is everyone know nows what works
and tries to do the same thing leading to hypercompetition which eliminates
real profit opportunities.

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davemc500hats
agreed, difficult for new entrants to come in at this point... that's also
what people told me 2 years ago, and we carved out our niche ok. so not
impossible, just challenging.

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asanwal
Dave does a nice job of articulating some of the forces changing VC. We are a
data company that sells data to many of the top VCs so here are some
observations based on how we see them work.

First, there are a good # of VCs who are evolving. Not sure they are trying to
scale in the way Dave talks about, but they're evolving how they run their
business. We do see many using data in very interesting and systematic ways –
analyzing industry trends including financing flows & exits, improving their
deal flow management practices, understanding investment patterns of peer
investors, etc. In many instances, they’re taking data feeds from us and
others and vacuuming them into their dealflow management systems to aid in
day-to-day operations. That's suggestive of process which again suggests some
desire to scale, make things repeatable.

But these investors are not the norm. I think Dave and his team have talked
about Moneyball in investing, but a quantitative approach to venture capital
may be difficult. Some of this difficulty is driven by data limitations, of
course, in terms of sheer quantity vs. something like public markets, but a
lot of the reasons that data is less used are structural or behavioral in
nature. While there are many reasons data is not used by a lot of VCs, a
couple of these reasons are detailed below. Pls note that these are
generalizations. As mentioned above, we see and know many VCs taking a very
progressive attitude towards the use of data, but they’re the exception and
not the rule.

First, VC is a long game – Unlike public markets or baseball where you have an
immediate scorecard to tell you how you’re doing, VC doesn’t have that. As a
result, the desire/need for data is less clear especially when you won’t know
for many years if your investment thesis was correct or crap.

Also, although there is a lot of talk about one's investment thesis, there are
again, some firms who stake out a thesis and invest in it and many others who
look to invest in similar companies invested in by Union Square or Andreessen
Horowitz or Sequoia.

Next, despite investing in the next big thing and often being exposed to
cutting edge innovation via their portfolio, the process VCs use to find deals
is hopelessly antiquated. This myth of proprietary dealflow has been so
ingrained into the VC ethos that using any type of scalable method (or
attempting to) is almost anti-thetical to how “VC is supposed to be done.” The
secret, of course, is that outside of ~20 firms (I'm being generous), most VCs
don’t have real proprietary deal flow. But instead of using data, most would
prefer to throw bodies at the problem expecting them to find hidden gems. Or
they attend demo days of accelerator programs and the like which offer them no
preferential, proprietary access to dealflow.

VCs often view their job as being good "pickers" of companies but the new
model suggests that picking is important but ongoing support (recruiting,
technical, etc) from investors can help change the outcome of their portfolio
companies. Google Ventures adheres to this philosophy.

Again, the above are for the majority of firms. There are some who are quite
progressive. And of course, there are new models a la 500 Startups in the
micro-VC category which are trying very different things.

Ultimately, given the returns in the industry have been subpar and the
decreasing allocations of LP money to the venture capital asset class overall,
a rethink of process might be forced upon VCs as doing more of the same with
the expectation of a different result defines insanity.

Another great discussion on this can be found on Matt Turck's (Bloomberg
Ventures) blog here - <http://mattturck.com/2012/07/20/data-driven-venture-
capital/> Many of my comments above I left on his post as well.

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fraserharris
Are exits not extreme trailing indicators?

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asanwal
Great point. And for early stage investors, I'd say that exit is def a
trailing indicator in terms of where to invest. That said, they still care
about valuations, multiples, etc on exits as that helps them value their
existing portfolio.

But there is of course a spectrum of investors so for some investors, exit
activity can be a signal. This will be moreso for growth equity or mid-market
PE variety of investors. I should have been clearer about that so apologies
for any confusion. Thx.

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far33d
VC firms are becoming more like top-tier universities and less similar to
private equity firms.

Hire luminaries in fields to become mentors. Invest in training, teaching, and
mentorship. Create an alumni network of successful people.

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rscale
Dave's interpretation of the YC alumni network is quite interesting to me. I'm
curious to those of you who are YC alumni: does it ring true to you? If you're
thinking of raising a round, do you talk to YC alumni about it? Are they
helpful?

As for his main thesis that VCs don't eat their own dog food, that strikes me
as absolutely true. If the VC industry was any other industry, VCs would be
trying their best to help a startup disrupt it.

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il
I can only speak for myself, but if a YC or 500 founder I don't know emails
me, I'll make helping them in any way I can my top priority.

I am not altruistic by nature, so this is done purely for self-serving
reasons:

1\. Everyone I've met through YC or 500 is absolutely brilliant at something
in their field. I usually end up gaining much more wisdom than I share.

2\. Top tier funds like YC or 500 are very selective, so I know anyone I meet
with has a nontrivial chance of being one of the world's top entrepreneurs in
a few years. It pays to get to know them before they are famous.

In short, meeting with someone endorsed by YC or 500 is guaranteed to be
worthwhile. That removes a lot of risk in choosing to invest time to help
them.

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davemc500hats
ilya, it's great to have folks like you in 500 and YC :)

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simba-hiiipower
^ whoa!

a very nice read sir; great insights as always

