The final Lean Start Melbourne event of 2014 was a Q&A with Dave McClure, tech entrepreneur, early-stage investor and founder of 500 Startups. It was certainly an ear-opening experience, as Dave laced his comments with enough expletives to fund a small start-up (if only the organisers had thought to provide a swear jar…).
But while he was vociferous in his refusal to answer questions like “what’s hot?”, or “where’s the next big thing?”, he did provide some refreshing insights on how founders and investors need to adjust their expectations on funding and returns.
The event was hosted by inspire9, with sponsorship from BlueChilli, General Assembly, and Loud & Clear. Adrian Stone from Investors’ Organisation was acknowledged for helping to bring Dave to Australia, and Amanda Gome was the MC for the evening.
Dave’s investing model is basically a numbers game – identify a large enough pool of startup opportunities, place smaller “bets” on each one, in the expectation that only 10% will succeed, and of those, only 10% will be really successful, and very, very few will reach an IPO – but the spread of successful bets should each return between 5x and 20x. Whereas, some investors still try to “bet on unicorns”, in the expectation of a 20x-25x exit every time. Such opportunities will be increasingly unlikely, as the technology costs of production continue to decrease, therefore startups don’t require the same level or type of funding.
Based on current trends, Dave sees huge potential in video commerce, mobile video, and anything that monetizes search – e.g., influencing followers via social media, and converting this traction to sales driven by personalised recommendations. He’s also big on Spanish- and Arabic-speaking markets, and “anything that arbitrages sexism and racism” – hence his interest in women and minority entrepreneurs.
Dave’s advice is pretty simple: get the product, market and revenue model right, and then build scale into the business as quickly as possible. As such, he hates people asking him his opinion on their startup ideas (“what do I know?”); instead, he emphasises the need to get paying (and profitable) end users plus building scale through marketing as the true proof of concept.
Throughout the evening, Dave talked a lot about unit economics – not just production costs, but the real cost of customer acquisition, and time to convert leads to sales. It was also interesting that unlike some speakers at previous Lean Startup events, he was not particularly negative towards startups developing enterprise solutions – rather, he prefers to segment clients based upon their decision-making and purchasing limits. So, he looks at revenues based on the respective number of end users, SME customers and enterprise clients, because of their different price points and procurement methods, as well as the different customer acquisition costs.
Finally, he encouraged potential startups to think of the “most boring and mindless” business activities or processes, and figure out ways to make them more interesting via apps that use gamification and social media tools.